VATLive > Blog > Europe > Brexit - where are we now

Brexit where are we now?

  • Oct 26, 2020 | Richard Asquith

EU-UK discussions on a Free Trade Agreement (FTA) are now effecitvely in a two-week negotiating tunnel - talks are progressing in London and then Brussels this week. The hugely disruptive effects of a no Free Trade Deal Brexit on top of COVID-19 mean all parties are highly motivated to reach a deal on time. The key outstanding issues are: State aid; fisheries; and agreement future governance; and the UK Northern Ireland Internal Market Bill.

An FTA deal could limit disruptors such as tariffs, quotas, data exchange restrictions, work VISA problems, recognition of transport regulations and licenses and more. Plus set a positive framework for further negotiations into 2021 on wider issues. However, customs documentation and checks, loss of VAT simplifications, restrictions on financial service trading and much more will still come into play on 1 January 2021

Intensive, tunnel negotiations this week?

'Intensive' talks - termed 'tunnel negotiations' - will last two weeks till the end of this month. These will involve political leaders making the necessary compromises to unblock the outstanding technical differences. A draft FTA will probably not emerge until early November.

Any FTA negotiation between two states is about securing preferential access to each others' markets in return for conditions on alignment and mutual recognition of rules to prevent unfair trade. Both sides are now playing to domestic audiences as they look for each other to move on the last blockers. The UK has begun to compromise on state-aid, but has been disappointed by a lack of EU reciprocity on fisheries.

The EU had refused to close talks sections, 'chapters', until all chapters are complete - 'nothing is complete until everything is complete'. That upset the UK. It now comes down to the state-aid strings the UK is willing to accept to be attached to a no-tariff, no-quota offer from the EU. The UK threat of rewriting the Brexit Withdrawal Agreement via its Internal Market Bill has not helped with mutual trust, and must still be resolved.

What are the Brexit deal blockers?

  • State Aid: This is now the key gap, the UK’s continuing access to the EU Single Market without close alignment to EU 'Level Playing Field' rules. The EU fears the UK’s close geographical proximity mean the UK will become a cheap competitor to EU businesses without regulatory alignment. It is not just state subsidies, it extends to the UK's government digital strategy and wish to escape data restrictions such as GDPR. This would push the EU into not granting data adequacy. The EU has now proposed a 'toolbox' of measures which the UK is close to accepting: 
    • signing the UK up to high standards;
    • a robust, independent UK competition authority; and
    • dispute settlement mechanism with clear retaliatory measures for the EU.
  • Fishing Rights:  There appeared to be slippage on the progress towards a compromise on fishing rights. Whilst of tiny economic importance, fishing remains a totemic hostage to progress as the UK must be able to show its fleets can fish in UK waters; the EU must show limited losses. The EU (France, Spain and low countries) 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 UK has proposed a 3-year transition. The EU is holding out on this hugely symbolic issue to gain negotiating leverage on state-aid. 
  • FTA Governance and dispute resolution: A single coherent structure is now likely. The UK has 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 reemerged:    
    • 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. The EU is also insisting on a physical presence in NI to carry out the checks it is entitled to under the Protocol. 
    • 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 seeking to rewrite the NI terms with its Internal Market Bill. The EU has started legal proceedings against the UK, and given it until the end of November to withdraw the biil for face action at the ECJ. 
  • Financial Services: This issue now seems concluded with the substantial UK sector not accepting the EU obligations attached with equivalence - which would have given it near full access to EU markets.  It is still possible that both sides will grant temporary transitional powers to waive rules up until 31 March 2022. Such powers had been in place for the 2019 no-deal Brexit planning. From 2021, UK banks, insurers and other regulated financial service providers will lose their passporting rights to offer and provide services from their UK bases to EU customers. The UK then switch’s to EU third-third country and standard WTO treatments. UK businesses will have to establish EEA (European Economic Area) offices with senior management to continue to offer the same services to the EU market. Mutual equivalence on financial services between the UK and EU would have given some limited continuance of services from the UK under UK rules, but would exclude major areas such as bank lending/deposit taking and insurance without imposing complex approval processes. Given the likelihood of significant UK divergence from EU financial service rules, the EU agreeing to equivalence has been withheld. The governance of equivalence between the EU and UK is also problematic. Both sides have struggled to agree on a basis for determining the withdrawal of equivalence decisions.

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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