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Brexit – Legal and Tax consequences

from a British perspective

Panthéon-Sorbonne, 16 March 2017

Tom Pickthorn, Partner and Head of International

What I am going to talk about
o Why the UK voted for Brexit
o The Process
o Likely UK – EU relationship: hard or soft Brexit?
o Legal consequences
o Tax consequences
Why the UK voted for Brexit
o 23 June 2016 – Referendum: “Should the United Kingdom remain a
member of the European Union?”
o Result:
– Remain: 48.1% Leave
– Leave: 51.9% Remain
o A revolution
o Note – very little discussion before Referendum on what leave would
actually mean
o Understanding the politics of why UK voted to leave helps to predict
what the legal and tax consequences will be
Why the UK voted for Brexit
o The majority seemed to have thought:
– EU too undemocratic – sovereignty
– EU too bureaucratic
– EU too expensive
– Wanted to have control on EU immigration
– Anti-establishment/anti-London liberal elite
Philosophical: UK voters did not see EU as UK’s political
destiny; economic pragmatism at best
Why the UK voted for Brexit – what
the vote did NOT mean
o NOT anti-free trade
o NOT anti-globalisation
o NOT isolationist
The Process – So far: 2016
o 24 June – Referendum result.
Cameron resigned as Prime Minister
o 13 July – Theresa May became
Prime Minister: “Brexit means Brexit”
o July – new ministries for Brexit and
for International trade set up
o November – legal case against
Government’s attempt to trigger
Article 50 without Parliament’s
The Process – So far: 2017
o 17 January – first detailed speech from Mrs
May on Brexit
o 24 January – Supreme Court finds against the
Government: Parliament must vote on Article
o 1 February – House of Commons votes 498:
114 in favour of “European Union (Notification
of Withdrawal) Bill” allowing Government to
trigger Article 50
o 2 February – White Paper published
o March - Notification Bill passes through
o March - triggering of Article 50 – notice to
The Process – The next two years
o Negotiations with EU of the Withdrawal Agreement
to start the “divorce”
o Summer 2017 – “Great Repeal Bill” to start
passage through Parliament
o By end of 2018 – Withdrawal Agreement in final
o Early 2019 – Ratification of Withdrawal Agreement
by member states
o Early 2019 – vote on Withdrawal Agreement in UK
Parliament: Yes/No
o By March 2019 – Brexit (unless extended)
The Process – Withdrawal Agreement
is the “easy” part
o Long Term EU-UK Agreement
o Temporary Interim Agreement
with EU will probably be needed
o UK to negotiate Free Trade Agreements with
– Countries with existing FTAs with EU(63)
– Other countries (USA, China, Australia?)
o UK to negotiate with World Trade Organisation
The Process – what is NOT going to
happen (probably…!)
o Brexit will not be blocked in the Courts (although people will try)
o Brexit will not be blocked in Parliament (no election until 2020)
o Brexit will not be blocked by the devolved authorities in Scotland,
N.Ireland and Wales (although they will try)
o There will not be another referendum
UK will leave.
Likely UK – EU relationship post-Brexit
o UK imports from EU - €341 Billion
o UK exports to EU - €260 Billion
If there is no agreement, everyone suffers: UK is third biggest
export market for each of France, Germany and Holland.
About 50% of UK exports are to the EU.
Likely UK – EU relationship post-
Brexit – Soft or Hard?
o “Norwegian Model”: EEA + EFTA = NO
– Implement most EU rules with no “seat at the table”
– Free movement of people
– Pay into EU budget
o “Swiss Model”: bilateral agreements + EFTA = NO
– Free movement of people
– Pay into EU budget
o “Canadian Model”: Free Trade Agreement = MAYBE
– Complex and lengthy negotiations: 10 years?
Likely UK – EU relationship post-Brexit
o If all else fails: World Trade
Organisation rules (like USA)
o 17 January 2017 - Mrs May:
– Bespoke
– “no deal for Britain is better than a bad
deal for Britain”
– not in the single market
– a customs union not the Customs Union
– phased implementation
Legal Consequences
So what are the legal consequences of a hard Brexit?
o Much depends on what happens in the EU
o Very few details yet
o Here are some (informed) guesses of what might
Legal Consequences
– “Great Repeal Bill”
o Until Brexit, EU law still applies
o Great Repeal Bill likely to be passed Summer 2017 conditional on Brexit
o Two purposes:
– Repeal the European Communities Act 1972 – return sovereignty to UK Parliament and UK
– Preserve and convert EU law into UK law: in principle, no change
o More complicated than it sounds:
– Will need consent in some areas from the devolved authorities in Scotland, N.Ireland and
– Many laws depend on EU bodies – what will happen?
– Many won’t make sense once UK has left
At the moment of Brexit, EU and UK law will be essentially the same, but will then inevitably diverge
Legal Consequences – CJEU
CJEU will cease to have jurisdiction over UK,
o Will old CJEU decisions still be binding?
o Should EU law that has become UK law be
interpreted by EU or UK legal principals?
o Will new CJEU decisions be relevant to UK?
Answers to these questions will be important to
speed of divergence.
Legal Consequences – Competition/Anti-trust
o Law unlikely to change
o Significant change in process
o At the moment, UK’s Competition Authority cannot investigate where
European Commission takes jurisdiction: “One-stop-shop”
o This will change and likely to be parallel EU and UK investigations on cross-
border matters
– Expensive
– Uncertainty
– Time consuming
o UK and EU law will diverge over time because UK will no longer have to
apply EU precedents
o UK Government: increase powers to review mergers on public interest
grounds: greater control over foreign ownership of strategic businesses
Legal Consequences – Contracts
o No change in law likely – not affected by EU
o Potential issues of interpretation for existing
– Obligation to comply with a piece of EU
– Will defined term “EU” include UK after Brexit?
– What if EU law essential to operation of the
o Potential for Brexit to be a Material Adverse
Change/force majeure event – depends on terms
of the contract
Legal Consequences – Contracts
o Starting to see contracts which will span Brexit to contain “Brexit
– Specific event (e.g. major exchange rate fluctuation) leads to
specific consequence (ego price adjustment)
– A trigger (e.g. imposition of tariffs or non-tariff barrier) leads to
renegotiation and, if that fails, termination
o Specific examples from M&A transactions:
– Brexit Warranty
– Earn-out
– Hard Brexit = MAC
Legal Consequences – Company law
o Companies Act 2006 heavily influenced by EU law but
unlikely to change
o UK Companies with main centre of operations in another
EU member may consider moving
o Soceitas Europaea – UK ones will probably become PLCs
automatically and will no longer be possible to transfer EU
SEs to the UK
o Importance of industry regulation, especially in financial
Legal Consequences – Financial Services
o Crucial sector in UK economy: “The City”. 11% of the economy.
o At the moment, UK authorised entity will have “passporting” rights to do business in other EU states
o With Hard Brexit, this will end – “third country status”
o Unlikely that The City will stop being the main European financial
centre but:
– Many firms will have to move some business to EU
– Regulatory burden
– Burden or Regulators
– Capital burden
o Unlikely that UK Financial Service legislation will change in short
Legal Consequences – Employment/Labour
o Much of UK Employment law is derived from EU law
o Unlikely that much will change
o Government: we “will maintain the protections and standards that benefit workers”
o Possible amendments:
– Working Time Regulations
– Agency Workers Regulations
– TUPE – easier to harmonise terms of employment
– Caps on compensation for discrimination?
Legal Consequences – Immigration
o Key reason for Brexit – politically, free movement of people will be
o Over 3 million EU citizens in UK, 7% of working population
o At same time, strong business reasons to make immigration of key
workers as easy as possible – from US, China, Australia etc, as well as
o Not just highly skilled jobs – agriculture, hospitality
and health depend on immigrant labour
o Some sort of targeted work permit system likely
o Reciprocal – over 1 million Britons in the EU
Legal Consequences – Data Protection
o Despite Brexit, The EU General Data Protection Regulation will come
into effect in UK in May 2018
o Will become UK law under the Great Repeal Bill
o Not clear how references in it to EU-wide coordination will work after
o Possible that UK rules will become more “business friendly” after Brexit
o BUT essential that data continues to move and that UK considered an
“adequate” by EU – “adequacy decision”?
o Government working “to make sure that we achieve a coherent data
protection regime and that data flows within the EU are not interrupted
after we leave”
Legal Consequences – IPR
o National IPR: (UK patents, UK registered designs, UK unregistered designs, UK trade
marks, copyright):
– will initially remain the same but is likely to diverge over time.
o Corresponding EU wide rights: (EU registered designs, EU trade marks):
– likely to be converted into equivalent UK national rights.
o Protected Geographical Indications (“AOC”) (foodstuffs):
– Likely that the UK will implement and equivalent with
mutual recognition with EU PGI system
o Unified Patent Court and European Unitary Patent:
– The UK will join the Unified Patent Court and European Unitary Patent –
expected to start in December 2017. It is not clear what will happen on Brexit,
but the UK will press to remain in.
Legal Consequences – Disputes
o CJEU judgements likely to be persuasive (like the judgements of other
common law countries are now)
o Brussels Regulation on reciprocal enforcement will no longer apply in
UK so specific agreement likely to be needed
o Government: “an effective system of civil judicial cooperation will
provide certainty and protection for citizens and businesses of a
stronger global UK”
o Unlikely to affect UK’s position as a key
global dispute resolution forum
o Arbitration unaffected
Legal Consequences – Environmental
o Half of UK environmental law comes from EU law
o Maybe pressure after Brexit to make UK law more business
– Waste law
– Chemical registration
– Air quality targets
o BUT strong political pressure will be to keep existing and
mirror new EU law
o UK exporters to EU will have to comply with EU rules
Tax Consequences – main UK taxes and their rates

o Corporation Tax on businesses: 20% now but falling to 19%

April 2017 and 17% April 2020
o Value Added Tax (“VAT”) on supply of goods and
services: 20%
o Income Tax on individual’s income:
– Not paid on first €13k then
– Next €13k to €50k @20%
– Next €50k to €177k @40%
– Over €177k @45%
Tax Consequences – possible changes
o Based on EU VAT Directives
o Brought in when UK joined the EEC
o Theoretically, could be abolished or cut, but unlikely:
– Good revenue raiser
– Not politically controversial
o May vary what is “zero rated” or on reduced rate (5%)
o Will not be subject to CJEU
o VAT related tariffs will depend on free trade agreement
Tax Consequences – possible changes
Corporation Tax
o Political factors – Government wants to:
– Encourage business
– Attract investment
– Attract holding companies
– Combat tax avoidance and aggressive tax planning
o Trajectory is already down – from 20% to 17% by April 2020
o Mrs May: Brexit gives UK “the freedom to set the competitive tax rates and embrace the policies that would
attract the world’s best companies and biggest investors to Britain”
o Chancellor Hammond: wants UK to stay “in the mainstream of European economic and social thinking”…but “if
we are forced to be something different, then we will have to become something different” – Singapore of the
o Government will “continue to consider the balance between revenue and competitiveness with regard to bank
taxation, taking into account the implications of the UK leaving the EU” – tax cut for the banks?
Tax consequences – possible changes
Income Tax
o Historic origins
o If economy continues to do well, top rate likely to be cut
o Might use opportunity to simplify a very complicated
Brexit - Conclusion
o UK will leave EU
o Brexit will be “Hard”
o Relationship with EU will take years to agree
o UK law will be the same on Brexit but…
o …will gradually diverge over time
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