The UK's withdrawal from the EU: An update

In this article, we consider recent developments in relation to the UK’s withdrawal from the European Union (“EU”), in particular the triggering of Article 50 of the Treaty on European Union (“TEU”), the key issues for the negotiations between the UK and the EU, the Government’s white paper regarding its proposed Great Repeal Bill and the calling of a ‘snap’ general election in the UK on 8 June. We set out our current thoughts regarding the potential implications for businesses.

The UK has triggered Article 50 – what’s next?
On 29 March 2017, Sir Tim Barrow, the UK’s permanent representative in Brussels, hand delivered a letter to Donald Tusk, President of the European Council, on behalf of the UK Government triggering Article 50 TEU (the “Article 50 Letter”). This begins the two year period during which the UK Government will seek to formally negotiate its exit from the EU. 

In response to the Article 50 Letter, the European Council published draft guidelines setting out the EU’s key negotiating principles (the “Guidelines”), which are expected to be approved at an EU Council Summit on 29 April. We have reflected below on the key issues for the negotiations on the basis of the initial positions of the UK and the EU, as set out in the Article 50 Letter and the Guidelines.

It is currently expected that negotiations will commence in June this year and will need to be concluded by September 2018 to allow time for ratification by the remaining Member States, the European Parliament and the UK Parliament before the end of the two year period envisaged by Article 50. However, talks may not begin in earnest until September, after the results of the French presidential elections and the German parliamentary elections are known. In addition, August is traditionally a quiet time in the EU institutions due to summer holidays and therefore the actual time for negotiations may be as short as 9-10 months.

If negotiations collapse or any deal is not ratified, then the UK will leave the EU on 29 March 2019 without a deal unless an extension is agreed by all Member States.

The negotiations between the UK and the EU – what are the key issues?
The UK’s exit from the EU requires two sets of negotiations to take place, one relating to the terms of the UK’s exit from the EU and the other relating to the UK’s future relationship with the EU.

In terms of the key issues relating to the exit package, there appears to be an acknowledgement of the challenges faced in the negotiations, particularly in relation to the following:

• Key withdrawal terms: Both the Article 50 Letter and the Guidelines recognise that it will be important to reach a financial settlement in relation to the UK’s rights and obligations, provide certainty for EU citizens in the UK and UK citizens in the EU and avoid a hard border in Ireland. It is not currently clear how these key objectives will be achieved.
• Transitional arrangements: The Article 50 Letter contemplates that implementation periods might be required to allow businesses and people time to adjust. Similarly, the Guidelines envisage that a transitional period might be necessary if a deal is not reached within the two year deadline (subject to certain requirements). This indicates that both sides are mindful of the need to ensure a smooth and orderly exit but it remains to be seen what this will mean in practice.
• Leaving without an exit deal: Both the UK and EU have acknowledged the possibility of a deal not being agreed and the necessity for contingency plans to be in place in the event of the UK leaving the EU without a deal. This means that it is not possible at this stage to rule out a ‘cliff-edge’ exit and the associated uncertainty and disruption to businesses and people.

In terms of the UK’s future relationship with the EU:

• Timing of negotiations: The Article 50 Letter envisages that a new free trade agreement (“FTA”) between the UK and EU will be negotiated alongside the terms of the UK’s exit from the EU. However the EU has previously taken the position that any FTA would need to be negotiated separately, and it can take many years to negotiate an FTA, for example the trade deal between Canada and the EU took over seven years to negotiate. The Guidelines contemplate a phased approach, with negotiations on an FTA commencing when the European Council has determined that “sufficient progress has been achieved” regarding the exit deal. This would be in the EU’s discretion and is likely to place considerable pressure on the UK in terms of exit negotiations, in order to facilitate the start of FTA negotiations, particularly as the current goal (at least from the UK’s perspective) is for both to be agreed within the two year deadline.
• ‘Hard’ Brexit: Immigration was a central issue of the Leave campaign and the EU has long made clear that there can be no access to the Single Market without accepting the free movement of people. The Article 50 Letter confirms that the UK does not seek membership of the Single Market, acknowledging that there can be no “cherry picking”. It proposes “a bold and ambitious” FTA between the UK and the EU.  The Guidelines suggest that the EU is open to negotiating an FTA with the UK and the EU, but this must not provide the benefits of the Single Market to a third country. Much will depend on the timing of FTA talks, as it is possible these will not have commenced, or that they will still be ongoing, at the time of the UK’s exit. In the absence of an FTA with the EU, the UK will rely on the World Trade Organisation (“WTO”) rules as a basis for trade with the EU (as confirmed in the Article 50 Letter). 

As with any negotiation, the UK and the EU will be coming at the issues from different angles. In the case of the remaining EU Member States, a number of different perspectives will need to be reconciled. Although there appears to be common ground between the UK and the EU on a number of issues and an acknowledgment on both sides of the challenges ahead, this will be a complex and difficult multi-faceted negotiation. Successful resolution of the issues is not guaranteed. 

The Great Repeal Bill – what is it and what will it do?
The Government has published a white paper setting out plans to introduce a ‘Great Repeal Bill’ to Parliament. It is intended that, on entry into law, the Great Repeal Act (the “GRA”) will do the following:

• It will repeal the European Communities Act 1972 (“ECA”), which established the supremacy of EU law over UK law and the jurisdiction of the Court of Justice of the European Union (“CJEU”). The Government’s intention is therefore to “put the UK back in control of its laws” by reinstating the supremacy of UK law over EU law and the jurisdiction of the Supreme Court.
• As repealing the ECA will leave large gaps in UK law in many areas, it is proposed that the GRA will convert the whole body of EU law into UK law, to ensure that as little as possible changes legally on the day of the UK’s exit from the EU. This is aimed at providing certainty for businesses and individuals and facilitating a smooth transition. More specifically:
  • all directly-applicable EU regulations will be converted into UK law;
  • all UK laws implementing EU directives will be preserved;
  • the rights in EU treaties that can be relied on directly in court by an individual will continue to be available in UK law; and
  • historic case law of the CJEU will be given the same binding or precedent status in the UK courts as the decisions of the Supreme Court, unless and until it is amended by the Supreme Court.
• The ECA will give ministers the power to create secondary legislation. This is intended to allow corrections to be made where necessary to ensure the law operates appropriately and to ensure UK law reflects the agreement ultimately reached between the UK and the EU.
• In the event of any conflict between EU derived law and UK law, the EU-derived law will take precedence. The white paper states that this is to ensure continuing legal certainty. Once the UK has left the EU, any new legislation passed by Parliament will take precedence over older legislation, including EU-derived legislation.

We note the following points arising from the approach envisaged by the Government’s white paper:

• The Government’s white paper does not set out a mechanism by which EU law will be incorporated into UK law but provides that “EU regulations will not be ‘copied out’ into UK law regulation by regulation”. This suggests that it will be done in general terms without reference to specific laws, which may result in a lack of clarity.
• The white paper points out that certain aspects of EU law will not “function sensibly” as incorporated into UK law once the UK has withdrawn from the EU and will need to be corrected or adapted. These include:
  • References to EU law: By way of example, section 171 of the Enterprise Act 2002 requires the Competition and Markets Authority to publish advice and information about the effect of EU law on certain provisions of that Act. The reference and the definition of EU law will need to be amended or deleted.
  • References to EU institutions: For instance, The Offshore Petroleum Activities (Conservation of Habitats) Regulations 2001 include a requirement to obtain an opinion from the European Commission. This will need to be amended to refer to a UK regulatory body or the requirement will need to be deleted altogether.
  • Rights derived from EU systems or frameworks: An example of this is the European Union Trade Mark which is a single trade mark covering the whole territory of the EU. This allows businesses to obtain pan-European protection for their brands on the basis of a single application, and pan-European injunctions and other remedies are available in some situations. The relevant EU law will be incorporated into UK law by the GRA, however, many of the rights cannot be replicated by the UK Government as they depend on reciprocity with other EU Member States. How this will be addressed depends on the outcome of negotiations with the EU.
• The changes required to ensure EU law works as part of the UK body of law will be carried out through secondary legislation, as mentioned above, because it would not be possible for Parliament to itself review and make all the required changes. The white paper estimates that between 800 and 1000 statutory instruments will be required to make the “necessary corrections to the law”. There is a concern that this will give the UK Government very broad powers to change the law without having recourse to Parliament.  The white paper states that the delegated powers will need to be wide in terms of the legislation to which it can be used to make changes but there will be constraints, for instance they “will not be available where Government wishes to make a policy change which is not designed to deal with deficiencies in preserved EU-derived law” arising out of the UK’s withdrawal from the EU. In addition, the powers are to be limited in time as the changes will need to be made before the UK leaves the EU and do not need to “exist in perpetuity”.
• The white paper states that the GRA is not aimed at making “major changes to policy” or establishing “new legal frameworks in the UK beyond those which are necessary to ensure the law continues to function properly from day one”. The Government will therefore introduce other bills to Parliament, for example it is envisaged that a customs bill will be required to implement a UK customs regime and an immigration bill will be introduced “so nothing will change for any EU citizen, whether already resident in the UK or moving from the EU, without Parliament’s approval”.   
• The Government’s proposed approach places great significance on the date the UK leaves the EU, for example, the white paper proposes that the GRA “will repeal the ECA on the day we leave the EU”, EU regulations “as they applied in the UK the moment before we left the EU” will become part of UK law and any queries as to the interpretation of EU-derived law will be determined by the UK courts with reference to the CJEU’s case law “as it exists on the day we leave the EU”. This may create difficulties in the interpretation of the law after the UK’s exit from the EU. It will be crucial to know what happened and when it happened, and whether this is before or after the relevant date/time of exit, in order to determine whether or not the relevant EU regulation or CJEU judgment forms part of UK law.    

There is going to be an early election – will this have an impact?
In a surprise development, Theresa May announced on 18 April that she would seek to call a ‘snap’ general election to take place in the UK on 8 June. Under the Fixed Term Parliaments Act 2011, the Prime Minister requires the approval of two thirds of MPs for an early election to take place and on 19 April the House of Commons voted by 522 to 13 to bring forward the election from 2020. 

The UK’s exit from the EU is likely to be main focus of the parties’ general election campaigns and the Government will be under pressure to develop and elaborate on its policy ideas. This may result in arguments around policy choices developing very rapidly and may provide further detail, as well as expose any shortcomings, regarding the Government’s plans for the UK’s withdrawal from the EU.

On the basis of current polls, it is anticipated that the Conservative party is likely to increase its majority and the Labour party is not expected to perform well. It is possible that there may be a bounce in support for the Liberal Democrats, particularly in constituencies strongly in favour of remaining in the EU, but it is not currently obvious how big the bounce may be or how significant its impact. If the Conservative majority is retained or increased, the election is unlikely to have any impact on the UK’s withdrawal from the EU. However, elections are unpredictable and may lead to unexpected outcomes. It therefore remains to be seen whether the election will affect the process, timing or manner of the UK’s exit from the EU.

What does this mean for businesses?
It is clear that although the process of the UK’s withdrawal from the EU has now begun, there is considerable uncertainty for businesses, particularly as there will be a general election on 8 June.

Assuming that the Conservative party increases its majority, as current polls predict, there is unlikely to be any change to the Government’s proposals for the UK’s withdrawal from the EU. There are challenges ahead, but there are some elements of comfort, as it appears that the key issues have been identified and are being considered and addressed and both the UK and the EU have recognised the need for transitional arrangements. The GRA is aimed at ensuring that as little as possible will change on 29 March 2019 (although there is a lack of clarity as to how the law will be interpreted, as set out above) to facilitate a smooth and orderly exit.

For the moment, the UK is still a member of the EU until it leaves on 29 March 2019 (subject to any agreed extension). EU law therefore continues to apply in the UK, and new EU laws, such as the General Data Protection Regulation, will come into force and be applicable in the UK. Clearly much will depend on the outcome of the negotiations with EU and the future trading relationship between the UK and the EU. 

The Brexit team at S&B will continue to monitor developments and publish updates from time to time. If you have questions regarding any of the topics covered in this article, please do not hesitate to contact Gustaf Duhs or your usual Stevens & Bolton contact.