Groundhog – 'No Deal' Brexit – Day

The UK government's new Prime Minister has said he is "absolutely committed" to leaving the EU on 31 October come what may.

The UK government's new Prime Minister has said he is "absolutely committed" to leaving the EU on 31 October come what may.  The chances of the UK leaving the EU without a deal have never been higher and businesses should be prepared.

Under the terms of Article 50 of the EU Treaties and the UK's own legislation, the UK will leave the EU on 31 October automatically if nothing further is done.  Any discussion of extension must be requested by the UK, and the new government has indicated that it will not make any further such request if the Withdrawal Agreement cannot be re-opened.

In March 2019 the UK Parliament was not willing to allow the Government to leave without a deal and the EU were prepared to extend the two-year deadline for withdrawal to allow for further discussion in the UK.  But circumstances change: a new Government this month; a Prime Minister with a 'hard Brexit' mandate (from his own party); an EU tiring of UK uncertainty and with a 7 year budget to approve early in 2020.  All affect the judgement on whether the UK will leave without a deal – either at the end of October or after a messy Parliamentary battle and a potential UK General Election.   

Despite the uncertainty there are, ultimately, only 3 main scenarios that may happen on 31 October:

1.  No Deal

The new Prime Minister – after some vacillation – has now stated that if the EU is not prepared to revise the Withdrawal Agreement, the UK will allow its EU membership to lapse simply by the expiry of the Article 50 period, and so leave the EU on 31 October without a deal.  This is also the effect of the UK's own domestic legislation and the government has made preparations for No Deal its “top priority”.  

Parliament's opportunity to thwart a No Deal Brexit are more restricted than at the start of 2019 and in the event of a 'no deal' Brexit UK-EU trade and co-operation would immediately face regulatory barriers. Negotiations to re-establish free trade could then take years. 

At a domestic level, the European Union (Withdrawal) Act 2018 will transpose existing EU Regulations into UK law at the time of Brexit, ensuring the continuity in the UK of all EU regulations currently in force, in so far as that is in the UK's power.  However, any continuity is often heavily dependent on the position the EU adopts.  Without a deal the UK becomes a "third country" from 1 November, subject to EU customs duties, Rules of Origin requirements and increased administration; to immigration controls on staff;  to EU requirements for product conformity and certification; to loss of passporting arrangements for financial services; mutual recognition of professional services; to changes in the legal status of contracts and of intellectual property rights; to restrictions on personal data transfers from the EU; to loss of access to EU joint programmes, research and investment funding; and to the loss of the benefits of some 30 EU free trade agreements with other countries that have yet be rolled over.

There may well be attempts to devise an alternative or interim arrangement, but the breadth and scope of those arrangements are far from clear and are constrained by the international trading framework that will govern the actions of the UK and the EU in the event of a no deal.

2.  A (revised) Withdrawal Agreement with a "status quo" transition period

The current draft Withdrawal Agreement provides for a transition period after Brexit to allow time for a comprehensive agreement on the future UK-EU relationship to be negotiated.  The EU has consistently said it will not re-open the text of the Withdrawal Agreement.  Given it has been rejected three times by Parliament the UK argues that it must now be re-opened.  In particular the Government wants to see the removal of the "Irish backstop" – a mechanism to ensure that there will be no need for a hard border in Ireland, by keeping the whole UK in the EU Customs Union (with the regulatory alignment that implies). The backstop would only come into effect if no agreement is ultimately reached.

3.  A further extension of the Brexit deadline

While the UK government has firmly ruled out seeking an extension, it has a majority of only two in the UK Parliament and is likely to face serious efforts by MPs to prevent a No Deal Brexit.

However, only an Act of Parliament could legally require the government to seek an extension and it is unclear whether there is a sufficient majority to achieve such an Act of Parliament, let alone enough time with a Government committed to leaving on 31 October come what may. Were such legislation nonetheless to make progress, the Prime Minister has not ruled out the option of "proroguing" Parliament, in effect suspending all business until after Brexit.

An early election might also be an option for the opponents of a No Deal Brexit – either because one is called by the new Prime Minister (though he has ruled this out, for now) or as a result of a successful "no confidence" motion against the government (and in the event no other parties could form a Government).  The EU has said that it could conceive extending the current 31 October deadline in the event of a General Election in the UK. 

Implications for businesses

Many companies had contingency plans in place for a hard Brexit on 31 March and their Brexit planning may require only minimal updating to reflect some of the policies emerging from the UK and the EU over the summer and up to the 31 October deadline.  Other companies took the view that Parliament's position in late 2018/early 2019 meant that a 'no deal' was unlikely but will want to revisit that conclusion – and possibly contingency planning – in light of the new UK government’s radical shift in approach.