Brexit: the saga continues

Mar 29, 2018
The decisions made in the months ahead will have lasting repercussions for everyone on the island of Ireland, writes Michael Farrell.
 
Confusion, contradiction and political ideology continued to dominate the Brexit debate in recent months. While much of this was noise without substance, some useful analysis emerged including studies looking at the potential Brexit impact in Ireland and the UK, potential border solutions and options to cope with regulatory divergence.
 
An important point for Chartered Accountants to be aware of is that the European Commission issued a notice to stakeholders on 8 February 2018 pointing out that, unless a ratified withdrawal agreement establishes another date, all European Union primary and secondary law will cease to apply to the United Kingdom from 30 March 2019. It also reminded statutory auditors and companies subject to audit requirements of the legal repercussions that will need to be considered when the United Kingdom becomes a third country.

Three scenarios

In January, a leaked report entitled EU Exit Analysis – Cross Whitehall Briefing, prepared by the UK’s Department for Exiting the European Union, examined three Brexit scenarios and found that in each case, the impact would be negative with Northern Ireland among the regions projected to experience the greatest decline in economic performance. More recently, a report prepared by Copenhagen Economics for the Irish Government examined the potential impact of four different scenarios and found that in each case, Brexit will have a negative impact on Ireland with the worst affected sectors being agri-food, pharma-chemicals, electric machinery, wholesale and retail, and air transport.
To minimise the overall economic loss to Irish GDP, this report says the best possible trade negotiation outcome for Ireland would be an agreement that has an acceptable balance of rights and obligations for all parties including no tariffs, large quotas for agricultural products, low border costs, land bridge transit, low barriers for service trade and low regulatory divergence.

A hot topic

Regulation is a particularly hot topic in sectors like agri-food. A position paper on Northern Ireland and Ireland published by the UK Government in August 2017 stated that, “an agreement on regulatory equivalence for agri-food, including regulatory co-operation and dispute resolution mechanisms, would allow the UK and the EU to manage the process of ensuring ongoing equivalence in regulatory outcomes following the UK’s withdrawal from the EU. Providing the UK and the EU could reach a sufficiently deep agreement, this approach could ensure that there would be no requirement for any sanitary and phytosanitary measures (SPS) or related checks for agri-food products at the border between Northern Ireland and Ireland.”
In the context of regulation, there has been some discussion of the so-called ‘Brussels effect’ which acknowledges that, regardless of the outcome of EU-UK negotiations, the reality for businesses wishing to sell into the European market will be that they will have to comply with EU rules. Based on their need for global compliance, companies operating in the UK may therefore choose to comply with EU regulations for business reasons.
Meanwhile, Prime Minister Theresa May has ruled out remaining in the customs union, but business representative groups, notably the CBI, continue to argue that staying in is the best option for the UK and would go a long way towards solving the border problem in Ireland. The EU’s chief negotiator, Michel Barnier, warned that if the UK leaves the single market and customs union, border checks on the island of Ireland will be unavoidable.

Full alignment

Readers will recall that at the end of the Phase 1 negotiations in December 2017, it was stated that “the United Kingdom will maintain full alignment with those rules of the internal market and the customs union which, now or in the future, support North-South co-operation, the all-island economy and the protection of the 1998 [Good Friday] agreement”. Three potential border solutions were envisaged – some form of a new relationship between the EU and UK; an alternative solution to be put forward by the UK; or a solution maintaining existing regulatory rules and procedures, which would effectively keep Northern Ireland in the customs union.
The EU wants the UK to come forward with a solution that avoids the need for physical checks and borders. At the time of writing, while some optimism has emerged around completion of Phase II and moving onto Phase III negotiations, it is still unclear precisely what the UK wants – the preference appears to be either to deal with the border as part of a broader agreement with the EU or to have a specific solution for Northern Ireland. However, the EU plans that the customs union option will be written into a draft withdrawal agreement. This is unlikely to be politically acceptable to Northern Ireland stakeholders such as the DUP and could also cause problems elsewhere. No sooner had Michel Barnier mentioned it than Scotland’s First Minister, Nicola Sturgeon, tweeted: “If NI stays in single market, the case for Scotland also doing so is not just an academic ‘us too’ argument – it becomes a practical necessity. Otherwise we will be at a massive relative disadvantage when it comes to attracting jobs and investment”.

Cynics and the ‘friction free’ proposal

Proposed solutions for the border issue include a technological solution put forward in a research paper requested by the European Parliament’s Committee on Constitutional Affairs and published by the Policy Department for Citizens’ Rights and Constitutional Affairs. Smart Border 2.0: Avoiding a Hard Border on the Island of Ireland for Customs Control and the Free Movement of Persons suggested that there is an opportunity to develop a friction-free border building on international standards and best practices, which it said could be implemented regardless of the legal framework for the UK’s exit from the EU. Critics, however, say that this type of solution ignores the political realities of the Republic of Ireland and Northern Ireland.

Conclusion

Decisions to be made in the coming months will have lasting repercussions for everyone across the island of Ireland. It is vital that Chartered Accountants and businesses continue to make their voices heard, drawing attention in particular to potential solutions that could work in their sectors.
 
Michael Farrell is Director at PKF-FPM Accountants Ltd., a service provider for InterTradeIreland’s Brexit Advisory Service.