Brexit: the extension dilemma

A decision is expected to be made this month on whether to extend the Brexit transition period. Not extending risks a disorderly end to the transition, adding a further economic shock to the damage done by COVID-19 – but extending exposes the UK Government to accusations of failing to deliver on its core promise to "get Brexit done". Faced with this dilemma, what are the UK Government's options?

KEY DATES

Under the Withdrawal Agreement, any extension to the Brexit transition period (which could be for up to 2 years) must be agreed before 1 July 2020. EU leaders are scheduled to meet on 19 June and could obviously use that to discuss any proposals for an extension. However, that would not prevent further meetings taking place later in the month if negotiations on an extension went down to the wire. June is also a key date in the Political Declaration as it is the month in which the parties will "convene at a high level" to "take stock of progress" on the Brexit negotiations more widely. It is conceivable that an agreement on an extension could emerge from those discussions.

Some assumptions

The UK Government continues to insist publicly that it will not request an extension to the transition. It is also possible that it believes that a sudden switch to new trading arrangements on 1 January 2021 does not pose a serious risk of economic disruption (or that this risk can be adequately mitigated). We explained this risk in our earlier briefing here. However, for the purposes of this briefing, we are going to assume that the Government acknowledges this last risk and is therefore prepared to consider options which might allow for more time, including an extension of the transition period.

COULD THE UK GOVERNMENT SHIFT ITS POSITION ON AN EXTENSION?

The Government has been steadfast in its rhetoric on not extending and has even passed a law purporting to prevent UK Ministers agreeing to it. However, opinion polls suggest that a majority of the UK public would accept a delay, given the COVID-19 crisis. This would provide political cover for some form of retreat from the Government's current "no compromise on extension" position (and Parliamentary sovereignty, coupled with its substantial majority, should enable it to overturn the prohibition on agreeing to any extension). The recent statement by Nissan that its Sunderland plant would not be sustainable if there is no trade deal with the EU may also be weighing on Ministers' minds (given that it could lead to significant job losses in a strongly Brexit-supporting constituency). Similarly, concerns have been raised about the impact of Brexit-related disruption on the supply of medicines, which is obviously particularly sensitive in view of the COVID-19 crisis.

A sudden pivot to a new strategy – in apparent contradiction of the Government's own rhetoric – also occurred in relation to the negotiations on the draft Withdrawal Agreement last year. Harder rhetoric makes it easier to present such an outcome as a triumph of diplomacy and the product of a tough negotiating stance.

A conditional extension

The political dilemma facing the UK Government is how to square its promise to "get Brexit done" with an extension. More time is arguably needed for (i) the negotiations themselves and (ii) measures to implement any eventual agreement to avoid a disorderly end to the transition.

One option for the UK Government would be to prioritise (ii) and request an extension which is conditional on agreement being reached with the EU on the future relationship by say, the end of the year – with the extension being used solely for the purposes of implementation. This would allow it to claim that it has maintained the immediate time pressure on the EU to "do a deal", whilst also providing extra time to avoid the disruption that is likely to result from a sudden switch to new trading rules on 1 January 2021 (provided there is a trade deal). The terms of the extension could also provide for the UK to bring the transition to an end earlier in some areas than others (or for it not to be extended at all in relation to some areas).

Politically, it might even be possible to present such an arrangement as something which both sides had discussed and agreed as a sensible way forward, rather than something which was requested by the UK. However, it would only assist businesses if agreement can ultimately be reached with the EU on the future trading relationship; businesses will therefore still need to consider preparing for the possibility of exiting the transition without a trade deal with the EU.

IS A CONDITIONAL EXEMPTION COMPATIBLE WITH ARTICLE 50?

It is possible that a conditional extension could be challenged on the basis that it goes beyond what is permitted by Article 50 of the Treaty on European Union. However, Article 50 contains no express wording that would seem to rule out conditionality as regards any extension and in order to be successful, any challenge would probably need to demonstrate that Article 50 had to be read quite restrictively.

An implementation period in the trade deal with the EU

An alternative – which would not involve requesting an extension – would be to include provisions in the new EU-UK trade agreement which preserve some aspects of the status quo, pending full implementation of what has been agreed. Such provisions could make use of existing models, for example:

The Irish Protocol from the October 2018 version of the draft Withdrawal Agreement, which effectively keeps the UK within the Single Market for goods and the Customs Union; or
The "reverse Ukraine" model: the EU-Ukraine agreement allows Ukraine access to the single market in particular areas once it has aligned its laws with relevant EU legislation. A similar mechanism could be used "in reverse" to provide for "phased" exit by the UK from different aspects of the transition at different times. For more about the Ukraine model, click here.

On the face of it, this approach might seem more attractive politically – at least from a UK perspective. However, despite the possibility of using existing models, it is much less straightforward than simply extending the transition period, particularly from the EU's perspective.

CHANGING THE DATE

Another option would be for the EU and the UK to shift the date by which an extension has to be agreed to later in the year. Politically, this could be attractive for the UK Government because it would preserve the possibility of using the extension as a straightforward mechanism to provide for an implementation period, as described earlier. However, it would involve amending the Withdrawal Agreement, which is problematic for the EU, as it is unclear what legal basis it would rely on to do this.

What businesses should do

The best outcome for businesses would be an extension to the transition which applies whether or not there is a deal with the EU, so as to give them additional time to prepare come what may. However, the politics of Brexit would seem to make such an outcome unlikely, especially as the UK Government appears to view its leverage as being enhanced by the threat to leave without a deal (which necessarily involves keeping that possibility open and emphasising how it would damage the EU as well as the UK). Without an "all weather" extension of the type outlined above, businesses will still need to prepare for a scenario where the UK leaves the EU without a trade deal on 31 December 2020.

It should also be noted that, even if a trade deal can be agreed, the level of market access will be significantly lower than the UK has been used to as a participant in the Single Market and the Customs Union. For example, the impact on goods supply chains in terms of additional red tape is not likely to be much different whether the UK exits the transition with a deal or without one.

At earlier points in the Brexit negotiations (particularly in relation to the Withdrawal Agreement), some businesses were reluctant to spend time and resources on preparing for the worst case scenario on the basis that such measures might prove to be unnecessary. However, now that the gap has narrowed between the worst case scenario (exiting the transition without a trade deal with the EU) and the best case scenario (a relatively limited Canada-style trade deal), there is less reason to hold back - because many of the preparations for the worst case scenario will stand you in good stead for the best case scenario as well. Adopting a "wait and see" approach is also likely to limit the time available to explore mitigation options and may make them more costly to implement.

If you would like help with preparing for Brexit, please speak to your usual contact at the firm or any of the contacts below.

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