Brexit: The UK has denied asking for an extension, so what are the options now?
Today is the 4-year anniversary of the EU referendum in which the UK narrowly, with a majority of only approximately 1.2 million votes, voted to leave the UK. Now, four years later, the UK and the EU are still working to implement Brexit. Last week the UK formally declined to ask for an extension of the transition period, and Boris Johnson stated that it "makes no sense" to extend post-Brexit trade talks beyond the end of the summer. The risk of a hard Brexit is therefore yet again heightened.
Where are we now?
On 23 June 2016, the UK voted to leave the EU. The vote barely passed with a majority of only approximately 1.2 million against approximately 33.5 million voters. After extensive and drawn-out negotiations, the UK formally ceased to be a member of the EU on 31 January 2020. The UK's existing relationship with the EU did not, however, change completely over night as a transition period began upon the UK's exit and will remain in effect until 31 December 2020.
Until the end of 2020, the UK will therefore, despite not being a member, continue to abide by EU legislation and uphold EU-negotiated trade agreements with third countries. The goal of the transition period is to give the EU and the UK time to negotiate, agree and implement new agreements as the UK will leave both the single market and the customs union at the end of the transition period. The most important agreement will be a new trade agreement, as trade between the EU and the UK will otherwise be subject to the WTO most favoured nations tariffs and custom checks at the border.
The negotiation progress between the EU and the UK has been limited, and Michel Barnier, the EU's chief negotiator, has gone so far as to call the progress "disappointing". In the light thereof, the UK recently confirmed formally that it will not be seeking an extension of the transition period. A request for an extension would otherwise have to be made on 30 June 2020, at the latest.
The parties will therefore continue their negotiations even though they have said in a joint statement that "new momentum was required".
This raises the question: If the parties require more time to negotiate, what are their legal options from here?
In short and slightly simplified, the main options seem to be:
- Extension of the transition period by amending the withdrawal agreement, or
- Implementation of a new transition period, which would enter into force when the current period expires.
Can the UK seek further extension?
It has been speculated that it is possible to extend the transition period
("Implementing Brexit, Securing more time", Institute for Government, published 30 May 2020). Such extension would, however, require an amendment of the withdrawal agreement.
An extension by amendment would require new domestic legislation on the part of the UK, which, among other issues, would have to cover the UK's continued contribution to the EU budget beyond March 2021.
On the part of the EU, much more legal uncertainty exists, as it is not clear on which legal basis the EU could agree to an extension by amendment. Given the uncertainty, it is further speculated that EU negotiators would likely first have to gain approval from the EU member states as well as the European Court of Justice.
The European Court of Justice would have to speed up its case work, as such approval can otherwise take years to conclude. Furthermore, if the EU negotiators were to proceed without consent of all EU member states, the negotiators run the risk of an EU member state (or in theory any citizen) bringing an action before the European Court of Justice to annul the decision.
If the UK and the EU intend to extend the transition period, such extension is not a viable last-minute option, and would have to be initiated well in advance of 31 December 2020.
Other ways of gaining more time to both negotiate and implement a solution have also been speculated. One way is for example to implement a new, separate, transition period. The legal basis for such an extension is clearer, but still not without risk.
The major obstacles to the implementation of a new transition period are primarily that a whole new agreement would be required, which would also have to be negotiated (taking time away from present trade negotiations) as well as approved by the EU Council and Parliament along with possibly requiring ratification nationally by member states.
Like an amendment to the existing withdrawal agreement, the implementation of a separate and new transition period would also be very time-consuming.
How should businesses prepare themselves?
It is expected, at least in the short-term, that the UK's move to a free trade relationship with the EU will have a negative economic impact. The COVID-19 pandemic has already caused a significant negative economic impact on both the UK and its trade partners (as well as the rest of the world).
Boris Johnson's and the Conservative Party's slogan of "Get Brexit done" continues to drive the UK negotiations with the EU, as Boris Johnson and his party likely feel pressed domestically to fulfil their political promises. Regardless of the risk of a further negative economic impact, the UK government will therefore likely continue to push for a final exit from the EU on 31 December 2020, and not attempt a further extension.
Therefore, businesses should be financially prepared for a further negative economic impact. In addition, businesses should also prepare for a worst-case scenario and, from 1 January 2021, be prepared to tackle new customs formalities and checks - regardless of whether the transition period is extended or not.
Businesses should expect delays as the new customs infrastructure is put into action, albeit the risk remains that sufficient infrastructure may not be in place to tackle the new volumes, which would further increase delays. Businesses are therefore strongly encouraged to cater for 'Brexit-related delays' in their contracts or via proactive communication with their customers and suppliers.
If your business has questions regarding Brexit, we are happy to elaborate further.