What next? Managing a 'No deal' Brexit

On 15 January 2019, Parliament rejected the Government's Withdrawal Agreement by 432 votes to 202. The Opposition has tabled a no confidence motion that will be debated today (16 January 2019). Theresa May announced that she will begin an engagement process with MPs on issues which would allow Parliament to support the Withdrawal Agreement before further talks with the EU. The Government is then likely to return to Parliament with another version of the Withdrawal Agreement (including additional clarifications/concessions from the EU, in particular, on the Irish backstop arrangements).

We expect the Government to ‘table’ a motion under section 13 of the EU Withdrawal Act by next Monday (following Dominic Grieve's controversial amendment last week to a business motion). This motion would be amendable and the Commons might ask the Government to renegotiate with the EU or hold a second referendum – see "A different deal" below.

If the Government's Withdrawal Agreement is subsequently passed, the Government would introduce the European Union (Withdrawal Agreement) Bill. The UK would leave the EU on the 29 March 2019 when an (extendable) transition period would commence and last until 31 December 2020 (during which time the UK would remain in the Single Market/Customs Union, with all EU law applying). 

No-deal Brexit

The legal default outcome of the European Union Withdrawal Act 2018 (EUWA) is Brexit without a withdrawal deal on 29 March 2019. If there is no-deal (and Article 50 is not extended or revoked), then there will be no transition period and at 11.00 p.m. (UK time) on 29 March 2019, the UK will leave the EU. In the absence of the Government changing course or Parliament being able to find a majority for an alternative solution which it can then write into law, no-deal will prevail.

A ‘no-deal’ outcome does not necessarily mean the end of negotiations on withdrawal arrangements, as a negotiation outside of the Article 50 process could take place covering key issues of mutual concern. Such a "bare-bones" deal (or deals) could even result in a last minute transition period to avoid the "cliff edge" scenario on 29 March 2019, in exchange for some or all of the UK promised payment of c.£39bn to the EU.

Once the UK leaves the EU, formal negotiations on the long-term future UK-EU relationship will start under Article 218 of the What Treaty on the Functioning of the European Union.

Alternatives?

The Government's defeats in the House of Commons last week suggest that Parliament may seek to prevent a no-deal Brexit, possibly by taking control of the Parliamentary schedule. How this could be achieved and what the outcome would look like is not yet clear. A few possibilities are:

A different deal: When Theresa May returns to Parliament (which she is required to do by next Monday), the motion tabled will allow amendments, which could mean MPs putting forward an alternative plan. It is reported that some MPs (led by Dominic Grieve and Oliver Letwin, and aided by the Speaker, John Bercow (contrary to the advice of his clerks)), are seeking a way to seize control of business in the Commons, so that backbench motions would take precedence over government motions – reversing the usual convention that the Government controls the parliamentary agenda.

This is significant as, up to this point, Conservative "Remainer" rebels could only block a Government decision to pursue the default position of no-deal in the EUWA by supporting a no-confidence vote to bring down the Government. An up-ending of parliamentary procedure would allow Remainer rebels to act on their alternative Brexit plans, which they could call to a vote and make law.

Under these circumstances, it is understood that MPs could prevent a no-deal Brexit, and acting through the parliamentary liaison committee (which is dominated by Remainers by a margin of 27 to nine) could come up with an alternative proposal which would have to carry a Commons majority. This would be likely to be closer to a "softer" Norway/EEA type deal. The 27 EU member states would have to agree to any such deal, however.

The loss by the Government of control over legislation would have serious repercussions for its stability and would move the country closer to a General Election (whatever the outcome of the confidence vote today).

A second referendum: A second referendum would require legislation in Parliament to agree the question and logistics, complying with the Political Parties, Elections and Referendums Act 2000. This would require a delay to Brexit to be agreed by the 27 EU member states. There does not currently appear to be a Parliamentary majority in favour of a second referendum.

Delay: The timeline for Brexit can be delayed, following a request from the UK and agreement by the 27 EU Member States. 

No Brexit: The European Court of Justice agreed that the UK could unilaterally withdraw the Article 50 notification by way of an "unequivocal and unconditional decision".  This would likely need Parliamentary approval. This option would be politically very damaging for the Conservative Party and would be likely to collapse the Government, so is improbable.

If there is no transition period, and the UK leaves the EU with no-deal, then EU law will cease to apply to the UK from 11 p.m. on 29 March 2019 - subject to some EU law continuing to apply indirectly through the EUWA. 

The UK Government's post-Brexit policies would come into effect on 29 March 2019, instead of at the end of the transition period. 

The Government has published technical notices, which set out the actions that the Government and/or business will need to take ahead of a no-deal exit from the EU, to ensure they are prepared.

• The "Four Freedoms": The UK will no longer be part of the EU's single market and customs union; the free movement of people, goods, services and capital will no longer apply; and there will no longer be mutual recognition of professional qualifications and regulatory frameworks.
• EU Retained Law: The EUWA incorporates into UK law most directly applicable EU law by creating a new body of retained EU law and preserves UK law that implements EU requirements. After Brexit, the UK can decide whether or not to mirror any post Brexit developments in EU law.
• Brexit Statutory Instruments: A significant number of Statutory Instruments (SIs) have been drafted and are ready to be put in place in the event of a no-deal Brexit, to amend deficiencies in EU derived legislation. The latest SIs can be seen here and the Financial Services SIs can be seen here.
• ECJ:  The ECJ will no longer have direct jurisdiction over the UK and the UK courts will no longer be obliged to give effect to EU law above domestic law, except to the extent provided in the EUWA.
• Enforcement of Judgements: The UK cannot unilaterally replicate the full effects of the Recast Brussels Regulation which regulates jurisdiction, and the recognition and enforcement of judgements between EU member states. In the absence of a bespoke deal on the application of the Brussels Regulation, the UK would re-join the 2005 Hague Convention and, likely, the 2007 Lugano Convention, which afford broadly similar enforceability outcomes.
• Data Protection: If there is no European Commission adequacy decision at the point of exit, the transfer of personal data from the EU to the UK will require an alternative legal basis.

The European Commission has been drafting amendments to EU legislation to take account of the UK’s exit in areas such as shipping, tariff obligations, energy, customs, aviation, health and safety, transport and citizenship. The Commission is identifying the legal acts that will have to be adapted in the context of Brexit by “preparedness acts” that will fill legislative gaps and “contingency measures to remedy negative impacts in the cliff-edge situation”, which would take effect in the event of a no-deal scenario.

For financial services, the EU has not (yet) announced any reciprocal regime such as the UK's temporary permissions regime (TPR) (which allows EU financial services firms to continue to provide services in the UK for a period). However, Germany has prepared similar draft legislation to apply in a no-deal scenario, which, although not as wide as the UK legislation, will provide a temporary permissions regime for 21 months for UK banks and investment firms (but not yet payments firms) currently relying on a EU passport to operate in Germany. France has also introduced legislation anticipating a no-deal. Other Member States will likely follow. If the EU proposes some comparable measure at EU level, then Member States would not advance national proposed legislation. 

With no withdrawal agreement or framework for future relations, trade between the UK and the EU would be conducted under the terms of the World Trade Organisation (WTO). Tariffs on UK exports to the EU and vice versa are expected (assuming the UK would not change its Most Favoured Nation tariffs under WTO rules).  The average of tariffs is expected to be low (about 2.6% for non-agricultural products) and would leave the UK net positive by a significant amount. However, in some sectors, tariffs can be quite high - under WTO rules, cars and car parts, for example, would be taxed at 10% every time they crossed the UK-EU border; and agricultural tariffs rise to an average of over 35% for dairy products. 

Potentially more disruptive would be non-tariff barriers, where additional paperwork, customs checks, technical requirements and regulatory standards could frustrate trade.  At the moment of leaving the EU customs union without a deal, the border between the UK and the EU would become a customs border. Both UK and EU businesses would have to apply relevant customs, excise and VAT procedures to goods traded between the UK and EU, in the same way that already applies for goods traded outside of the EU with customs declarations and checks. This is likely to mean more customs controls and probably increased costs and delays. The WTO has little to say about services, and does not cover aviation. 

The Government anticipates disruption at Calais, for example, due to the impact of longer border checks and is looking to divert shipping traffic to other ports. However, French officials at the port of Calais have suggested that it is prepared for a no-deal Brexit, and that there should be no delays for trucks with all appropriate customs declarations.