Global menu

Our global pages

Close

Eversheds Sutherland comment: EU Referendum result - What will it mean to leave the EU?

The result of the EU referendum was announced on Friday, 24 June 2016 with a vote in favour of the UK leaving the EU. In this briefing we outline what happens next and the exit process. We also identify some of the issues that businesses should be considering now and the steps that they should be taking. We will keep you updated on developments via our Brexit Hub.

Although it will be some time before the terms of the UK’s future relationship with the EU are known, there are things that businesses can consider and plan for now, key issues that businesses need to follow, and changes they can start to make, to help protect their interests. Planning will help put businesses in the best possible position in the uncertain months to come. The shape that Brexit will take is not certain and there is scope for businesses to be involved, on their own or together with their trade bodies, to influence the outcomes of the EU/UK negotiations in relation to their sector.

What is the exit process?

Article 50 of the Treaty on European Union sets out the mechanism for leaving the EU. It states that any Member State can “decide to withdraw from the Union in accordance with its own constitutional requirements.”

The EU Referendum was “advisory” to the UK Government and the referendum result in itself did not trigger the Article 50 process. On 24 January 2017, the UK Supreme Court ruled that the UK Government cannot use its Royal Prerogative to give notice under Article 50 to withdraw from the EU. Instead such a notice must be authorised by an Act of Parliament. Our briefing on the Supreme Court’s judgment is available here.

On 13 March 2017, the UK Parliament passed the European Union (Notification of Withdrawal) Bill, which received Royal Assent on 16 March 2017. Theresa May, the British Prime Minister, subsequently triggered Article 50 on 29 March 2017 by giving notice of the UK’s intention to leave the EU in a letter to the President of the European Council (which includes the Heads of State and Governments of the EU Member States).

On 31 March 2017, the European Council published its draft negotiating guidelines, which set out its broad objectives for the Article 50 negotiations. A special European Council meeting has been scheduled for 29 April 2017 to adopt the guidelines, which will need to be approved unanimously by the heads of the remaining 27 Member States. Once agreed, the Commission will use the guidelines to draft a more detailed negotiating mandate, which will flesh out the details on the EU’s negotiating strategy. It will include the Commission’s recommendations on each area under negotiation as well as detailed institutional arrangements. The Council of the European Union (“Council”), which represents the governments of each Member State of the EU, will then need to approve the mandate (excluding the UK) by a majority representing at least 65% of the combined population of those Member States.

Once the Council agrees the mandate, the Commission will commence the Article 50 negotiations with the UK. The Commission will report back to the European Council and to the Council throughout the negotiations, and will keep the European Parliament regularly informed.

Who are the EU’s lead negotiators?

The Commission, the Council and the European Parliament have each appointed their lead Brexit negotiators.

The Commission has appointed Michel Barnier, a former Vice-President of the Commission and former French Europe Minister. Mr Barnier’s team will prepare the draft negotiating mandate and will lead the talks with the UK negotiating representatives.

The Council has appointed Didier Seeuws, a Belgian diplomat, to lead its Brexit taskforce. He will have a key role in co-ordinating the positions of each of the Member States, agreeing the European Council’s negotiating guidelines and in overseeing the work of the Commission during the negotiations.

The European Parliament has elected Guy Verhofstadt, a former Belgian Prime Minister and MEP, to represent it during the Brexit negotiations.

Timeline

The UK and the EU will have two years to negotiate a withdrawal agreement (unless this timeframe is extended with the unanimous consent of the European Council and the UK). However, this timeframe will, in practice, be considerably shorter.

Firstly, the negotiations will not commence straightaway. Once the negotiating guidelines are approved on 29 April 2017, the Commission will need to draw up the mandate, which will then need to be approved by the Council. The negotiations are, therefore, likely to commence around May/June 2017 although they will be affected by the French presidential elections and the German federal elections which will take place in May 2017 and September 2017, respectively.

Secondly, Mr Barnier has said that the deal will need to be agreed by October 2018 to allow for it to be ratified. Once the draft text of the withdrawal agreement is agreed by the Council, it will be sent to the UK Parliament for its consideration which will either approve or reject it. If it is approved, the withdrawal agreement will be considered by the European Parliament, which will need to approve it by simple majority to proceed. The draft agreement will then return to the Council and will be passed if 20 of the remaining 27 Member States, representing 65% of the population vote in favour of the agreement.

Furthermore, the process will be affected by the European Parliament elections which will take place in May 2019. This means that in order to ensure that Parliamentarians focus on the Brexit deal rather than their re-election, the draft agreement will need to be before the European Parliament by early 2019.

Scope of the withdrawal agreement

The Article 50 negotiations will focus on the separation of the UK’s rights and obligations from the EU, which have been acquired over the past 40 years. This will include issues such as:

  • the separation of the UK’s financial obligations from the EU’s finances;
  • securing rights for EU nationals living in the UK and UK nationals living in the EU;
  • the border between Ireland and the United Kingdom;
  • the relocation of EU bodies currently located in the UK, for example, the European Banking Authority and European Medicines Agency;
  • the UK’s future involvement in international treaties signed by the EU on the UK’s behalf including more than 50 trade agreements;
  • the future of British civil servants working in the EU institutions; and
  • the status of EU cases which will no longer be under the EU’s jurisdiction post-Brexit

Does the UK still have to comply with EU law?

The short answer is yes – nothing changes until the UK actually leaves the EU. During the negotiation period, the strict legal position is that the UK and businesses operating in the UK must continue to comply with EU law and EU law will still be enforceable in the UK. Free movement of goods, people, services and capital will continue and the UK will continue to make contributions to the EU budget. The UK will be required to implement any new EU laws that are due to come into force during the negotiation period.

A number of commentators have, however, suggested that there could be a "go slow" in relation to the implementation of new EU laws during the negotiation and withdrawal period.

Parallel trade negotiations

In her letter to Mr Tusk, Mrs May made clear that during the Article 50 process, the UK Government wants to agree the terms of the UK’s “deep and special partnership” with the EU, taking in both economic and security cooperation. Mr. Barnier has stated that the withdrawal agreement, in particular a consensus on the EU finances and the status of EU/UK nationals’ rights, would need to be resolved before any substantive trade discussions can take place.

Although Article 50 states that the withdrawal agreement will take account of the framework for a Member State’s future relationship with the EU, this does not mean that the Article 50 negotiations have to cover the details of a comprehensive free trade agreement between the UK and the EU. That is not to say, however, that parallel trade negotiations between the parties cannot take place alongside the Article 50 negotiations.

As the UK’s law is already aligned with EU law, it should take less time for the UK to agree a free trade agreement with the EU than for the EU to reach such an agreement with third countries with different legal systems. Moreover, in her letter to Mr Tusk, Mrs May states that the UK Government is looking towards a future where the UK’s and the EU’s regulatory frameworks are developed in tandem. She states that the management of “the evolution of our regulatory frameworks to maintain a fair and open trading environment, and how we resolve disputes" should be prioritised. Furthermore, Mrs May highlights that the UK starts from a unique position in the trade discussions with “trust in one another's institutions and a spirit of cooperation stretching back decades”.

Unlike the withdrawal agreement, any trade agreement would need to be approved by the parliaments of each Member State including some regional parliaments.

What will the UK’s trading relationship with the EU be post-Brexit?

The EU has the exclusive competence to negotiate trade agreements on behalf of its Member States under its Common Commercial Policy. As a result, the UK has not negotiated a trade agreement for over 40 years.

In a speech given by Mrs May on 17 January 2017, she outlined the UK Government’s Brexit plan. She stated that the UK will seek a “new, comprehensive bold and ambitious free trade agreement” with the EU and that the UK:

  • will leave the Single Market;
  • will take back control of its laws and end the jurisdiction of the Court of Justice of the EU (“CJEU”) in the UK;
  • will ensure that it can control immigration to Britain from Europe;
  • will seek a comprehensive free trade agreement with the EU allowing for the freest possible trade in goods and services between Britain and the EU’s Member States;
  • aims to enter into a customs agreement with the EU, but wants the ability to enter into its own free trade agreements with other countries and fix its own external tariffs on imports into the UK;
  • will seek a phased implementation of the changes to the UK’s and EU’s relationship but not an “unlimited transitional status”; and
  • wants to guarantee the rights of EU citizens who are already living in the UK, and the rights of British nationals living in other EU Member States, as early as possible.

Our briefing on the UK Government’s Brexit plan and what it means for businesses is available here.

If no trade deal is agreed, the UK and the EU will trade under the terms of the World Trade Organisation ("WTO"). This would mean that the EU would be obliged to impose its Common External Tariff on UK imports and the UK would be free to impose import tariffs on goods entering the UK (from the EU and elsewhere). Goods would also be subject to customs checks. The EU’s Common External Tariff varies from 0% on cotton, 11.5% on clothing, 26% on sugar and confectionery, to 45% on certain dairy products. Goods exported to the EU would still need to comply with EU standards.

For businesses in the UK who import from or export to the EU or are part of an EU corporate group this uncertainty means that planning is very difficult if not impossible until we have some clarity on the terms of the UK’s future relationship with the EU. Lawyers in our EU and International Trade Law team have been advising clients on the impact of Brexit on tariffs for their particular business, and has a Trade Risk Analysis tool. Contact one of our Trade lawyers for further information. In addition, our Commercial team has a Contractual Risk Analysis and Brexit Proofing tool which provides a review of your current trading relationships and contracts to identify the potential areas of risk arising out of Brexit and ways in which that risk can be mitigated.

Transitional/implementation arrangements

The UK Government wants to avoid a cliff-edge whereby the EU Treaties cease to apply to the UK once it leaves the EU. Instead it is seeking a smooth, orderly exit from the EU by having a phased implementation of the new relationship between the UK and the EU. In Mrs May’s letter to Mr Tusk, she asks that such a principle is agreed early in the process in order to minimise disruption and give as much certainty to individuals and businesses as possible.

The EU is also keen to enter into transitional arrangements with the UK. Mr Barnier has stated that the UK and the EU would need to agree the framework for their new partnership before it will be possible to identify the transitional arrangements needed to cover the time to finalise the EU’s new relationship with the UK.

Scotland

Scotland voted in favour of the UK staying in the EU by 62% to 38% with all 32 council areas in Scotland voting to Remain in the EU. Consequently, Nicola Sturgeon, the First Minister of Scotland, has said that:

1. She is seeking a second independence referendum asking the people of Scotland whether they wanted Scotland to be an independent country, which would take place between Autumn 2018 and Spring 2019. She does not, however, have the power to force the UK Parliament to approve such a referendum; and

2. She intends “to take all possible steps and explore all possible options” to secure Scotland’s continued place in the EU and in the Single Market, although short of leaving the UK and applying to join the EU, it is unclear what they might be.

A second Scottish independence referendum would have significant consequences not just for Scotland but for the UK as a whole.

Trading with the rest of the world

Once the UK leaves the EU the UK will lose the benefit of the EU’s free trade deals with non-EU countries. The UK will no doubt look to replace these and create trade relationships with countries with which the EU does not have a relationship. Indeed several countries have already expressed an interest in commencing trade negotiations with the UK including, Brazil, Canada, China, the Gulf States, Mexico, South Korea and the United States of America. Furthermore, Theresa May has stated that the Government has already started scoping discussions on trade agreements with Australia, India and New Zealand. The UK cannot, however, conclude any trade agreements before it actually leaves the EU due to the EU’s Common Commercial Policy.

In respect of non-EU countries with which the UK does not negotiate a free trade agreement, WTO rules require the UK to charge each country the same tariffs (referred to as its “most favoured nation” tariffs). Although Mrs May wants the UK to be free to establish its own tariffs, it is expected that the UK will seek to adopt the EU’s Common External Tariff as a starting point. Over time, however, it seems likely that the UK would seek to drop the EU’s protectionist tariffs on produce and goods that the UK does not grow or make, but the EU does, such as bananas and tobacco.

What happens to those laws deriving from the EU on Brexit?

EU Treaties form the constitutional basis of the EU and create the Single Market supported by the four freedoms of movement in goods, people, services and capital. The EU Treaties are implemented into UK law through the European Communities Act 1972 ("ECA"). The ECA provides for the supremacy of EU law in the event of a conflict with UK law and also provides the legislative basis for transposing EU law into UK law.

The UK Government has confirmed that once the UK leaves the EU, the ECA will be repealed and EU law will no longer apply from that date. All EU law in force immediately prior to that date including case law will, however, be converted into UK law through the “Great Repeal Act”. This will give the UK Parliament time to decide whether to amend, repeal or improve those laws.

The UK Government has made it clear that once the UK leaves the EU, the CJEU will no longer have jurisdiction in the UK. Judgments of the CJEU which are already reflected in EU law immediately prior to Brexit will continue to apply until the UK Parliament and/or the UK Supreme Court decide otherwise. It is expected that post-Brexit, CJEU judgments will remain persuasive if decided on equivalent law.

The review process of deciding which EU laws should continue to be applicable in the UK will take many years. As time goes on there could be an increasing divergence between EU and UK law. UK businesses that wish to continue exporting to the EU may find that they have to comply with two sets of laws. It may make practical sense to separate businesses exporting to the EU and selling into the UK domestic market into different legal entities.

How can we help?

We will be monitoring the political developments closely as well as the negotiations between the UK and the EU when they commence. The outcome of those negotiations as well as any action taken by the UK Government to sidestep the UK’s obligations under EU law will have different consequences for each business. Businesses should, therefore, keep abreast of these developments.

As a law firm with legal experts in all areas of law, we are well-placed to advise businesses across all sectors on the possible implications of Brexit. We can help you to identify the specific risks, challenges and opportunities for your business to manage your exposure and help you prepare a "Brexit ready" plan.

The impact of Brexit on each business will be different. It will depend, for example, on the sector, operating model, corporate structure, trading relationships and workforce profile. Common questions that you should be already asking include:

  • what strategic changes do you see your business making as a result of Brexit?
  • what impact does Brexit have on your current business plan?
  • how reliant is your business on the EU “freedoms” or any services or branch “passport”?
  • what exposures do you face as a result of changes in foreign exchange rates?
  • is your business overseen by an EU regulator?
  • do you buy/import goods or services from an EU country?
  • do you sell goods or services to an EU country?
  • is any part of your supply chain in an EU country?
  • do you buy or sell in a different currency? Are you hedged?
  • do you undertake in your contracts to comply with EU standards and require the same of your counterparty?
  • do you share or send data across the EU?
  • do you have ongoing cross-border litigation?

The above is by no means an exhaustive list but we can help you navigate this myriad of complex issues. Our approach also includes offering Brexit focused products to help you manage specific issues; for example our Contractual Risk Analysis and Brexit Proofing tool is designed to help you understand the potential risks to your trading and contracting arrangements arising from Brexit (whether pricing, currency, regulatory, tariff, people, data or otherwise) and put measures in place to protect against those risks. Our guide to the Implications for Global Mobility summarises the practical steps which employers can take to manage both the immediate and the longer term risks and issues. More information about our Brexit tools is available here.

The new EU/UK trade deal will be crucial to business and, with a team with extensive experience in advising on WTO and other trading terms, we can also work with you to help you lobby for post-Brexit arrangements for your sector.

If you have any queries regarding the content of this briefing or any legal query on Brexit, our team of legal experts will be happy to assist you.

 


 

This page was last updated on 5th April 2017.

Subscribe to get Brexit law updates and briefings.
Download our legal publications on how Brexit will affect business