If the UK left the EU then...

by LexisNexis

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25 Jan 2012

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IN THE LIGHT of recent media coverage of the parliamentary debate on the possibility of calling a referendum on the EU membership of the UK it has become necessary to shed some light on the likely outcome of such withdrawal (if it ever were to occur).

This note aims to provide a general idea of the possible effects the actual withdrawal could have on the UK legal system and on the every day life of its citizens. Some examples are also provided to illustrate these potential (or in some cases certain) effects.


Tax and custom duties
- Taxation falls within the competence of the Member States. However, Member States must exercise that competence consistently with the fundamental principle of the EU Treaties and remove any tax obstacles to cross-border trade into the Internal Market. Some areas have been harmonised such as VAT, duty on capital raising, cross-border mergers, relation between parents and subsidiaries, pension savings, etc. where common rules apply among the Member States.

- National law must respect EU law with the result that any tax rules contrary to EU law are disapplied and taxes wrongly paid must be reimbursed. This would lead to a situation where HM Revenue and Customs would have to pay back millions of pounds to UK companies and individuals. An example of where this has occurred in the past is when Marks & Spencer reclaimed from HM Revenue and Customs a total of £3.5m for VAT paid on teacakes contrary to EU law.

- Were the UK to withdraw and EU laws fall away, businesses and individuals would not have to abide by EU rules but nor would they be able to invoke EU law in their favour. The UK would be free to impose its own taxation on cross-border transactions and harmonised areas, and vice versa. This is likely to result in investments made in other Member States or assets inherited abroad to be taxed differently, and perhaps more heavily, than pure domestic situations.

- Since Directives have been transposed into national law, in theory the rules deriving from them may be maintained into UK law. However, in practice UK businesses and companies would not benefit from any rights specifically accredited to "Member States of the European Union". For example, they would be considered as foreign traders for VAT purposes and therefore able to recover VAT paid abroad only under very strict conditions.

- On the other hand, the UK might be able to refuse to implement new taxes such as the financial transaction tax.

- Such withdrawal is also likely to have the effect to re-establish the Customs borders between the UK and other Members States. That would result in the possibility for the UK to subject imported products to customs duties and quotas and, vice versa. Since the EU negotiates on behalf of the Member States at the WTO, the UK may have to renegotiate agreements on Tariff and Trade with other countries.

Legal framework
Before December 2007 there was no mechanism by which EU Member States could leave the EU. This changed with the signing of the Treaty of Lisbon which amended, once more, the EU founding Treaties. The mechanism became a reality with the entry into force of the Treaty of Lisbon on 1 December 2009 .
Now, Article 50 of the Treaty on the European Union (TUE) sets out the steps that a Member State is required to follow in order to withdraw from the EU. It reads:
1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.
2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.
3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.
4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it.
A qualified majority shall be defined in accordance with Article 238(3)(b) of the Treaty on the Functioning of the European Union.
5. If a State which has withdrawn from the Union asks to rejoin, its request shall be subject to the procedure referred to in Article 49.

The conditions of negotiation of the agreement referred to in Article 50(2) TUE are:

The Commission, or the High Representative of the Union for Foreign Affairs and Security Policy where the agreement envisaged relates exclusively or principally to the common foreign and security policy, shall submit recommendations to the Council, which shall adopt a decision authorising the opening of negotiations and, depending on the subject of the agreement envisaged, nominating the Union negotiator or the head of the Union's negotiating team.
Furthermore, according to Article 238(3)(b) TEU the majority required to approve a withdrawal shall be at least 72 % of the members of the Council comprising at least 65 % of the population of these EU.
Summarising, there are two ways for a Member State to withdraw from the EU: with an agreement negotiated with the Union or, if no agreement is reached, by waiting for two years after the notification of the intention to withdraw (unless the period is extended unanimously by the European Council).
Some practical implications of an effective withdrawal
There are many possible ways to analyse the implications that such withdrawal could originate for both parties involved (EU and withdrawing MS). In this note we will focus on the perspective of withdrawal without an agreement as this would be the worst possible scenario (not unlikely by any means) and because speculating on the possible nature and content of the ‘agreement' would be only that, speculation.
The document will only refer to a few effects as the list could potentially be nearly endless.


Legislation
- A vast majority of UK law is derived from the EU, estimated at 80% of law currently in force in the UK. As such, withdrawal from the EU will have a huge effect on legislation applied in the UK.

- The Treaties (the TEU and the TFEU) would cease to apply, including as part of those, the fundamental freedoms (free movement of goods, services, capital and persons/workers) meaning that the protection of UK citizens either living in or intending to move to an EU Member State will disappear. UK nationals will require visas just to visit any MS and stringent requirements will apply to workers visas. Such rights, which derive from fundamental freedoms and are directly enforceable in UK courts, will be deprived to nationals of other Member States residing in the UK.

- Treaties, Regulations and Decisions (the latter explicitly addressed to the UK or UK party) are directly applicable, i.e. they are automatically legally binding without the need to implement such provisions into national law. All of this legislation currently in force will automatically become inapplicable in the UK and any rights derived will cease to exist. This will leave huge gaps in the UK legal system. For example, the Regulation on compensation to passengers for delayed or cancelled flights will no longer apply. Likewise, competition law regulations such as the vertical agreements block exemption, which exempts thousands of common commercial agreements from UK competition law enforcement, will no longer apply. Identifying such national legislative measures which are affected by Regulations or Decisions (as these are not explicitly given effect into national legislation) and revising them, would be a daunting task.

- National legislation adopted to comply with EU Directives could be ‘potentially' repealed or amended - whichever option would be more beneficial to the UK. However, given the large number of such measures and the way in which the UK has implemented EU Directive, identifying and assessing the benefit and risks of keeping those provisions will prove a mammoth exercise. One area that would be revised as priority 1 will most certainly be Financial Regulation (Banking and Credit institutions) and possibly Company law (mergers and acquisitions). However, this exercise will take years owing to the numerous areas where the EU has legislated to date. Amendment of existing legislation and adoption of new measures would add significantly to the workload of UK Departments and Parliament.

- The effectiveness of judicial rulings (case law) which were decided following a preliminary reference procedure, used when a UK court or tribunal refers a question of EU law to the Court of Justice of the EU for a preliminary ruling, would also need to be revisited.

 

At EU institutional level

Disentangling from the EU institutional framework will see thousands of UK nationals currently working for the EU institutions being made unemployed and likely returning to the UK. Those will need to be absorbed by the local labour market (except the few that may reinsert themselves in any other EU MS as third country nationals). In addition, the proportional share of the UK in the European Central Bank will need to be reimbursed. No further aid in the form of Cohesion Funds will be received by poor areas of the UK, with the economic situation in those areas likely to worsen relative to more wealthy areas of the UK.


Trade repercussions
Within the international trade field, the UK would cease to be covered by thousands of bilateral or multilateral agreements signed by the EU and, as a result, to benefit from those. As a result, new agreements would need to be negotiated with the EU and with any other country such as China, Japan, other ACP countries or Brazil. Negotiations would be complex, lengthy and costly.


Basic goods and their prices

Due to the non participation in the Agricultural or Fisheries policies, in case of shortage of those products in the UK (a likely occurrence given current production and consumption rates), the prices of those goods will rise considerably as custom duties will need to be paid on products imported into the UK from the EU. Similarly prices may rise if UK does not negotiate good deals with ACP countries or other producers of imported food-related products.


Financial accounts between the UK and the EU

- The Structural and Cohesion Funds are the EU's main financial instruments for supporting social and economic restructuring across the EU. They account for over one third of the EU budget and are used to tackle regional disparities and support regional development through actions including developing infrastructure and telecommunications, developing human resources and supporting research and development.

- The main Structural Funds available are the European Regional Development Funds (ERDF), which promotes economic and social cohesion through the reduction of imbalances between regions or social groups; and the European Social Fund (ESF) which prevents unemployment, develops human resources and promotes integration into the labour market. For the period 2007-2013, the UK received €9.4 billion in Structural Funding. Each UK region has an allocation of that money to fund projects. Allocations are based on regional employment and skills needs and are matched with a similar amount of national funding. Many regions and organisations, such as higher education institutions, use such structural findings, in order to establish various projects which are beneficial for UK regions, people or institutions. Depriving the UK from such structural cohesion funds, would lower the quality of life for many British people.

- The money used by the Bank of England to fund the European Central Bank (ECB) may need to be returned; and any kind of open financial accounts, planned on the basis of continuing UK membership, would need to be negotiated and settled.

 

Free movement of persons and immigration

- The EU law on free movement of persons allows EU citizens (and their families) to travel to, reside in and exit other EU countries with limited administrative formalities, providing that they meet certain conditions. For residence beyond three months this requires a person to be working, self-employed, self-sufficient or studying in the host member state. As a result of a number of agreements, the right of free movement of persons has been extended in the UK to nationals of EEA states and Switzerland.

- Many thousands of businesses and individuals have taken advantage of the right of free movement of persons. Some estimates put the current number of British citizens living in Spain at 750,000. Thousands of EEA nationals and their family members live and work in the UK, and are employed at all levels in UK businesses.

- Were the UK to withdraw from the EU, the right of freedom of movement would fall away. This could have significant effects on individuals and businesses concerned: both for those who were intending to exercise their right to move to other EU states and for those who already have. The latter would depend on (i) any transitional measures put in place here and in other EU states, and (ii) whether persons had already acquired rights, e.g. if they had acquired permanent residence under the Citizens Directive (2004/38/EC).

- Were the right of free movement to fall away completely, the UK would be free to impose its own domestic immigration law on citizens of other EU states (assuming that the UK Regulations which give effect to the relevant Directive are revoked), and vice versa.

- The UK's restricted ability to limit the inward migration of persons from other EU states has become controversial in some quarters, particularly since the accession to the EU of two tranches of east European countries in 2004 and 2007.

- However, the ‘worst case scenario' consequences of the UK pulling-out could include the repatriation of thousands of UK citizens if they did not meet immigration requirements of the EU state in which they are currently living, and potentially the requirement for UK nationals to obtain a visa when going on holiday to other EU states. The effects on UK business would be significant, both on their ability to do business in and transfer people to other EU states, but also in relation to their own workforce, particularly given the current limits on non-EU economic migration.

 

Air travel

- If the UK did withdraw from the EU, air travel as we know it would change overnight. The immediate loss of passenger rights to compensation for delayed or cancelled flights has already been mentioned. Another impact would be on the airlines flying to and from the UK. For example, Ryanair, as an Irish airline, has the right to fly between any EU airport. If the UK withdraws from the EU, Ryanair would only be permitted to fly from the UK to the Republic of Ireland.
We do not know if the UK would secure a ‘good deal' in terms of interaction with the EU such as Switzerland or other neighbour countries have in many respects.

 

Conclusion

Many aspects of the effective situation we may experience if the withdrawal were to occur remain unknown or are speculations at best. However, the examples mentioned above are quasi certainties. It all may depend on the skills of the negotiators [if an agreement were to be reached] and the potential mutual benefits that would be derived from a new relationship.
Of course, the UK may be able to secure a good deal. Alternatively, the UK may not but over time find a way to leverage its new status. More likely, than any of this is that the EU further evolves and the UK, and other nation-states, continue their association but may redefine the relationship in certain ways.

Contributors:
Laura Bolado, LexisNexis EU Tracker
Pagonia Basia, LexisNexis EU Tracker
Albane Mackin, LexisNexis EU Tax Cases Tracker
Jonathan Kingham, LexisNexis Immigration PSL
Simon Dodd, LexisNexis PSL

 

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