The UK and EU have today released a new colour coded draft legal agreement on leaving the EU. techUK takes a look at what it all means.
Brexit was originally going to be red, white and blue, now it’s green, yellow and white. Yesterday Michel Barnier and David Davis released a new version of the draft agreement due to be delivered by 21 March. It sets out the full scope of the UK’s withdrawal from the EU, including the transition period. The text is helpfully colour coded: green for text agreed by both parties that can be considered locked; yellow where there is a political agreement but the language is still subject to change, and white for areas where agreement is not yet secured.
Ensuring the agreement is formalised is vital so negotiations on what comes after Brexit (and the transition period) can begin in earnest. So, what does the new text say?
The main headline is that the core text around a transition (or implementation) period has been agreed. After failing to secure a longer time commitment, the UK has agreed the EU’s proposal that the transition ends at midnight - Brussels time - on 31 December 2020. The transition period will therefore be just 21 months from the end of the Article 50 period.
The transition will largely be based on the status quo. EU law will continue to apply and the UK and UK businesses will maintain the benefits of EU membership. This is the model of transition that techUK has supported. It means that tech businesses will only have to adjust once to the impact of Brexit rather than having to make staged adjustments which would have much more complicated, uncertain and expensive. In the vast majority of areas, companies should see no substantive change in the way they do business with the EU until the end of December 2020.
However, the period is shorter than many had wished. It leaves very little time to negotiate the new Free Trade Agreement (FTA) with the EU. It also provides a very tight window to put in place new procedures and systems, not least new customs and border systems, to allow for a smooth transition for businesses used to trading in the Single Market. That is why techUK has warned both sides to be realistic about the prospect of extending the transition if needed, rather than simply having the Brexit cliff edge moved back to New Year’s Day 2021.
Citizen’s Right: Secured
The text confirms the process for EU citizens currently in the UK (and UK citizens living in the EU) to continue to live and work in the country during the transition period and to apply for ‘settled status’ after living there for five years. This is a hugely important issue for the over 180,000 EU citizens working in the digital sectors and the companies who rely on them. The agreement also states that those arriving during the transition period will be allowed to seek settled status. This was something the UK initially resisted and is a welcome move to allow continuity until the end of 2020.
According to the text, the deadline for applications for settled status cannot end earlier than the end of July 2021. However, it agrees that, in the event of any technical problems, that deadline shall be extended by one year. This is a hint that, in this area at least, there is some contingency planning against unforeseen problems during the transition/implementation period.
techUK continues to work with the Home Office on the full implementation of the system for delivering settled status. We have been clear that this process needs to be as simple as possible. The formal agreement requiring minimal documentation and keeping costs to no more than the price of a passport shows a commitment to delivering this goal. The clear statement on mutual recognition of professional qualifications is also an important enabler in cross-border trade in services.
Trade: Open for business, for the moment
Unsurprisingly, there is significant detail in the agreement on trade. In particular, the processes for goods on the market before the end of the transition, which was agreed at a political level in December, is formalised in the text. Essentially, any goods or services placed on the market prior to the end of transition may remain available and move between the UK and the EU until the goods are delivered or the service utilised. However, businesses will bear the burden of proof in showing it was on the market prior to the end of the transition. This will require tight record keeping for many businesses used to selling into the Single Market on a relatively easy basis.
On customs requirements there is clarity that anything moving across border during the transition, or beginning to move before the end of transition, will abide by existing customs processes. While this is good news, the real challenge for movement of goods will be the next phase of negotiations on the post-Brexit relationship. This is likely to be complicated by the Irish border question (see below).
There is welcome clarity on Intellectual Property (IP) rights, where any IP registered in the EU before the end of the transition will continue to be deemed registered in the UK as well (and vice versa) without the need for further checks. For tech suppliers into the public sector, it is also ‘deal done’ on provisions maintaining EU procurement law throughout the transition period.
The agreement also states that for the purposes of existing EU international agreements, the UK is to be considered as remaining an EU member for the transition period. This means that the UK will retain the advantages of current trade agreements, such as CETA and the FTA with South Korea. This will be welcome for UK tech businesses who conduct trade with markets covered by these deals. However, it remains to be confirmed whether all parties to these treaties have agreed to allow the UK to be treated as an EU member in that way. It is important that this is clarified quickly.
One outstanding issue for agreement in on VAT procedures. Under the proposals the UK remains within the scope of the commons system on VAT, with the rights the current rules confer (such as the right to deduct VAT on acquired goods and services) continuing to apply for five years from the end of the transition. However, this text is marked yellow, so there may yet be changes that affect the ability to reclaim VAT or who might be expected to pay it during (or immediately after) transition.
One area where tech businesses may be concerned is on the free flow of data during the transition period. It is vital that the ability to move data between the EU and the UK is maintained post-March 2019 while an adequacy-like agreement is secured. The text on this issue, found in Title VII, hasn’t changed since the previous draft. It simply states that EU law (specifically the General Data Protection Regulation – GDPR) will apply to the UK in the processing of personal data during transition. It also states that any future processing is based on the agreement, meaning for any of this data EU rules will apply effectively in perpetuity (unless an adequacy agreement is concluded).
However, the text is marked ‘as yet to be agreed’. This may well be for good reason. techUK has raised concerns that the existing wording isn’t clear if the UK is a ‘third country’ post-March 2019 when it comes to allowing the free flow of data. If the UK was considered a third country, then a full adequacy agreement would be needed before the start of transition. That would be an undeliverable timeframe. It is not yet clear, but is highly possible, that the delay is due to trying to ensure that the framework truly is watertight during the transition phase. Either way, agreement on this is an urgent priority for both the tech sector and every business as the economy rapidly digitises.
The European Investment Bank (EIB), and its subsidiary, the European Investment Fund (EIF), have been a source of political football during the negotiations. On one side you have those who view both institutions as vital in delivering funding for infrastructure and (through the EIF) supporting UK Venture Capital Funds. On the other are those who see the UK’s EIB stake of over £9 billion as a significant amount to be repatriated post Brexit, taking a slice of the final UK ‘exit bill’.
The agreement makes clear that the UK will indeed be getting its cut of the EIB’s funding back. However, because it will remain responsible for on-going liabilities surrounding previous investments, and the fact that EIB money is tied up in investment, the process for doing so will take a long time. The agreement establishes a mechanisms that will yearly see the UK reclaim a bit of its funding. That means any EIB funded ‘Brexit bonus’ will be paid in small instalments.
The agreement does clarify that any project funded during the current Multiannual Financial Framework period (MFF), which runs until 2020, will continue to be valid. This is welcome in ensuring that funding cannot suddenly be withheld or withdrawn when the Article 50 process concludes. The same applies for other EU funding programmes, such as Horizon 2020.
However, the key statement on the EIB is that, come the end of the transition, the UK will “not be eligible for new financial operations from the EIB group reserved for Member States”. That means the UK participation in the EIB, and the benefits that is can derive from it, will cease. Whether the same will be true for the EIF, which can have non-EU stakeholders (for example Turkey has a small stake through their Industrial Development Bank), remains to be seen.
Ireland: The big unknown
It’s been clear for some time that the Irish border issue is likely to dictate a lot of the discussion on future partnership and it remains one of the most difficult issues surrounding Brexit. The draft agreement sets out, in detail, the so-called ‘backstop’ agreement whereby Northern Ireland would remain in the Customs Union.
This backstop agreement comes into force unless one of two alternatives prove true. Either the UK and EU agree, as part of the future partnership discussions post-March, to a system that means it is unnecessary (for example the whole of the UK remaining in the customs union), or where the UK can identify another solution that means the backstop isn’t need (such as a much vaunted ‘technological solution’).
While this key part of the Northern Ireland text remains subject to negotiations, the fact is that the backstop of remaining in the customs union for Northern Ireland is now formalised. What that means for Northern Ireland/ rest of the UK customs treatment is unclear.
Where from here?
The final core aspect of the agreement is the creation of a Joint Committee to oversee the process of implementing the agreement and the transition period itself. That means expect the David Davis/ Michel Barnier joint meetings to continue (albeit possibly with different participants given the length of time the agreement will be in place). The creation of this new committee (plus the no less than five specialist committees on everything from citizen’s right to financial provisions that sit underneath it) just goes to show that, while the agreement is a step forward, there is a huge amount of work still to do.