Deal? No deal? No Brexit? The scenarios explained

Caroline Turnbull-Hall Director Regulation and Legal Issues, PwC United Kingdom 20/06/19

Two exit days have now passed, and despite intense political debate, resignations from a number of ministers and the Prime Minister, and much speculation, there is still little clarity as to what the eventual outcome of Brexit will be, and indeed when the UK  might leave the EU. In November, the Prime Minister referred to the choice facing Parliament as leaving the EU with a deal, leaving without a deal, or having no Brexit.

Here Caroline Turnbull-Hall, our Brexit Policy lead, explores the impact that recent developments might have on the eventual outcome, and considers some of the possible scenarios that could follow.

Things are moving quickly and, whilst this was up to date at the time of writing, it may have been superseded by events. Please get in touch with our Brexit specialists if you have any queries.

Following agreement between the European Council and the UK to further delay exit day until 31 October 2019, there is currently no clear solution to the Brexit impasse. The Withdrawal Agreement failed to gain Parliamentary approval on 29 March, and despite two days of indicative votes, no single option commanded a majority in Parliament. Lengthy talks between the Government and the Labour Party failed to reach a compromise, the UK held European Parliament elections, and the Conservative Party is now in the process of selecting a new leader. So with the clock ticking down to 31 October the UK remains a member of the EU whilst uncertainty reigns, and there appears to be no solution to the political impasse.

What extension has been agreed?

On 11 April the European Council offered the UK a “flextension” (a flexible extension). Consequently the UK is committed to remaining in the EU until 31 October, unless the Withdrawal Agreement can be ratified earlier, in which case exit day will be 11pm on the first of the month following the day on which ratification is completed. This means that following the UK’s participation in the European Parliament elections on 23 May, there is now almost no risk of the UK leaving the UK without a deal before 31 October 2019.

In addition, the European Council has once again reiterated that there will be no renegotiation of the Withdrawal Agreement that was agreed between the UK and the EU in November 2018. However,  it has indicated that it will reconsider the Political Declaration on the future relationship.

As a result of the European Council’s decision, the EU (Withdrawal) Act 2018, has been amended again to change exit day, in part to ensure that the no deal statutory instruments, which will come into force on exit day in the absence of a deal, did not automatically apply from 12 April, the previous default exit date.

Who will be Prime Minister?

On 24 May, Theresa May announced that she would be standing down as leader of the Conservative Party from 7 June, but would continue as caretaker Prime Minister until a new leader is elected. Nominations for candidates closed on 10 June, and it is expected that the new leader of the Conservative party, and Prime Minister, will be announced in the week commencing 22 July.

What next?

Whilst much will depend on who is the new Prime Minister, with just over six months to go before exit day, the options appear to be unchanged. As a result,  if advantage is taken of the longer extension, to agree a revised approach to Brexit, this could lead to an exit from the EU with a deal, otherwise we may see

  • a second referendum;

  • no deal; or

  • revocation of Article 50.

There is also the possibility that a further extension will be sought from the European Council, especially as, by the time the new Prime Minister is selected, over half of the time granted for the extension will have passed, and the summer period may mean that insufficient progress can be made before the 31 October deadline.

So let’s explore each of the remaining options in turn.

Is the existing deal off the table?

There have been two meaningful votes so far, but on 25 March the Prime Minister stated that there was insufficient support for her deal to hold a third meaningful vote. Following the extension granted by the European Council in March, which was centred around the Withdrawal Agreement being approved by 29 March, a vote on the Withdrawal Agreement alone was held on 29 March, but failed to secure the approval of Parliament.

The European Council has been clear that it will not reopen the Withdrawal Agreement, as this was an agreement between the UK and the EU, and not between Mrs May and the EU. Consequently, if the UK is to leave with a deal, the Withdrawal Agreement must be written into UK (as required by the EU (Withdrawal) Act 2018), before it can be ratified as an international treaty. Although Theresa May had indicated that this process would be expedited with the European Union (Withdrawal Agreement) Bill receiving its second reading in the week commencing 3 June, this did not happen, and so remains a hurdle to be overcome in the future.

The European Council has indicated its willingness to reconsider the Political Declaration “in accordance with the positions and principles stated in its guidelines and statements”.

If there is to be a deal, there will still need to be a meaningful vote, as required by the European Union (Withdrawal) Act 2018, which will be a single motion covering both the Withdrawal Agreement and the future framework (the Political Declaration). Parliamentary precedent, as invoked by Speaker Becow, prevents a motion that has previously been defeated in Parliament being brought back for another vote without being substantially changed. Consequently, as we are not expecting the European Council to reopen the Withdrawal Agreement, any meaningful vote will have to include a different Political Declaration. Thus the two main hurdles remain getting the Withdrawal Agreement approved, as ratification of this is the defining feature in the European Council’s decision, and reaching an agreement on the future framework.

How might the current extension help?

Following the European Council meeting on 10 April, Donald Tusk warned the UK “please do not waste this time”, and so if the next Prime Minister is unable to get approval for the existing deal, the pressure will be on for the UK to find a new approach to Brexit whilst remaining a member of the EU.

Based on attempts to date it is hard to see just what a different approach to Brexit might be, as lengthy talks with Labour to find a compromise solution have failed. One option might be for the Government to seek to agree a small number of options for the future relationship that would be put to the House in a series of binding votes, to determine which course to pursue. This approach was one that Theresa May had indicated might be adopted, although based on the series of indicative votes held in late March and early April, it is hard to see any option commanding a majority of votes as the preferred option. Based on the previous indicative votes, it is possible that either a Customs Union (defeated by three votes on 1 April), or a confirmatory referendum (defeated by 12 votes), might be the preferred option. But all will depend on the approach of the new Prime Minister.

Since the extension was granted there has been little progress, and in the light of the current Conservative Leadership contest, it is hard to see that there will be any progress at all before early August, once the new Prime Minister is in office. By this time there will only be three months before the 31 October deadline, or potentially fewer than 30 Parliamentary sitting days.

On this basis if there was a different approach which involved a confirmatory vote, or second referendum, it would be challenging, if not impossible, to put this in place before the deadline of 31 October. It is estimated that a referendum takes at least 22 weeks from start to finish, as legislation needs to be enacted, questions need to be agreed and assessed to ensure that they are unambiguous and unbiased, and there needs to be a period of campaigning before the vote itself. There are suggestions that a referendum could be organised in as little as twelve weeks, but this seems ambitious. Note that the results of the European Parliament elections in May could indicate that a second referendum may serve to confirm the result of the 2016 referendum, rather than indicating a change of direction..

The European Council approves a way forward

If an alternative approach emerges, and the European Council agrees to this (e.g. a change to the Political Declaration), there would need to be a meaningful vote in the House of Commons to approve the new approach. The UK would then enact the European Union (Withdrawal Agreement) Bill, unless this has already been done, and ratify the deal as required by the Constitutional Reform and Governance Act 2010. Note that the EU would also have to ratify the deal, which requires unanimity.

Once ratification has taken place, and assuming that this is in advance of 31 October, the “flextension” agreed with the European Council provides that the UK can leave the EU on the first day of the following month. At this stage the transition period (set to end on 31 December 2020, but subject to a two year extension) will come into force to allow the UK and the EU to negotiate the future economic partnership, and for businesses and individuals to plan for the future, whilst continuing to operate under EU rules.

Once a deal has been agreed and ratified by both sides, it is expected that the second phase of negotiations around the future economic partnership would start immediately.

Bearing in mind the Conservative Leadership contest, the Summer recess, the election of the European Commission, and the party conference season in the early Autumn, it is hard to see on this basis that a new deal will be reached and the Withdrawal Agreement will be ratified before October, and that exit day not be earlier than 31 October.

What may be more likely is that the UK might request a further technical extension, beyond 31 October, to enable a deal to be agreed and ratified from the European Commission. Whilst President Tusk did not ruled this out in April, a further extension may not meet with support from the EU leaders, or indeed be seen as a desirable outcome from the UK perspective,  especially if it not merely to complete legal technicalities.

No deal by 31 October

Despite the April extension, no deal is not off the table, and the likelihood of no deal may have increased. If no agreement on a deal can be reached by 31 October, and no further extension granted, the default position is that the UK leaves the EU without a deal. In this scenario, there would be no transition period and the numerous no deal statutory instruments will come into force, transferring EU legislation to ensure that the UK has a functioning statute book from 1 November.

Despite the House voting against a no deal Brexit in April, some of the Conservative Leadership candidates have indicated that they would advocate leaving without a deal. On 12 June the Labour Party (with cross party support) attempted to take control of the Parliamentary agenda on 25 June. The aim was to give MPs a chance to introduce legislation that would have prevented a no deal Brexit being forced through, effectively binding the hands of the new Prime Minister. However, the opposition motion to take control of Parliament was defeated by 11 votes.

In the absence of a transition period businesses, individuals and public bodies will have to react immediately to the changes, and implement no deal contingency plans. The UK would revert to World Trade Organisation rules on trade (apart from where free trade agreements have been ‘rolled over’) and any exports to the EU would be subject to EU tariffs, as well as authorisation and certification. On 13 March the Government published its tariffs and quota arrangements for the first 12 months after a no deal exit, which will have been welcome news for some businesses. Additionally the Government also announced on 13 March its temporary no deal plans for the Irish Border which, although welcome in the short term, do not resolve the issue of the border on the island of Ireland in the long term.

In this case it is possible that negotiations with the EU would begin within a relatively short timescale to establish a new relationship between the UK and the EU in the future. But significant disruption should be expected, in at least the short term.

No Brexit

If ultimately no deal can be agreed after an extension of Article 50, the UK will move into uncharted constitutional waters, and some emergency action will need to be taken.

One option available to Parliament would be to revoke Article 50. In December 2018 the Court of Justice of the European Union confirmed that a member state could revoke its notification under Article 50 to withdraw from the EU, and that there was no requirement to seek the permission of the other member states. However, the withdrawal must be unequivocal and unconditional, so cannot be used as a way to ‘buy’ additional time for negotiation either with the EU or domestically.

Interestingly the revocation decision must be taken ‘in accordance with ... constitutional requirements’. Whilst the Prime Minister could use prerogative powers to receive Article 50, there are legal arguments against this and it might require a vote in the House of Commons (assuming that a majority would support revocation of Article 50). Politically it may be necessary to hold a second referendum to confirm this course of action, but of course the outcome of any second referendum may be the same as the first.

Whilst there is some political momentum for this option, this has not yet manifested in a decisive majority in Parliament despite recent opportunities for it to do so. Businesses should not therefore be planning on the basis of this scenario at this point.

So what next?

Which of these scenarios plays out is not clear at this stage. Although there is a breathing space, there will still be considerable uncertainty and no time for complacency as time is running out. Over the next weeks and months, it is vital that all businesses keep an eye on developments and, for now at least, continue to prepare for the ‘default’ option of a no deal exit on 31 October.  Read my colleague Phil Brown’s blog for how businesses should be adapting their plans in the light of the extension of the Article 50 period.

Key terminology:

Meaningful Vote

“Meaningful vote” is the name that has been given to the vote referred to in Section 13 of the European Union (Withdrawal) Act 2018, and is the mechanism which ensures that Parliament must approve, or otherwise, the outcome of the negotiations with the EU.

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Indicative votes

MPs vote on a series of options designed to test the will of Parliament to see what, if anything, commands a majority.

Supporters of the indicative votes believe it could provide a way out of the current political stalemate. But they are not legally binding on the Government.

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Common Market 2.0 aka Norway Plus

Takes as its starting point the Norway’s relationship with the EU and seeks to build on it. The UK would reapply to join the European Free Trade Association (EFTA), which it left when it signed up to the EEC. If successful, it would join what is known as the "EEA pillar" of the EFTA agreement.

In essence, the UK would not leave the European Economic Area, to which it currently belongs as an EU member, and would remain a member of the single market. This plan envisages a "comprehensive customs arrangement" which would include a common external tariff as well as the UK having an input into future EU trade deals. The UK would retain freedom of movement, so British citizens would keep the right to live and work in the EU and vice-versa. However, as the EU consider that the four fundamental freedoms are indivisible, the UK would also have to ensure the other freedoms

It would remain in place until the agreement of a wider trade deal that guaranteed frictionless movement of goods and an open border in Ireland.

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Customs Union

A customs union is a group of states that have agreed to eliminate customs duties (import taxes) on trade between themselves, as well as reduce other administrative requirements. The EU’s customs union ensures EU member states all charge the same import duties to countries outside the EU. It allows member states to trade freely with each other, without customs checks at borders, but limits their freedom to strike their own trade deals.

The Customs Union, as proposed by Father of the House Ken Clarke, requires that any Brexit deal should include, as a minimum, a commitment to negotiate a "permanent and comprehensive UK-wide customs union with the EU" as part of the Brexit deal.

This would give the UK a close trading relationship with the EU, and would ensure that there would only need to be a minimum of checks at the Irish Border. However, it would mean that the UK would not be able to negotiate and conclude trade agreements with other non-EU countries.

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Single Market

Allows the free movement of goods, services, money and people (the four freedoms) within the European Union. The Single Market is not completely integrated so for example, a UK qualified auditor can not deliver their services in another EU market without going through local approvals.

It is worth noting that  the EU consider that the four fundamental freedoms are indivisible, so believe the UK could not select to keep some but lose or diminish others.

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Free Trade Agreement (FTA)

An agreement of two or more countries to cooperate to reduce trade barriers and to increase trade of goods and services with each other. This might involve reducing tariff barriers (taxes on inbound goods) or non-tariff barriers (e.g. making it easier for people to travel and work in another country).

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The Backstop

The ‘backstop’ is the proposed mechanism to satisfy the requirement, agreed by both the UK and the EU, that there will be no ‘hard border’ (ie no intrusive checking of goods or people) between Northern Ireland and the Republic of Ireland. The arrangement will automatically kick-in if there's no deal at the end of the extended transition.  In essence, the ‘backstop’ would mean all of the UK staying in a customs union with the EU, but Northern Ireland also staying part of and fully aligned to the ‘single market’ on all relevant rules, without any scope for divergence.

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European Economic Area (EEA)

The European Economic Area (EEA) extends the EU’s Single Market to three non-EU countries, which are also three of the four members of the European Free Area (Norway, Iceland and Liechtenstein). EEA members are not covered by all EU treaties, for example, they are not party to the Common Agricultural Policy.

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European Free Trade Association (EFTA)

The European Free Trade Association is a trade organisation and free trade area comprising Norway, Switzerland, Iceland and Liechtenstein. All apart from Switzerland, are members of the EEA, with Switzerland having negotiated a special relationship with the EU. All four EFTA states are members of the Schengen area, and Norway and Switzerland enjoy tariff free access to the EU, without being members of the Customs Union.

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Contact us

Caroline Turnbull-Hall

Director Regulation and Legal Issues, PwC United Kingdom

Tel: +44 (0)7718 966482

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