Following the vote by the UK to leave the EU, we have all been exposed to terms such as hard Brexit, soft Brexit, Single Market, Customs Unions, frictionless borders, tariffs and divorce bills. This article goes back to the very beginning and examines why the vote took place in the first instance and what has happened so far in the negotiations.

What is Brexit?

It’s a merge of the words Britain and exit. The term can also be found in the Oxford dictionary where it is defined as “the withdrawal of the United Kingdom from the European Union.”

The UK voted by a majority of 51.9 percent to 48.1 percent to leave the European Union (EU) by referendum on 23 June 2016. More than 30 million voted in total representing 72 percent of the population.

What parts of the UK voted to leave?

England and Wales voted to leave the EU with 53 percent and 52 percent of the votes respectively. Scotland backed to remain in the EU with 62 percent of the vote and 56 percent of Northern Ireland voted to remain.

Why was there a vote?

The UK’s relationship with the EU has always been complicated. In 1988, Margaret Thatcher famously stated that her government would oppose any attempt by the EU to make Britain cede power to other European states. Since the economic recession of 2008 and the crisis in Greece, the UK people have become increasingly sceptical of the benefits of remaining in the EU particularly when the UK economy remained relatively robust. Record levels of EU immigration into the UK and increasing EU regulation were also factors for the growing anti-EU sentiment. What were seen as anti-European parties, enjoyed a rise in popularity in the UK in 2012 and in an apparent bid by the Conservative party to ensure that they remained in power, backbenchers demanded that the then Prime Minister David Cameron announce an EU referendum to help fend off the anti-EU challenge. In 2013, Mr Cameron said that he would hold a referendum on EU membership if the Conservative party won the 2015 election. Which they did and here we are.

What happened then?

Standing outside 10 Downing Street before the vote, Mr Cameron said “The choice is in your hands but my recommendation is clear: I believe Britain will be safer, stronger and better off in a reformed Europe”. The UK voted to leave and Mr Cameron resigned and was replaced by the now Prime Minister Theresa May. Theresa May did not support Brexit during the referendum campaign but now is in favour because she says it’s what the British people want.

Wasn’t there a snap election?

What might have come as a surprise to most, Theresa May called an election for 8 June earlier this year as she seemingly wanted to strengthen her hand in the Brexit negotiations. She reportedly felt that the opposition parties would try to block her Brexit strategy and wanted to show a united front. However, the result of the election didn’t go to plan. The vote failed to give the Conservatives an overall majority in parliament so Theresa May had to go into government with Northern Ireland’s Democratic Unionist Party.

What date will the UK leave the EU?

The UK Prime Minister triggered Article 50 on 29 March 2017 so this means that barring an agreement by all other EU member states to extend this deadline, the UK will leave the EU on 29 March 2019.

What is Article 50?

Article 50 of the Lisbon Treaty is the legal agreement, signed by all EU members, which gives any EU member the right to leave the EU. The article outlines the procedure for doing so and also provides for a two year time limit in reaching an agreement, unless all members agree to extend it. It’s only five paragraphs long.

Brexit talks

Brexit talks started in Brussels on 19 June 2017 and there have been several rounds of negotiations so far. Teams from the EU and the UK meet for around one week at a time. The timetable for the talks has two phases.

The aim of phase one was to reach agreement on the rights of citizens, the financial settlement the UK will need to pay on leaving the EU as well as the border in Northern Ireland. When sufficient progress has been made on these three issues, the future trading relationship between EU and UK can be discussed. It was originally hoped that talks could move on to trade following the EU Summit in early October but that did not happen. The talks ended in deadlock with the Northern Ireland border and the financial bill becoming very difficult issues. The Irish government wanted written assurances that a hard border would be avoided on the island of Ireland. These assurances were received on 8 December and with reported progress on the divorce bill, at the time of writing the talks are very likely to finally move on to Phase 2 where trade will be discussed.

Why was there deadlock over the financial settlement?

The UK Prime Minister said in her speech in Florence in September that “the UK will honour commitments we have made during the period of our membership”. So why is there deadlock?

The problem lay in the way the EU funds future projects. The Reste à Liquider (RAL) is the term given to the EU’s unfunded future liabilities. The way the RAL works is that rather than seek funds from Member States upfront, the EU commits to expenditure on infrastructure and other projects on the assumption that Member States will continue to fund it. For example the EU might agree to fund a €100 million project over two years but might only receive the money from other EU Members States over a six year period. Therefore there is a gap between income and liabilities and sometimes this difference can be significant. It’s reported that the difference currently stands at over €230 billion.

So with projects completed now and funded later, what happens if the UK leaves EU during this time lapse? And this is the very problem the EU has. At the time of writing, its estimated that the UK will pay somewhere in the region of €50 billion to the EU. This still needs to be agreed formally. Article 50 doesn’t say anything about financial settlements once a country has departed the EU so we are in unchartered legal waters.

What does the UK want from the trade talks?

The UK has said it will leave the Single Market and Customs Union and forge a new and innovative free trade agreement with the EU.

What is the Single Market?

The Single Market was completed in 1992 and represents what the EU stands for. It allows all member states to act as a single entity. It’s based on four freedoms; free movement of goods, services, money and people within the EU and its objective is to boost trade, increase employment and lower prices.

What is a Customs Union?

Turkey is in a Customs Union with the EU but is not a member of the EU. A Customs Union means Turkey and the EU can trade freely with each other without customs checks at the borders. Turkey must charge the same customs duties to countries outside the EU as the EU does and there are limitations on Turkey being free to strike its own trade deals.

What is a free trade area?

In a free trade area, there are no tariffs or quotas on goods or services which move freely. Parties to a free trade agreement are free to make their own trade deals.

What is a hard and soft Brexit?

The terms relate to the UK’s relationship with the EU post Brexit. A hard Brexit could see restrictions on the free movement of people and trade as well as physical infrastructure at the border between Northern Ireland and the Republic of Ireland. A soft Brexit would be seen as free movement of people and goods.

What needs to be discussed at the trade talks from the island of Ireland’s perspective?

The island of Ireland is faced with a unique challenge given that it is the only country in the EU which shares a land border with the UK. Ireland also operates a trade surplus with the UK and the composition of this trade shows how critical customs issues are. One sixth of Ireland’s imports from the UK are made up of energy products and around 40 percent of the agri-food that Ireland imports come from the UK, while 39 percent of our agri-food exports go to the UK.

The extent of cross-border trade in goods and services between Northern Ireland and Ireland is disproportionate in terms of Northern Ireland’s size and population according to figures from the Central Statistics Office. While the population of Northern Ireland is less than 3 percent of the population of the UK as a whole, exports from Ireland to Northern Ireland amount to 13 percent of the total to the UK and imports from Northern Ireland to Ireland are around 6 percent of the total from the UK.

So we have a situation where many businesses on the island of Ireland are involved in cross-border inter-group purchases where sales might be small in value but frequent in number. A hard border would make this purchasing model difficult and is likely to cause delays and upset in supply chains. Furthermore many Irish businesses channel goods through the UK for onward exportation to the EU. Are these businesses going to face multiple customs checks and delays? The UK has said it wants to avoid a hard border and encourage frictionless trade. If the UK leaves the Customs Union, this makes frictionless trade more difficult especially if customs checks are required. The implications of this for the agri-food sector, in particular, where strict regulations govern the time perishable goods can be kept in transit could be particularly serious.

While both the EU and the UK have voiced their opposition to implementing a hard border on the island of Ireland, little has emerged in terms of the practical detail of how this might be avoided. There has been talk of electronic tagging, frictionless borders, small trader exemptions, simplified customs procedures and the UK have even written a paper on what will happen to customs procedures should talks fail and no trade relationship is agreed. Unfortunately much of the detail illustrates how the UK intends to put trade frameworks in place should talks fail but unfortunately for businesses, the paper does not and cannot address the burning question for traders on the make-up of the future trading relationship with the EU.

What about tax issues?

Taxes such as income tax, corporation tax, capital gains tax are not really controlled by EU law. There are principles in the European tax treaties which control some of the rules but generally each country is free to set its own tax rules across these tax heads. VAT is a different matter.

In theory, when the UK leaves the EU, it could abolish VAT as it will be no longer controlled by EU Directives. In reality, VAT accounts for over one fifth of the overall tax take in the UK. While the UK might not be able to afford to abolish VAT, it could have more flexibility over how it operates VAT.

For Irish traders who import from the UK after Brexit, VAT will have to be paid by the importer up front at the same time as customs duties and this could cause cash flow disadvantages. Chartered Accountants Ireland has called for the introduction of the postponed method of accounting for VAT in Ireland which would see VAT accounted for at the time of filing the next VAT return in the same manner that intra-community acquisitions are dealt with. This method has been adopted by several other EU countries.

What’s the outlook?

The UK has been a member of the EU for the past 44 years. That is a lot of treaties and agreements to work through and we must remember that with the exception of Greenland, no other country has ever left the EU before. The UK cannot simply cut all ties with the EU without working through the implications for trade and people movement, among other matters. While there have been mutterings that the UK is prepared to walk away without a deal, it’s in the interests of both sides that an agreement is reached. The UK wants to leave the Customs Union and the Single Market and wants to instead forge an innovative free trade deal with the EU. It has indicated that it would like to replicate the existing customs arrangements during a transition period; the length of which has not been discussed yet. Whatever the final outcome of the talks is, concessions are likely to be required on both sides.

The UK will leave the EU in just over 15 months and it has been almost 16 months since the UK held the vote to leave. As the EU repeats time and time again, the clock is ticking.

Cróna Brady is a manager in the Tax and Public Policy Department with Chartered Accountants Ireland.

Email: crona.brady@charteredaccountants.ie