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Brexit where are we now?

  • Oct 1, 2020 | Richard Asquith

1 Oct - the EU has issued this morning a formal notice to the UK to retract its Internal Market Bill, which threatens to override the Northern Ireland (NI) Protocol element of the Brexit Withdrawal Agreement. However, since the UK now has until the end of October to respond, this is just a holding 'threat'. By then, it will be clear if a EU-UK Free Trade Agreement (FTA) can be completed and so the UK's Bill would become moot.

The ninth and final EU-UK FTA  talks complete this week on technical issues. If successful, this could enable both sides to enter a two-week 'negotiating tunnel' to complete the political-level compromises to strike a draft deal by the end of the October and then complete full legal texts. The EU and UK parliaments could then ratify the FTA in time for the end of the Brexit transition period on 31 December 2020.

The economic risks for both sides for a Brexit no trade deal indicate compromises are likely. The UK and EU realise the effects of no basic settlement on tariffs, quotas and other issues (see below), with the threat of a second wave of COVID-19, would be catastrophic. 

Below is a summary of the key blockers and what a deal could look like. 

What are the Brexit deal blockers?

The three major stumbling blocks to striking a Free Trade Agreement (FTA) are: 

  • State Aid: This is now the key blocker, and the EU has given ground on dynamic alignment. The UK’s continuing access to the EU Single Market without close alignment to EU standards. This includes the ‘Level Playing Field’ rules, which ensure governments do not seek to help domestic companies with unfair rules. It includes: employment rights; social policy; environmental standards; state aid to domestic companies; competition and tax. The UK wants full control over state aid, and a free hand to subsidise young tech businesses. The EU fears the UK’s close geographical proximity to its markets could mean the UK could easily become a cheap competitor to EU businesses without regulatory alignment.
  • FTA Governance and dispute resolution: A single coherent structure is now likely. The UK has now abandoned its aim of the keeping different elements of the deal separate - to prevent the EU punishing any UK infringements with measures in other areas. But dispute resolution still remains undecided with the UK unwilling to accept reference to EU law and the jurisdiction of the ECJ.
  • Northern Ireland.  NI will remain in the EU customs and VAT regimes from 2021 for goods, and checks would be done at NI ports on goods coming/going to GB. This is termed the border in the middle of the Irish Sea. A number of issues in the negotiations have now emerged:    
    • The EU is pushing on export documentary requirements for goods moving from NI to GB. The UK sees this as control over its sovereign single market
    • Potential EU ‘back-reach’ jurisdiction on state aid granted to NI businesses with GB connections. The UK is concerned that the EU could use Article 10 of the Withdrawal Agreement as a backdoor to interfere with UK state aid measures.

Because of the above, the British government is now seeking to rewrite the NI terms with its Internal Market Bill. The EU is threatening to the take the UK to the European Court of Justice at the end of September if the Bill is not withdrawn.

  • Fishing Rights.  This is one issue which appears close to resolution - it is just not deemed important enough to hold-up more important issues. The EU wants its fishing fleets to have continuing access to UK waters. The UK wants to return full rights to UK-based fleets. The issue will come down to the process and timing for doing this. The EU is holding out on this hugely symbolic issue to gain negotiating leverage on state aid and other issues. 

Seven key components under discussion in the Free Trade Agreement (FTA):

Any UK – EU FTA will contain seven key components:

  1. Tariff and quota-free trade on all goods.
  2. Increased customs co-operation and possible reduced bureaucracy
  3. Provisions on services similar to the EU’s free trade agreement with Japan
  4. Mutual recognition of professional qualifications
  5. Creation of regulatory co-operation forums to avoid unnecessary future barriers to trade
  6. Enforceable non-regression commitments ensuring UK does not weaken existing rules on state aids, competition, labour and environment.
  7. Provisions facilitating the temporary movement of people and services suppliers

Failure to achieve this will result in the UK Brexiting without an FTA, with major impacts to cross-border trade.  

Explore more content like this in our Get ready for Brexit hub


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VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He can be contacted at: richard.asquith@avalara.com. He is part of the European leadership team which won International Tax Review's 2019 Tax Technology Firm of the Year. Richard qualified as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.

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