A new Brexit agreement has been reached between the UK government and the European Union. This was approved by EU heads of state today.
What does the new agreement say?
Alongside the original withdrawal agreements on payment of UK liabilities to the EU and guaranteeing citizens’ rights, the new deal abandons the previous UK-EU customs territory (the ‘Irish Backstop’) and waters down the original political declaration.
Northern Ireland has a special status
Northern Ireland would effectively be part of the single-market regulatory regime for goods, the EU VAT regime and would be both in and out of the EU customs union.
These Northern Ireland arrangements could last a significant period of time.
They would come into effect automatically on 31 December 2020; after four years the Northern Ireland Assembly would vote on whether to continue or end them.
If the Assembly votes to end the arrangements, then there is a two-year period before it ceases. If they vote to continue, this can be for another 4 years or (if a majority of both communities) another 8 years.
So, these Northern Ireland arrangements would last for a minimum of six years – through to 31 December 2026; and could last a lot longer.
For more detail on Northern Ireland, see my blog here: grantthornton.co.uk//brexit-deal-indirect-tax-and-special-status-for-northern-ireland
Withdrawal agreement provides little certainty for future EU-UK economic relationship
For businesses in Great Britain (England, Scotland and Wales), the withdrawal agreement sets the ‘worst case scenario’ for the future economic relationship - the minimum integration on which any future EU trade agreement then builds. This ‘baseline’ for the future relationship is a significantly less aligned EU-UK economic relationship than that envisaged in the previous withdrawal agreement.
Political declaration = blind Brexit?
The political declaration that accompanies the withdrawal agreement is a non-binding text which sets out common EU and UK aims for the future relationship.
There is an aspiration to agree a UK-EU trade deal by the end of December 2020. The pace of negotiation over the last three years suggest this is optimistic.
The declaration sets out an aim of a less comprehensive free trade agreement than the one envisaged by Theresa May.
It no longer aims for a UK-EU customs territory, which would have smoothed cross border trade and supply chains and reduced customs administration.
It no longer suggests that the UK will ‘consider aligning with EU rules’ in terms of sectoral regulation. Whereas Theresa May envisaged as ‘frictionless trade’ as possible, and was prepared to look at international alignment of EU and UK rules, the new political declaration reflects Boris Johnson’s commitment to pursue a lighter touch Free Trade Agreement with the EU, and the desire of the UK government to seek trade deals with the USA, Japan, Canada and Australia.
With so much left up to negotiation, the destination of Brexit is still largely unknown.
What happens next?
The draft agreement now must be approved by MPs in the UK Parliament and it also has to be approved by the European Parliament.
The UK Parliament meets on Saturday to debate and vote on the agreement. This will be a tight vote.
No date has been set for the European Parliament to debate the agreement. They may demand more time to do so properly.
We could still have a no-deal Brexit on 31 October if MPs or MEPs vote down the agreement. We may have a further delay. And we may even see MPs demand a second referendum.
It’s not a done deal yet.
Saturday’s vote in Parliament will be the moment of truth.
If approved what does this mean for business?
· 14 months for businesses to prepare for change: a transition period would run until 31 December 2020, during which free movement, access to markets, programmes and regulatory regimes will remain unchanged
· No certainty on the future UK-EU relationship after December 2020. All the things that matter to business are still up for grabs: future trade agreements, regulation, and economic partnership.
· It creates a special status for Northern Ireland but much of the detail is yet to be worked out. There could be some advantages for some businesses to locate manufacturing in Northern Ireland, particularly as the arrangement provide stability for six years. However, the agreement also introduces significantly increased customs administration for businesses operating in Northern Ireland – documenting origin and destination of products will be critical and reclaims for domestic sales will impact cashflow.
· Most business preparations made for a 'no deal' will be valid in 14 months’ time: importers and exporters will need to handle more customs administration and documentation, so review your customs processes and skills; be ready for divergent regulatory regimes in UK and EU; continue to mitigate against skills shortages (with the end of free movement); and look at how you can cut cost and manage cashflow. UK services have no guarantee of a favourable EU trade agreement and can expect some friction and trade barriers.
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