Although the final terms of the UK’s departure from the EU and any transition period are far from settled, the last few weeks have seen major announcements clarifying negotiating positions of both sides.
The UK position
On 2 March 2018, Theresa May set out five key principles for any post-Brexit agreement with the EU as follows:
- It must respect the referendum result (ie allow the UK to take control of its borders, laws and money)
- It must endure (ie be sustainable not short term)
- It must protect UK jobs and security
- It must allow the UK to be a modern, open, outward-looking, tolerant, European democracy
- It must strengthen the UK (ie union of nations and people).
Alongside this ‘principles’ approach, Theresa May announced some intended policy outcomes from any final trade deal – although she did make clear that it was unlikely either party would get all they were seeking.
Leaving the EU customs union is still on the Government’s agenda but the Prime Minister is seeking a “deep and comprehensive agreement” on the UK’s post-Brexit relationship with the EU. The UK’s key targets for the final deal were set out as follows:
- Financial services – a new system to achieve the regulatory outcomes as for countries within the EU so that the loss of automatic ‘passporting’ rights for UK financial services business does not have a significant impact.
- Other regulatory systems – while the UK is unlikely to be able to be a full member of EU institutions after Brexit, the Government will seek forms of ‘associate membership’ of the EU medicines, chemical and aviation agencies (including making financial contributions). The UK will also aim to maintain a close relationship with Euratom. However, on all regulatory matters, the UK Parliament will retain the right to create its own regulations (even though this could threaten co-operation with EU bodies) while keeping UK regulatory standards "as high as the EU's" to ensure smooth trade.
- Other EU bodies – the Government wants to continue UK participation in EU science, education and cultural programmes where possible – even seeking to continue to be part of the EU's internal energy market (but protecting the single energy market on the island of Ireland).
- Mutual recognition of broadcasting rules is also intended to allow TV channels to be seen Europe-wide. Similarly, the Prime Minister wants to protect continuity of rail, haulage, maritime and aviation services across European markets. However, the Government wants a ‘fairer deal’ for UK fishermen while allowing reciprocal access to waters and sharing fish stocks management.
- Although the Prime Minister recognised that the rulings of the European Court of Justice (ECJ) would continue to have an impact on the UK, the aim in relation to trade disputes is to have an independent arbitration mechanism to resolve them (without involving the ECJ).
EU draft of withdrawal agreement
The draft exit agreement published on 28 February 2018 was intended to summarise the points agreed with the UK in December 2017 – even though a number of points remain to be resolved.
The outstanding issues include the length of the transitional period. While the UK does not want to set a time limit, the EU suggests that it should end on 31 December 2020. However, the most controversial point will be the customs duty arrangements for Northern Ireland/Ireland border. The draft agreement sets out the EU’s fall-back position that Northern Ireland will remain in ‘full alignment’ with EU customs rules applied in Ireland and throughout the EU.
Few truly expect this approach will ever to come into play, but setting it out in the draft agreement puts pressure back on the UK to come up with a workable solution to the border issue.
Read the draft withdrawal agreement.
The EU guidelines on trade deal negotiations
Draft negotiating guidelines were published on 7 March 2018, and must be approved by the remaining 27 EU states at a Brussels summit on 22 March 2018.
The draft guidelines make clear that any free trade agreement finally signed with the UK “cannot offer the same benefits as [EU] Membership and cannot amount to participation in the Single Market or parts thereof” (ie cherry picking). However, they do reiterate the aim of creating “as close as possible a partnership with the UK in the future” including:
- Ambitious provisions on movement of natural persons and recognition of professional qualifications
- An aim of zero-tariff trade in goods – but only where the EU has a surplus
- As the UK will be outside the EU common regulatory and judiciary framework, access for services will be limited
- Continued access to UK waters for EU fishing vessels
- An air transport agreement and aviation safety agreement to allow flights to continue
- Preventing the UK creating an unfair competitive advantage for businesses by “undercutting of current levels of protection” (ie competition, state aid and regulations).
- EU-UK cooperation in policing, judicial, security, defence and foreign policy issues.
The guidelines set out that as a ‘third-country’, the UK will not participate in EU Institutions, agencies or bodies and also that the agreement must respect the role of the Court of Justice of the European Union. Donald Tusk summed up the guidelines in simple terms by explaining that any “agreement will not make trade between the UK and EU frictionless”.
The length and scope of a transitional deal after March 2019 is far from agreed. The Northern Ireland border issue is still a major hurdle – and if not resolved, will block active negotiations on the free trade agreement.
And time is short. There are only six months to get the substance of the post-Brexit trade deal agreed if there is going to be time to allow all parties (the European parliament and 27 member states) to vote on it. Of course, there is no guarantee that either the European parliament or all 27 EU member states will approve the deal.
On the positive side, we now have some fairly clear positions set out by both sides and, as Theresa May pointed out, “every free trade agreement has varying market access depending on the respective interests of the countries involved”. So it is hoped that the real bargaining can start soon.
BDO has participated in discussions with HMRC over its preparations for Brexit and can confirm that there is a huge amount of work underway to facilitate a smooth transition. For example, group of 23 government agencies is coordinating work on all cross-border issues and HMRC plans to consult widely on the hundreds of statutory instruments that needed to ensure that, once the Brexit transitional period ends, businesses will continue to trade under broadly similar rules.
Of course, whatever the final agreements look like, there are going to be many changes after Brexit. However, businesses can take some simple steps to start preparing for life after Brexit now. Further Brexit resources:
Read our Brexit planning guide
How much withholding tax will your business pay on payments from EU countries after Brexit? Try our calculator at WHT after Brexit.
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