Brexit Update – Transition Period

Featuring Daniel Sladen | 22nd March, 2018

In our latest update on the progress of the Brexit negotiations, Daniel Sladen looks at the agreement on transition that was reached earlier this week.

Both sides of the Brexit negotiations had hoped to deliver a transition deal in early 2018 – one of the few shared aspirations – and both were pleased to announce transition arrangements this week. These will come into effect on 29 March 2019 and remain in place until 31 December 2020, and cannot be extended beyond that date.

However a rapid deal always comes at a cost, and there are considerable costs which Britain has agreed to bear in order to be able to move on and out of the European Union:

  • Britain will continue paying into the EU budget until 2064 (an estimated figure of £35-39bn);
  • Britain must abide by European Court of Justice rulings during the transition period;
  • Britain will permit free movement of EU nationals, with the same rights, during the transition period;
  • Britain will still be inside the single market and customs union, and party to existing EU trade deals, during the transition period;
  • Britain may negotiate future bilateral trade deals but cannot implement these until after the transition period;
  • Northern Ireland and the Republic of Ireland will stay in regulatory alignment unless the need for this in order to avoid a hard border is superseded by a future trade deal and/or new technology; and
  • Britain will allow EU vessels continued access to its fisheries during the transition period. Britain will be consulted on quotas, but will not have a veto.

The benefits to the UK are that next year the UK may start negotiating future trade deals, and meanwhile businesses can continue with single market and customs union trading arrangements unchanged. British ex-pats will continue to enjoy free movement and their current rights during the transition period.

What does it mean?

The aim of the UK government is to deliver stability for UK businesses, and the transition deal may give some reassurance to those worried by an imminent regulatory cliff edge. The CBI has welcomed the deal as a victory for common sense, lifting a cloud of uncertainty. The UK government’s hope is that from next year, businesses can expect a steady trickle of announcements of bilateral trade deals that the UK has succeeded in negotiating to come into effect in December 2020. However there is a risk that potential bilateral trade partners will be reluctant to sign trade deals before knowing the terms of the future UK-EU trade agreement.

Businesses who depend on trade with the EU should be aware that the UK looks unlikely to be able to start negotiating a future trade relationship with EU member states until the article 50 withdrawal agreement is finalised. This means that EU trade negotiations are unlikely to start before April 2019, and are likely to prove lengthy. UK businesses may well approach December 2020 with little or no idea of what future trade terms with EU member states are likely to be, and that date may still prove to be a cliff edge for many. The UK government had hoped to allow the transition period to be extended if necessary to cushion this moment – but the agreement has specifically ruled this possibility out.

Will it happen?

As ever, there is a possibility that the transition period will not happen. Firstly, the transition deal as announced must be signed off by all 27 EU leaders at the EU summit this week. And secondly, because “nothing is agreed until everything is agreed”, the transition period will only happen if the two sides reach a legal article 50 withdrawal agreement by 29 March 2019, which remains far from certain. Areas where the sides continue to disagree include: governance of the treaty; police and judicial cooperation; data sharing; ownership of nuclear material; Gibraltar; and, perhaps most crucially, how to solve the issue of the Irish border in practical terms.

For further information, our Brexit Update and Tax Guide (published in January following the “agreement in principle” between the UK and the EU) discusses some of the possible tax consequences of the Brexit negotiation and our Brexit Planner provides practical suggestions on assessing the risks to your business.

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