Businesses are in limbo – losing investment, losing customers and incurring additional costs with Brexit delay

We have been calling for UK industry and commerce to factor ‘continued membership of the EU into their medium-term strategy business planning and budgets for 2019’.

Business and commerce should not stand down their no-deal contingency planning for the next six weeks.  However, they can and should now factor ‘continued UK trading on EU terms’ into medium-term strategy planning and budgeting thought to 2021.

This call is further endorsed by the views expressed in an interview with MakeUK Managing Director, Simon Phipson, and published by Bloomberg.  “MakeUK” is the ‘new name’ for the long-standing EEF – ‘representing over 5000 UK manufacturers’.

We also published our analysis of the political and constitutional processes going forward in support of the probabilities of the main scenarios:  an outside chance of a no-deal on 1 June; and ‘high probability’ that the UK will remain an EU member – or fully operating on EU conditions – until 2021.  A just-published Parliamentary briefing for MPs reached the same conclusion.

Background – Political

EU leaders at the European Council meeting on 10 April 2019 agreed to extend the Article 50 period in order to delay Brexit for a second time.  This could delay the moment of Brexit until 31 October 2019 – providing certainty for the UK while it remains in the EU – and the subsequent transition period.

Before the meeting, President Tusk proposed a flexible extension of up to a year – avoiding a series of short extensions and emergency summits.  The majority of EU leaders supported this idea with opposition led by French President Macron – who proposed a short extension until 22 May instead.

The ‘flextension’

  • allows the UK leaving earlier if the Withdrawal Agreement is ‘ratified’ – on the first day of the month after ratification;
  • provision for UK to leave with no-deal on 1 June if it does not hold EP elections;
  • reference to the UK committing to “act in a constructive and responsible manner during the extension period in accordance with the duty of ‘sincere cooperation’;
  • confirms the UK will remain a Member State “with full rights and obligations”;
  • confirms the UK has the right to revoke its Article 50 notification at any time.

Sincere co-operation

The principle of ‘sincere co-operation’ is set out in Article 4(3) of the Treaty on European Union (TEU) which states that the EU and its Member States shall “in full mutual respect, assist each other in carrying out tasks which flow from the Treaties”, and that they shall ensure fulfilment of obligations arising from the Treaties, facilitate the achievement of the EU’s objectives and refrain from any measure which could jeopardise them.  Member States have previously been taken to the Court of Justice of the EU (CJEU) for not ‘sincerely cooperating’.

The European Council Conclusions and Decision refer to an expectation that the UK fulfil its obligation of ‘sincere co-operation’ – “in a manner that reflects its situation as a withdrawing Member State”.  They state that the UK should “refrain from any measure which could jeopardise the attainment of the Union’s objectives, in particular when participating in the decision-making processes of the Union”.  This is a non-legal request for the to UK behave ‘nicely’ in light of its impending departure.  There is no legal obligation on the UK as a “withdrawing Member State” to behave in a certain way beyond its normal Treaty obligations – including ‘sincere co-operation’.

Transition and the future UK-EU relationship

Unless the relevant dates in the Withdrawal Agreement are amended, a longer Article 50 extension will simply eat into the transition/implementation period ending December 2020.  A further extension of one or two years is possible if the UK and EU agree this by mid-2020.

This shortened transition period means less time to negotiate a future agreement governing UK-EU relations.  The EU has reiterated that these negotiations cannot start until the UK actually ‘leaves’ the EU.

As the UK’s position “evolves”, it might “reconsider” the Political Declaration setting out the framework for the future UK-EU relationship “in accordance with the positions and principles stated in its guidelines and statements, including as regards the territorial scope of the future relationship”.   The wording on territorial scope is thought to be a reference to a future EU-UK agreement not applying to Gibraltar without Spain’s consent.

European Parliament elections

On 8 April, the Government made the Order enabling the holding of the EP elections.  The deadline for delivery of nomination papers and lists of candidates is 25 April for most UK constituencies.  If the UK reaches agreement to leave the EU before 23 May and “exit day” as defined by the EU (Withdrawal) Act 2018 is amended to reflect this agreement, then the legislation allowing EP elections to happen will be repealed and UK participation in the elections will be cancelled.

If UK MEPs are elected on 23 May, they will not take up their seats if both the UK and EU ratify the WA and the UK then leaves the EU prior to 2 July when the new EP sits for the first time.

UK participation in the EP elections means that the planned reallocation of UK MEP seats will not happen.  EU legislation had reallocated 27 of the UK’s MEPs to 14 other Member States.  This reallocation will still take place when the UK leaves the EU, meaning that MEPs for these reallocated seats will be ‘elected’ but will remain in limbo – unable to take up their seats until the UK and its MEPs leave.

Practical difficulties in ratifying Withdrawal Agreement prior to European Parliament election

UK ratification requires House of Commons approval of the Withdrawal Agreement – and the passage in Parliament of the EU (Withdrawal Agreement) Bill by 22 May.  There are 17 sitting days between 23 April (when the House of Commons returns from Easter recess) and 22 May – although there could be additional sitting days if the Commons sits on Fridays and possibly even weekends.

EU ratification requires the consent of the European Parliament.  If the UK does ratify the Withdrawal Agreement very soon logistical difficulties arise as European Parliament is not scheduled to sit again until 2 July – and this could delay Brexit.  EU law provides that outgoing MEPs remain in office until the new Parliament sits for the first time – and it can be recalled on an exceptional basis.

Election of Commission President

UK MEPs could potentially only be members for a short period.  However, their presence will have an impact on the formation of (and funding allocations) for political groups in the European Parliament – and the election of the its President.

The European Commission President is elected by the European Parliament by qualified majority voting, taking into account the results of the European Parliament elections.  The presence of UK MEPs is likely to benefit the (currently) second-largest political group in the European Parliament – the Progressive Alliance of Socialists and Democrats – the Labour party belongs to this group.  The largest is the European People’s Party – the Conservative party left this group in 2009.

Nomination of a UK Commissioner

The term of office of the European Commission expires on 31 October.  Once a Commission President is elected, Member States put forward their nominations for Commissioners.  Nominations face European Parliament hearings in September and then the EP votes to confirm the composition of the Commission in October.  It is possible that the UK may still be required to nominate a Commissioner even though it is scheduled to leave the EU by 31 October at the latest.   The European Council could agree that the UK does not need to nominate a Commissioner.

Exit Day

The two Article 50 extensions have required that Statutory Instruments be laid by the Government to change “exit day” as defined by the EU (Withdrawal) Act 2018.  This can be done under the Act to align it with any new exit date agreed with the EU.  A Government amendment introduced during the passage of the ‘Cooper Bill’ amended the ‘European Union (Withdrawal) Act 2018’ so that any regulations that change “exit day” will no longer require approval by both Houses under the draft affirmative procedure.  Instead, the Government may make regulations subject only to annulment by either House.  This procedure was followed on 11 April for the extension agreed the previous day.

Background – Industry and Manufacturing

The latest Brexit delay means more uncertainty, frozen investment and lost customers for UK manufacturers.  That’s the verdict of Stephen Phipson, who represents 5,000 companies as chief executive officer of the MakeUK industry group.

Theresa May’s agreement to accept the European Union offer to postpone Brexit to 31 October leaves companies in ‘limbo’: “There’s no good news here – it’s extended uncertainty.”

MakeUK represents many companies based in leave-voting areas of central and northern England:

  • Smaller and medium-sized manufacturers especially face financial difficulties: “It’s a dramatic moment – there’s just nothing going on” in terms of investment;
  • More than 70 percent of MakeUK’s members have frozen investment as they diverted cash to building up inventories in case a no-deal Brexit strangled supply lines;
  • Those still investing are doing so in warehouses and offices in continental Europe – money that could otherwise have been spent in the UK;
  • Non-critical spending on training, conferences and advertising has dried up as firms “batten down the hatches”.

Phipson reported on his discussions with Business Secretary Greg Clark on how to persuade manufacturers to invest through the period of limbo.  “It’s particularly difficult” in the case of Japanese companies with U.K. operations given the country’s new trade deal with the EU.

Japanese firms including Honda Motor Co., Nissan Motor Co. and Panasonic Corp. have scaled down their ambitions in Britain amid uncertainty over Brexit.  “Why would you invest in the U.K. if there’s the possibility of a 10 percent tariff going forward and you’ve now got this tariff-free arrangement with the EU directly?”

Inventory-building has also constrained the ability of companies to invest.  Many manufacturers have built 60-90 day stockpiles at the request of customers expecting trade disruption following Brexit – originally scheduled for 29 March.  There’s no sign of companies unwinding stocks after the latest extension, and that comes at a cost.

“That cash is sitting in warehouses, in some cases in seagoing cargo containers in their car parks because they’ve got no warehousing,” according to Phipson. “They’ve been operating for years on just-in-time delivery systems and people aren’t used to holding stocks.”

Over the past three months in particular, half of manufacturing output has been on building inventory.  This stores up problems for their suppliers as companies eventually run down their inventories.

Potentially most damaging is the effect of uncertainty as European customers postpone purchases and seek alternative suppliers until the future is clarified.

Phipson concluded that while 10 to 15 percent of his members would be happy with a no-deal Brexit – the majority want it avoided.  He reported that in the past two months, the proportion of members supporting a revocation of the Brexit process increased to 66 percent from 20 percent.  Manufacturers are saying “reach a deal now to stop this uncertainty so that we can get out of this cycle – and if you cannot do it, stop the process and go back to it when you’ve got a plan.”

Historical Note

The first Article 50 extension

The first extension of Article 50 was agreed on 21 March and provided for an extension until 22 May if the UK-EU Withdrawal Agreement (WA) had been approved by the House of Commons by the original Brexit date of 29 March.  Alternatively, it provided for an extension of Article 50 until 12 April if the WA was not approved, by which point the European Council expected the UK to “indicate a way forward”.   The WA was rejected for a third time by the House of Commons on 29 March.

On 2 April, the Prime Minister proposed talks with the Leader of the Opposition to agree a deal enabling the UK to leave the EU by 22 May.  This would involve approval of the WA and an agreed approach to the future UK-EU relationship.  If an agreed approach is not possible, the Government would seek to agree with the Opposition on a number of options to be put to the House of Commons and the Government would be ready to “abide” by the decision of the House.  The plan envisaged that the WA would be approved and legislation to implement it would be passed by Parliament by 22 May in order to avoid UK participation in the European Parliament (EP) elections.  Mrs May said the plan would require a further extension of Article 50. The Labour party leader agreed to talks and these are ongoing.

After votes enabling non-government MPs to control the agenda of the House of Commons on specific days, the Cooper bill obliging the Government to seek another Article 50 extension passed its various Commons stages in one day on 3 April.  It took longer to get through the House of Lords, but eventually received Royal Assent on 8 April.

On 5 April, the Prime Minister wrote to the President of the European Council Donald Tusk seeking a further extension of Article 50 until 29 June.  She said she accepted the EU’s view that if the UK were still a Member State on 23 May, it would be required to take part in the EP elections.  She said that while it was beginning preparations for the poll the Government wanted to agree a timetable for ratification of the WA before the election date in order to cancel participation.  Mrs May referred to the ongoing talks with the Labour party to agree a unified approach and the alternative plan of putting different options to the House of Commons.


Commons Briefing papers CBP-8549

Countdown to Brexit: 11 days – Groundhog Day; “All Fools Day”…where now with and no end in sight?

No – it’s not an April Fool – having got the countdown to 4 days from Brexit, the clock was reset by the European Council to 12 April.

Brexit is now scheduled and written into UK and EU law for 23:00 BST on Friday 12 April.

If the UK wishes to extend beyond 12 April, it will have to ask the European Council and “indicate a way forward”.  This is almost certain to involve the UK being required to hold European Parliamentary elections on 23 May – and needs the unanimous support of each of the remaining EU27 nations.

European Commission President Jean-Claude Juncker said that patience was running out with the UK.  In an Italian television interview, Mr Juncker said that the EU wanted to see MPs reach an agreement about the terms of the UK’s departure in the “coming hours and days”.

Today, 1 April, MPs will hold a second round of indicative votes to determine if there is a Brexit option that can secure the support of a majority in the House of Commons.  MPs will also be asked whether they want a third day of debate on indicative votes to take place on Wednesday 3 April.

In parallel, MPs debate the three Brexit-related e-Petitions that have achieved the required 100,000 votes starting at 4:30 in Westminster Hall.

Government Chief Whip, Julian Smith, looking at the difficulties on the Parliamentary process and options told the BBC that the Government ought to have admitted after the election that it would inevitably have to move to a softer Brexit, saying ministers should have been clearer about the consequences of losing their majority then.

Smith – and others in Government – have suggested that the prime minister might still put her deal back in front of MPs – perhaps as early as this week.  Whips are, hypothetically, the keepers of secrets inside government. But in these turbulent times, few conventions still apply.

This week in Parliament

Monday 1 April: the House of Commons Chamber, MPs will hold a second round of indicative votes and decide whether they want further time to debate on Wednesday 4 April.

Two Brexit-related Statutory Instruments: Animal Health, Seed Potatoes and Food; and Extraterritorial Application of Third Country Legislation, will also be debated in the Chamber.

Welsh Affairs Committee: questions Secretary of State, Alun Cairns and scrutinises the Government’s no-deal preparations.

Public Accounts Committee: hears from Cabinet Secretary and Head of the UK Civil Service, Sir Mark Sedwill.

MPs will debate three e-petitions relating to leaving the EU, including the petition seeking to revoke Article 50 which has attracted over 6 million signatures at 4:30pm in Westminster Hall,

 Tuesday 2 April: Foreign Affairs Committee will take evidence from Maya Lester, QC, as part of its inquiry into ‘Global Britain: The future of UK sanctions policy.’

MPs debate a Brexit-related Statutory Instrument on Geo-Blocking – dealing with geographical restrictions to online shopping.

 Wednesday 3 April: Exiting the EU Committee will hear from Secretary of State, Stephen Barclay, on ‘The progress of the UK’s negotiations on EU withdrawal: role of Parliament’…topical.

Treasury Committee: continues its scrutiny of the UK’s economic outlook as set out in Chancellor’s Spring Statement.

International Trade Committee holds two panels: experts on ‘Trade and the Commonwealth: Australia and New Zealand’ including Elizabeth Ames, Executive Director of the Australia-UK Chamber of Commerce; and questions Minister of State for Trade Policy, George Hollingbery, to follow up on its previous inquiry into ‘UK trade policy transparency and scrutiny’.

Two Brexit-related SI’s scheduled for debate in the Commons: on notification of personal data breaches; and the second on trade in certain goods which could be used for capital punishment, torture or other cruel, inhuman or degrading treatment.

Depending on the outcome of Monday’s votes, it is possible a third Indicative Vote debate will be held on Brexit options in the Commons.

 Thursday 4 April: MPs ‘oral questions to the Department for Exiting the EU’ – an opportunity for Members to ask Ministers topical questions on the progress of the UK’s exit from the EU.

Easter Recess: for the House of Commons was scheduled 4–23 April 2019.  Given the timing of the new default Brexit date of 12 April – we anticipate an announcement from Leader of the House, Andrea Leadsom, amending the dates of Easter Recess.

And in case you missed – last week’s Brexit headlines

  • For the first time in over one-hundred years, British MPs voted to seize control of the Parliamentary timetable from the Government in a bid to break the deadlock over Brexit;
  • This led to a series of indicative votes on eight Brexit options.  None secured a majority.  Least favoured options will be eliminated and further debate on the rest continues Monday to see if a majority scenario emerges;
  • On Wednesday, MPs voted to change the UK’s ‘exit day’ to 12 April.  It almost stumbled when it was passed to the House of Lords for approval later that day – and a formal objection was raised on the grounds that, constitutionally, Statutory Instruments should be presented in time to allow scrutiny before a vote…and this convention has been ridden over roughshod in the chaos that is the Brexit process;
  • On Friday, Prime Minister Theresa May held a third vote seeking to approve only the Withdrawal Agreement part of her deal – it failed to pass by a margin of 58 votes;
  • Mrs May had offered to resign if MPs approved her Withdrawal Agreement last week.  Bookmakers’ odds suggest Michael Gove, Boris Johnson, Jeremy Hunt and Dominic Raab – all of them Brexiteers – as frontrunners in a potential leadership contest;
  • The UK is now in the default scenario leaving the EU without a deal at 23:00 BST on 12 April – unless a further extension can be agreed with the EU – which requires UK participation in the European elections on May 23 – or unless Article 50 is ‘revoked’;
  • Patience with the UK has run out and there is no certainty that the EU would agree to a longer delay.  Germany thought to be more open to the idea, but France increasingly against;
  • The newly created ‘Independent Group’ of Remain-supporting British MPs plans to register as a political party named Change UK – discussions with other centrally-oriented political parties and individuals are progressing.


8 motions have been proposed for debate on Monday 1 April by Parliament.  The Speaker will select some or all of them and voting will take place around 8:00pm this evening.  From the ‘Order Paper’  for 1 April with together with a short explanation:

(A)    Unilateral right of exit from backstop: That this House agrees that the UK shall leave the EU on 22 May 2019 with the Withdrawal Agreement amended to allow the UK unilaterally to exit the Northern Ireland backstop.

(B)    No-deal in the absence of a Withdrawal Agreement: That this House agrees that, in the absence of a Withdrawal Agreement that can command the support of the House, the UK shall leave the EU on 12 April 2019 without a deal.

(C)    Customs Union: That this House instructs the Government to: (1) ensure that any Withdrawal Agreement and Political Declaration negotiated with the EU must include, as a minimum, a commitment to negotiate a permanent and comprehensive UK-wide customs union with the EU; and (2) enshrine this objective in primary legislation.

(D)   Common Market 2.0: That this House – (1) directs Her Majesty’s Government to – (i) renegotiate the framework for the future relationship laid before the House on Monday 11 March 2019 with the title ‘Political Declaration setting out the framework for the future relationship between the European Union and the United Kingdom’ to provide that, on the conclusion of the Implementation Period and no later than 31 December 2020, the United Kingdom shall – (a) accede to the European Free Trade Association (Efta) having negotiated a derogation from Article 56(3) of the Efta Agreement to allow UK participation in a comprehensive customs arrangement with the European Union, (b) enter the Efta Pillar of the European Economic Area (EEA) and thereby render operational the United Kingdom’s continuing status as a party to the EEA Agreement and continuing participation in the Single Market, (c) agree relevant protocols relating to frictionless agri-food trade across the UK/EU border, (d) enter a comprehensive customs arrangement including a common external tariff, alignment with the Union Customs Code and an agreement on commercial policy, and which includes a UK say on future EU trade deals, at least until alternative arrangements that maintain frictionless trade with the European Union and no hard border on the island of Ireland have been agreed with the European Union; (ii) negotiate with the EU a legally binding Joint Instrument that confirms that, in accordance with Article 2 of the Protocol on Ireland/Northern Ireland of the Withdrawal Agreement, the implementation of all the provisions of paragraph 1 (i) of this motion would cause the Protocol on Ireland/Northern Ireland to be superseded in full; (2) resolves to make support for the forthcoming European Union (Withdrawal Agreement) Bill conditional upon the inclusion of provisions for a Political Declaration revised in accordance with the provisions of this motion to be the legally binding negotiating mandate for Her Majesty’s Government in the forthcoming negotiation of the future relationship between the United Kingdom and the European Union.

(E)    Confirmatory public vote: That this House will not allow in this Parliament the implementation and ratification of any withdrawal agreement and any framework for the future relationship unless and until they have been approved by the people of the United Kingdom in a confirmatory public vote.

(F)    Public vote to prevent no deal: That this House considers that it would be appropriate to commit to the holding of a public vote if it were necessary to prevent the United Kingdom leaving the European Union without a deal.

(G)   Parliamentary Supremacy: That -(1) If, at midday on the second last Day before exit day, the condition specified in section 13(1)(d) of the Act (the passing of legislation approving a withdrawal agreement) is not satisfied, Her Majesty’s Government must immediately seek the agreement of the European Council under Article 50(3) of the Treaty to extend the date upon which the Treaties shall cease to apply to the United Kingdom; (2) If, at midday on the last Day before exit day, no agreement has been reached (pursuant to (1) above) to extend the date upon which the Treaties shall cease to apply to the United Kingdom, Her Majesty’s Government must immediately put a motion to the House of Commons asking it to approve ‘No Deal’; (3) If the House does not approve the motion at (2) above, Her Majesty’s Government must immediately ensure that the notice given to the European Council under Article 50 of the United Kingdom’s intention to withdraw from the European Union is revoked in accordance with United Kingdom and European law; (4) If the United Kingdom’s notice under Article 50 is revoked pursuant to (3) above a Minister of Her Majesty’s Government shall cause an inquiry to be held under the Inquiries Act 2005 into the question whether a model of a future relationship with the European Union likely to be acceptable to the European Union is likely to have majority support in the United Kingdom; (5) If there is, a referendum shall be held on the question whether to trigger Article 50 and renegotiate that model; (6) The Inquiry under paragraph (4) shall start within three months of the revocation; and (7) References in this Motion to “Days” are to House of Commons sitting days; references to “exit day” are references to exit day as defined in the Act; references to the Act are to The European Union (Withdrawal) Act 2018; and references to the Treaty are to the Treaty on European Union.

(H)   EFTA and EEA: That this House notes that the motion to agree the Withdrawal Agreement negotiated between Her Majesty’s Government and the European Union was defeated on 29 March; further notes that the Government must, under the agreement made at the EU Council on 22 March, indicate a way forward for consideration by the EU by 12 April; acknowledges that this House has previously expressed its reluctance to leave the EU without an agreement and therefore calls on the Government to – (a) assert the UK’s existing rights and obligations as a signatory to the Treaty establishing the European Economic Area (b) indicate to the EU before 12 April that the UK intends to rejoin the European Free Trade Association at the earliest opportunity to make its rights and obligations as an EEA member operable (c) agree with the EU a further short extension to the UK’s membership of the EU during which accession to the EFTA pillar can be concluded and (d) negotiate with the EU additional protocols relating to the Northern Ireland border and agri-food trade.

Notes on options from soft to hard

Remain in the EU: Things stay as they are.  The UK continues paying into the budget but retains its rebate and keeps its opt-outs from the euro and the Schengen common travel area.  Free movement continues, as does membership of the customs union and single market.

Common Market 2.0: aka “Norway plus”.  This proposal has the support of soft Brexiteers on the Tory and Labour benches.  The UK would have the same close relationship to the EU that Norway does – but with the addition of a customs union.  UK leaves EU democratic, decision-making and institutions.  Remain within the single market and customs union.  Join the European Free Trade Association – whose current members are EU plus Norway, Liechtenstein, Switzerland and Iceland.  UK no longer be subject to the Common Agriculture Policy or the Common Fisheries Policy.  Freedom of movement between the UK and the EU continues. Requires the Northern Ireland backstop to be in place.

EFTA/EEA: per Common Market 2.0 plus UK remains in the single market but not the customs union – leaving it free to pursue its own trade policy.   UK would “seek agreement on new protocols relating to the Northern Ireland border and agri-food trade.”

Customs Union: Britain leaves the single market and no longer subject to freedom of movement.  UK would negotiate “a permanent and comprehensive UK-wide customs union with the EU.”   Michel Barnier has said the EU would be open to negotiating a customs union with the UK — but the backstop would be non-negotiable.

No-deal: UK leaves the single market, customs union and all other EU structures and arrangements instantly.  Freedom of movement ends.  Tariffs and controls required between the UK and EU – including between Northern Ireland and the Republic of Ireland.  EU is powerless to prevent a no-deal Brexit – but EU will not open trade talks until UK: settles its financial obligations to the bloc; ensured the protection of EU citizens’ rights in the UK; and agreed to safeguards to protect the Good Friday Agreement in Ireland.