UK Brexit 3rd delay to 31 Jan 2020 – but deal emerges
- United Kingdom
- Oct 30, 2019 | Richard Asquith
The third Brexit deadline of 31 October 2019 has been missed!
A new ‘flextension’ has been agreed between the UK and EU which could enable the UK to leave the EU at any point between now and 31 January 2020. And to help break the parliamentary deadlock, which has delayed passing a departure agreement, a general election has been agreed for 12 December.
However, there is now an EU-UK deal that won a second reading in Parliament – overtaking the three times rejected Theresa May’s deal. The UK would first leave the political institutions of the EU on 31 January 2020, but remain within the EU's Customs Union, Single Market, VAT regime and similar arrangements in a transition period until 31 December 2020.
This new deal revealed the eventual likely exit arrangements: a relatively hard, Free Trade Agreement relationship. Northern Ireland will be tied practically, if not in law, to the EU on trade. And it will enjoy speacial dual free access to both the UK and EU markets - potentially attracting global investment. For the rest of the UK, this new deal is far from the closer, Customs Union-based connection of the Theresa May rejected agreement.
What does the new deal look like? How may parliament seek to reintroduce the CU and Level Playing Field provisions, plus gain control over the implementation period?
What’s in the new deal
On 17 October, the metaphoric white smoke plumed from the Brexit negotiations as a new deal materialised. There were no changes to many of the big-ticket issues in the binding Withdrawal Agreement (WA) and non-binding post-Brexit Political Declaration (PD). This included no movement on the exit bill and citizen’s rights. The much-anticipated European Union (Withdrawal Agreement) Bill (the WAB) was published by the government on 21 October 2019.
However, the small number of clause changes to the thrice-rejected Theresa May WA bellied a massive UK shift on Northern Ireland and future trade relations:
- The 2021 Backstop EU Customs Union (CU) insurance policy was removed from the WA.
- It was replaced by a dual Northern Ireland customs, VAT and regulatory status from 2021, the end of the transition period. After this date, there will effectively be a border for these regimes between Great Britain (GB) and Northern Ireland (NI) in the Irish Sea.
- The DUP veto proposal on the NI measures was removed in favour of a ‘mutual consent’ simple majority vote at the NI National Assembly ever four years.
- The transition period, to 31 December 2020 remains, and the UK will continue to apply EU law until then. But it may now result in a new December 2020 Brexit no-deal cliff edge if no Free Trade Agreement (FTA) on the future UK/EU relations is completed. In this case, the GB (not NI) will revert to WTO terms with the EU. There is an option to extend the transition period out to the end of 2022. But the UK must apply for this by 1 July 2020.
- There was a can-kicking of ‘level playing field’ provisions including workers’ rights and state-aid competition. They were shifted from the binding WA to the non-binding, aspirational PD. The level playing field issues will now be negotiated after Brexit in a future Free Trade Agreement (FTA). This is a clue to the future, low-regulation UK economy the Conservative government is seeking after Brexit.
The details - new NI border burdens for businesses and HMRC
Below is a summary of the main changes in the new Brexit proposal. There are many risks and open-ended questions associated with them, including:
- Businesses facing the loss of frictionless trade;
- Traders having to track and comply with a NI dual customs and VAT regime;
- HMRC being tasked with designing and implementing the NI systems within 14 months;
- Companies having to follow proof-of-origin rules for NI-destined deliveries; and
- The prospect of a new no-deal Brexit, this time on 31 December 2020, embedded in the revised WA if no agreement on a new FTA is reached within the next year.
1. Removing the Backstop
Theresa May’s Backstop clause agreed with the EU sort to avoid physical checks at the NI border. This envisaged a transition period until 31 December 2020, when the UK would remain within the CU whilst a new FTA was negotiated. If no deal could be found which prevented border checks, then the UK would have remained within the CU until a mutually acceptable border solution could be found. This was viewed by Leave supporters as the worst of all post-Brexit worlds: trapping the UK within the EU without a voice on the rules; and thwarting it from negotiating FTA deals around the world.
The UK government has now secured the removal of the Backstop to be replaced by a new status for the NI. Any attempt to avoid creating a regulatory, customs or VAT border between Northern Ireland and the rese of the UK has been abandoned.
2. NI’s dual customs, VAT and regulatory status
The new protocol proposes that NI will have an innovative economic status for customs, VAT and regulation of goods to avoid any physical border with Ireland. NI will remain within the rest of the UK (Great Britain, ‘GB’, which excludes NI) for these rules. However, NI will also administer the EU rules on behalf of the EU for goods passing between NI and Ireland. In practical terms, associated paperwork, tax collections and checks will be done at NI ports by NI officials.
The changes across the three areas are as follows, although details are still vague and contradictory on new taxes and documentation. This will have to worked out in the forthcoming months.
- NI will remain within the UK customs union,covered by the UK GATT schedule and benefit from UK trade agreements.
- However, it will apply the EU Customs Code on goods entering from outside of the EU (including the UK) to Ireland. This involves NI entry ports administering EU customs processes and tariff collections.
- Despite claims in the press that there would no need for checks on NI goods going to Ireland, they will be necessary under World Trade Organisation rules to ensure no preferential treatment of UK goods heading to the EU via this particular border.
- The default position would be that goods coming into NI from GB will be liable to EU tariffs, although this will be rebatted by the UK. Duties collected will not be remitted to the EU by the UK. Questions on state-aid limits to the UK effectively subsidising businesses by settling EU duties will need to be addressed and resolved.
- Only if it can be demonstrated that the final customer for the goods is resident in NI will the goods be subject to UK tariffs.
- If EU tariffs are collected at the NI ports, but the goods eventually are sold to a NI customer, then the importer would be able to apply for a tariff refund on any difference. This would ensure NI businesses would be able to enjoy the benefits of future lower tariff rates agreed by the UK with other countries.
- Goods shipped between Ireland and NI would pay no tariffs at the border, and there would be no customs checks.
- Certain goods destined for Ireland will be exempted entirely from EU tariffs if they are determined as low risk. A new Joint Committee will be responsible for determining which goods are entitled to this status. This will likely be a source of future tension as the EU is traditionally risk-adverse in granting such exemptions because of the fear of tax 'leakage' and attracting fraud criminals.
- Import and export declarations will be required on all goods moving between GB and NI to support the above procedures.
- Personal goods will be exempted from tariffs.
- HMRC will have to develop the rules and systems to accommodate the above processes, which businesses will then have to incorporate into their own organisations, IT and ERP systems.
- Another point requiring future consideration is NI's place in future UK Free Trade Agreements. It's new EU relationship will mean it may have to be excluded from agreements the UK strikes with the US, China and others. This is because EU single market regulations and preferential tariffs will have to be applied in NI. This could even include an UK-EU FTA deal since NI will have a different deal with the EU. Until the whole UK and EU future relationship is decided, the NI issue may slow down any FTA agreement.
- NI will also gain from future EU negotiated trade deal. Again, this opens up difference with GB.
VAT and excise
- NI will remain part of the UK VAT and excise areas.
- However, it will continue to be subject to the EU VAT Directive, including the rulings of the European Court of Justice, for goods passing from outside the EU, including GB, to Ireland. This includes collecting import VAT at the NI ports on affected goods. This VAT will not be remitted to the EU.
- Goods moving from NI to Ireland will still be considered as intra-community supplies, and therefore not subject to import VAT. Businesses responsible for the intra-community supply will be required to complete current Intrastat and EC Sales (for goods) filings.
- The UK may decide to align reduced VAT rates and exemptions applicable in NI with those of Ireland. The aim is to prevent distortions of markets across the border. A key area will be tourism services where Ireland has a 13% reduced VAT rate.
- However, NI could not benefit from any GB exemptions or reduced rates introduced e.g. VAT on women’s sanitary products or on heating fuel.
- Businesses will face complex VAT and excise rate tracking requirements.
- The NI VAT measures do not apply to services. However, many industrial supplies include a service support element. This will provide a complex burden on businesses to understand the services-only component of their supplies so as to apply UK VAT rules and rates.
Single Market regulatory alignment
- NI will remain within the EU Single Market to avoid the need for product standard and safety checks on the border with Ireland.
- NI goods will maintain regulatory alignment with the EU. This will be on the basis of a ‘limited set of rules’ on goods, agricultural supplies, food and manufactured products. Services are excluded.
- Goods moving from between GB and NI would face regulatory checks by UK officials at the NI ports. The EU may request for their officials to be present.
- There would be no regulatory checks on goods (including food and livestock checks) moving from NI to the rest of the UK.
The logistics challenges for HMRC for the above dual regime will be a considerable challenge. Back in 2018, when the Theresa May ‘Chequers Deal’ proposed a UK-wide CU administration arrangement, the Chief Executive of the HMRC, Jon Thompson, suggested a five to seven-year implementation. Whilst obviously for only a small proportion of the economy, this NI deal still requires the same level of IT design and coding. And HMRC will be simultaneously conceiving the new post-Brexit reporting systems for the rest of the UK. Quite a workload.
3. Consent on NI arrangements
- The NI measures come into automatic effect on 1 Jan 2021.
- NI’s Stormont Assembly will vote on whether to continue the measures four years later at the end of 2025. This is a switch to ‘mutual consent’ from the effective DUP veto contained within the first Johnson government proposal from the start of October.
- In the case of a rejection, the measures will only be withdrawn after two years. This means the measure will remain in place until at least the end of 2026
- The Assembly may then vote every four years on continuing the measures. There is an option for the Assembly to extend this to eight years.
4. Implementation period – a new no-deal cliff edge Dec 2020
If the WA is agreed, the implementation period deadline remains as 31 December 2020. This is intended to give businesses and citizens time to adjust to a post-Brexit UK. This date is likely to be modified:
- Dec 2020 was set at the time of the planned March 2019 exit date. So the period is already run down to just 14 months.
- Since the eventual final UK-EU relationship will not be clear until 2020, or more likely well beyond that, a further ‘transition’ period may be required. The agreement allows the UK to request a further one or two-year implementation period until December 2022. However, importantly, the UK must decide on requesting this further extension by 1 July 2020. Since it will be unclear by then if the extension period is required, UK MP’s are likely to challenge this potential new ‘no-deal’ Brexit deadline since it has no real say on the July 2020 decision process..
- Until the end of the implementation, or further transition period, the UK will continue to apply EU law as if it were a member state. But the UK will leave the political and institutional structures of the EU, and will have no representation or say in decision making. The UK will remain subject to European Court of Justice, including its interpretation of the WA. Any new EU laws coming into effect during the implementation or transition periods would have to be implemented into UK law.
- The UK will remain within the EU single market, CU and VAT regime during the implementation period until 31 December 2020. It will not be allowed to return to the EU under a revocation of Article 50.
After the implementation period
What has changed from the Theresa May WA is that the UK’s default future position will be a ‘hard Brexit’ on 31 December 2020, the end of the implementation period. The UK will revert to World Trade Organisation terms, and most favoured nation status duties rates. This can only be averted if the UK and EU have agreed an FTA governing customs, VAT and other exit issues. This means if the WA passes, and no all-encompassing FTA deal is struck, the UK could be refacing a no-deal Brexit scenario at the end of 2020.
Any FTA will be broadly based on the Brexit Political Declaration, which requires UK Parliamentary backing. However, Parliament cannot insert major changes at this point, including CU membership, without EU consent.
5. ‘Level Playing Field’ kicked down the road
The Level Playing Field provisions have been swapped out of the legally binding WA into the non-binding PD. The provisions committed the UK to not undermining the EU on policies including: state-aid; competition; climate change; environment, social; and employment standards.
They had been included in the Theresa May WA, tied to full membership of the CU for the whole of the UK. Since only NI will remain administratively interconnected to the CU, it is no longer necessary to enforce them at Brexit through the WA.
The PD states the aims of both parties on this matter when they come to negotiate a further FTA after Brexit. The EU conceded this change since it will be able to fully negotiate them as part of a full goods and services trade agreement. What is clear is that the EU will not provide CU membership to the UK without the full inclusion of the Level Playing Field provisions.
The new WA and PD are undoubtably shrewd politics in terms of securing the government’s aim of an orderly Brexit. NI, instead of the whole UK, has been tied into the EU customs and single market rules to sidestep the physical NI border blocker that has prevented agreement for over three years.
But with the triggering of the Benn Act and Letwin Amendment, the provisions of the WA lay open to amendments after the general election in early December. A likely strong contender is reverting to membership of the CU for all the UK. But this would bring in the employment and state-aid provisions, too, which the Conservative new-deal coalition could not countenance. This will all depend on the Conservative post-election majority.
What is certain is that we will all be back on the Brexit roundabout for months ahead.
But the new deal has shown the likely landing ground of Brexit – a much loser affiliation to the deal envisaged by Theresa May. Wish HMRC and business well with managing the multitude of new regimes it must create and administration.