H+K Analysis

One week before the Brexit deadline of the 31 October, a hard Brexit may have decreased in likelihood, but we are still far from a certain outcome.

The EU and UK governments agreed on an updated Withdrawal Agreement (WA) on October 17th. The WA foresees a transition period until end of 2020 (that can be extended with a maximum of two more years) that starts at the Brexit date and during which the UK essentially continues to apply EU law, without participating in the decision-making process of EU Institutions. This period should be used to negotiate a Free Trade Agreement (FTA) between the EU and the UK that will govern the economic relations after the transition period. If no FTA can be concluded within that period, a hard Brexit may still occur. For the Withdrawal Agreement to enter into force, however, both the European and UK parliaments need to ratify it before 31 October.

The UK House of Commons decided on 19 October that it will only give its final assent to the WA after having examined in detail the legal implementing acts. As a consequence, the UK government had to ask the EU for a further extension of the Brexit deadline of 31 October, since more time would be required for Members of Parliament to fully scrutinise the legal texts. On 22 October, the House of Commons indicated general support for the WA but rejected the tight deadline given to them for legal scrutiny and final approval. The European Parliament, on the other hand, decided that it will only vote on the WA once the UK has adopted it.

The UK request for a deadline extension is currently being discussed by the 27 EU Member States who need to unanimously grant the extension and decide on its length.

Internal UK political developments may further complicate the process. Nobody can predict what the outcome of the parliamentary scrutiny of the legal texts will be, since the texts could be amended in the process. The government may also attempt to hold a general election before the final decision on Brexit.

As a result, the uncertainty on what type of Brexit and when it will happen remains intact. Both procedures in the UK and the EU parliaments can lead to unexpected rejections of the WA. Final voting must still take place and predicted majorities seem fragile until that vote is cast.

For companies and organizations exposed to Brexit risks, this means that an orderly Brexit with a transition period now seems more likely than a hard Brexit, but it is not yet achieved.  In any event, the risk of a hard Brexit remains intact, though postponed, should no Free Trade Agreement be agreed and ratified by the UK and the EU27 parliaments during the transition period foreseen in the WA between the date of the UK leaving the EU and the end of 2020 (or the extension of that deadline for one or two years).

What has changed

The removal of the so-called Irish backstop provision from the WA, often quoted as  unpalatable for the UK parliament and the reason for the triple rejection of the deal negotiated by previous UK Prime Minister Theresa May, is the main difference in the revised Withdrawal Agreement, which was endorsed by the European Council on 17 October 2019. The EU required concrete proposals from the UK that would prevent a future hard border on the island of Ireland in order to revise the backstop and reopen negotiations. Prime Minister Johnson’s government provided these proposals in early October so that a new deal could be reached.

The new arrangement translates into an EU-UK customs border in the Irish Sea with Northern Ireland following the EU’s customs rules while staying in the UK’s customs territory. Customs checks will occur at British ports before entering Northern Ireland and goods will not be charged with tariffs if their final destination is Northern Ireland. For goods that might enter the EU single market, UK authorities will apply the EU’s tariffs. Meanwhile, products from Northern Ireland will be able to cross into Ireland without any customs controls and follow EU rules.

As Value Added Tax (VAT) rules differ in the EU and the UK, there were concerns that the UK would apply VAT rates to Northern Irish goods that were lower than those in Ireland and thereby undermine the Single Market. It was agreed that Northern Ireland will apply EU rules.

It is interesting to note that, besides these two amendments, Johnson’s deal is identical to Theresa May’s.

Where we stand

A revised version of the Withdrawal Agreement has been agreed by the negotiating parties and Prime Minister Boris Johnson has requested an extension of the 31 October deadline, shifting the likelihoods of possible outcomes but hardly providing any more certainty.

  1. Extension of the Brexit deadline: To extend the withdrawal date, demand needs to come from the UK and be unanimously agreed on by the EU27. The first part of this has occurred and we are now waiting on the decision of the EU27 whether they will grant an extension and for how long. The EU27’s unanimous support is quite likely now that there is indication that there is a political will on the UK side to pass the deal.
  2. Ratification of the Withdrawal Agreement: The Withdrawal Agreement requires ratification by the House of Commons and European Parliament. Neither of these have ratified it thus far and, although it is expected that the European Parliament will ratify it, this should not be taken for granted.
  3. No-deal Brexit: The UK’s disorderly withdrawal from the EU on 31 October is the default outcome. If there is no extension granted and the deal is not ratified in both parliaments before the 31st, the UK will crash out of the EU.

Following a no-deal Brexit, the UK will no longer be subject to EU law at home, will no longer fall under the jurisdiction of the European Courts, participate in EU meetings, receive EU funds or contribute to the EU budget. Free movement of goods, services, people and capital will stop. Phytosanitary, immigration and customs control will be instated at the borders. There will be no transition period.

While multinationals have taken the necessary precautions for a no-deal Brexit (for example, over 100 companies have relocated their headquarters from London to Amsterdam), governments are in varying states of preparedness, especially regarding their border and customs controls and personnel.

  1. Revoking Article 50: The UK can unilaterally revoke its Article 50 letter at any time before 31 October, ending the Brexit process.

Timeline

Brexit Timeline