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05 March 2018 UK and EU put forward proposals prior to critical March European Council meeting On 2 March 2018, the United Kingdom (UK) Prime Minister, Theresa May, delivered her third major Brexit speech. Although it did not contain any major surprises, it was the most serious attempt yet by the Prime Minister to engage on substance with some of the tougher trade-offs and compromises involved in Brexit. As several analysts have described it, Theresa May's position can now be summarized as the softest possible Brexit outside of the Single Market and Customs Union. The Prime Minister noted that existing trading models would not provide the best way forward for either the UK or the European Union (EU). She said that there was a need to strike a new balance and stressed the UK would not accept "the rights of Canada and the obligations of Norway." She noted that the UK might choose to commit some areas of its regulations – like State aid and competition – to remaining in step with the EU's rules. In terms of mutually recognized standards, the UK's starting position is that UK law may not necessarily be identical to EU law, but it should achieve the same outcomes. In certain cases, Parliament might choose to pass an identical law. While both the UK and the EU 27 Member States (EU27) are preparing for negotiations on future trading arrangements, the pressure is increasing to reach an in-principle agreement on the terms of any transition period before the European Council summit on 22-23 March. Both the EU and the UK have published documents intended to set out their respective positions.1 The transition period would be between 21 and 24 months. If a deal can be reached, this agreement would offer more political clarity, but it would not be legally binding until the formal Withdrawal Agreement is ratified at some point in the autumn. Theresa May's speech focused primarily on the future relationship, rather than the transition. There was plenty of reiteration of previous positions in the speech, but some key points for businesses include: Customs Union is still a "no go": The Prime Minister repeated her previous position that instead of a Customs Union, the UK would seek either a highly streamlined customs arrangement with the EU, including maximizing tech and trade facilitation tools, or a "customs partnership" involving the UK acting as the EU's de facto border agent (and vice versa), eliminating the need for a UK-EU customs border. The issue of a Customs Union will likely be settled by votes in Parliament at some point in 2018. The question remains whether Conservative members of Parliament (MPs) will side with Labour MPs on this issue. In the meantime, business should continue to plan for the re-introduction of some sort of EU-UK customs border, as Customs Union also involves a border. Businesses should also keep a close eye on the "customs partnership" option as that has sailed up the agenda in the Government as it would deal with the Irish border and avoid UK-EU customs procedures – but would be a huge challenge for business and government to administer. "Substantially similar" goods standards – but flexibility on agri-food: May repeated the ambition for mutual recognition on goods, underpinned by a dispute settlement mechanism, but did not provide significantly more detail on how this would work. Notably, she did call for "flexibility" on standards for "farmers and exporters." For sectors like automotive or consumer products, this speech did not offer much additional clarity around regulatory alignment but gave a strong hint at the potential for the UK diverging on agricultural policy and possibly food standards in future. Increased likelihood of single EU-UK authorization for pharma, chemicals and aviation: Theresa May cited three sectors in which she would explore remaining part, in some form, of existing EU agencies – aviation, pharmaceuticals and chemicals. She conceded that this would involve accepting jurisdiction of the European Court over those agencies. She also acknowledged that even though the UK Parliament would ultimately decide whether to stick to EU rules associated with these agencies, diverging risked shutting the UK out of the agencies and UK firms out of markets. This move significantly increases the chances of UK and EU firms in these sectors not having to duplicate certificates and authorizations, including, for example, "REACH" registrations for chemicals, testing for medicines and landing rights for airlines. If the UK Government gets its way, moving functions like REACH registrations or market authorization for medicines to an EU27 entity or vice-versa could be avoided. However, there remains uncertainty around the negotiations and the EU's position in response. Single Market-specific services access likely to go: This includes the financial services passport and the country of origin principle for broadcasters, which Theresa May said should be replaced by "creative options" including mutual recognition and reciprocity. She also called for continuation of existing mutual recognition of professional services. This is the strongest acknowledgement yet – though it has been implicit for a long time – that services firms currently reliant on single market-specific services provisions will need to think about alternatives, possibly including relocating some functions. In her speech, the Prime Minister referred to the "real progress" being made on the Withdrawal Agreement covering the UK's departure from the EU (the key elements of which were agreed in December 2017) and on the terms of a "transition" or "implementation" agreement (which would be included in the formal Withdrawal Agreement). Both the UK and the EU are clear this implementation period must be time-limited and cannot become a permanent solution. However, she highlighted the UK's concerns with the European Commission's draft legal text of the Withdrawal Agreement, published on 28 February 2018, and it is clear there are still issues to be resolved. The European Commission's draft Withdrawal Agreement is a very lengthy and detailed document. The task of the Withdrawal Agreement is to reflect the joint commitments set out in the joint report published on 8 December 2017 and to include arrangements for a transition or implementation period. As may be expected, the Commission's draft includes its interpretation of how to implement some of the points agreed, especially around any amendments necessary to reflect an agreed transition period. However, it also includes items which were not agreed in the joint report (such as the rights of future spouses) and declines to include others (on the grounds they are issues only for the UK). The draft will now be discussed over the coming weeks with the European Council and the Brexit Steering Group of the European Parliament before negotiations formally commence with the UK authorities. A specific area which has attracted attention concerns the Ireland/Northern Ireland border as the draft proposes a "common regulatory area" on the island of Ireland after Brexit as a "backstop," if other solutions are not found. In response, Theresa May has said that the draft legal text the Commission have published would, if implemented, undermine the UK common market and threaten the constitutional integrity of the UK by creating a customs and regulatory border down the Irish Sea. She stated no UK prime minster could ever agree to it.
Separately on 28 February 2018, the UK Government set out its own proposals for EU citizens arriving in Britain during any transition period. The UK Government is proposing key differences for those EU citizens to those EU citizens living in the UK before the UK leaves the EU in March 2019. Notably:
The European Commission is likely to insist that this offer does not go far enough. It wants full "freedom of movement" rights during the transition period and will require that the CJEU is the ultimate arbiter of such rights. The European Parliament has already responded, saying that it cannot accept any form of discrimination between EU citizens who arrive before or after the start of any transition.
The lead times needed for a number of key actions mean that, with only one year to go to March 2019, businesses have to understand the outcome from the March European Council meeting and decide which strategic choice they will make - doing nothing may itself be making a choice. This is a significant decision. Businesses will need to interpret whatever comes out of the Council meeting, apply that to their existing plans, and reach a decision in their Brexit steering committee as to the strategy going forward. 1 See EY Global Tax Alerts, EU27 develops its approach to post-Brexit arrangements, dated 5 February 2018 and UK Government introduces European Union (Withdrawal) Bill, dated 14 July 2017.
Document ID: 2018-5368 |
