After Brexit: is another extension around the corner?

As the uncertainty continues, businesses, while already stretched in managing their Covid-19 response, should continue to update and refresh their contingency plans for all credible scenarios – including the possibility that the transition period may end on 31 December 2020, with no new trade agreement between the UK and EU in place.

The Brexit withdrawal agreement permits the transition period, which is due to end on 31 December 2020, to be extended by up to two years if both the EU and UK agree to it before 1 July 2020. If no extension is agreed, then EU law will cease to apply to, and in, most of the UK as of 1 January 2021.

For businesses, this timetable is important. No extension means that by the end of this year, they will either need to adapt to the requirements of a new UK-EU trade agreement, or adjust to a new trading landscape based on World Trade Organisation (WTO) terms. That is subject to the requirements of the Northern Ireland protocol to the withdrawal agreement, which provides for large parts of EU law to continue applying in relation to trade in goods in Northern Ireland after the transition period.

The EU has already made it clear that it considers an extension necessary. However, the view that the UK should definitively leave the EU on 31 December 2020 - trade deal or no trade deal - is entrenched within the UK government and enshrined in domestic legislation. Whilst the legislation can, in principle, be amended, those at the top of the government will not take the decision to extend lightly, and they have remained adamant in recent weeks that there will be no extension.

The position of the EU is that the short timetable remaining to put a detailed trade agreement in place before the end of 2020 as unrealistic, given ongoing disagreements and the effects of the Covid-19 pandemic on the two sides' ability to engage fully in negotiations. This is not only as a result of the need to allow time for ratification to be effected on the EU side, but also in light of the UK's position that it would accept the imposition of tariffs on certain goods as a trade-off for not incorporating strict 'level playing field' commitments in the trade agreement. The line by line negotiation of hundreds of pages of tariffs is a process usually measured in years rather than months.

For its part, the EU will insist on any extension being agreed in principle by early June, so that there is time for a negotiation with the UK on its additional budget contributions for the extended period. This 'mini-negotiation' and all formalities would need to be completed before the 1 July deadline set in the withdrawal agreement.

If the UK government was to reverse its position, it would need to take a short emergency bill through parliament to repeal the self-imposed bar on an extension which it inserted into section 15A of the 2018 European Union (Withdrawal) Act earlier this year. There would also be a need for some other consequential changes to related legislation. However, ultimately, an extension would be possible under UK law, despite current legislative requirements.

Although opposition parties could be expected to support this, it could prove a test for the unity of the governing Conservative Party that has been built on the promise to "get Brexit done". The UK has already left the EU, but for many Brexit supporters the end of the transition period has acquired totemic significance as the true end point of the Brexit process, heralding as it will the end of the application of EU law to, and in, most of the UK.

After the eleventh hour Brexit extensions we saw in 2019, some have questioned if the extension deadline of 30 June 2020 is a false one, with the option of another eleventh hour extension on the table if the trade negotiations are still unresolved when the snow starts to fall in December 2020. But in contrast to those previous extensions, the EU insists that this is not an option it can legally pursue as it would have no power to do so under the terms of the withdrawal agreement from 1 July 2020.

There is some legal debate as to whether the EU could act under its powers in article 50 of the EU Treaty, which refer to EU agreements with a departing member state, now that the UK is no longer an EU member state. All the same, the political pressure to find a 'fix' for these legal obstacles could be considerable if both sides agreed that an eleventh hour extension would give them the time they needed to put a new trade deal in place – so it cannot be ruled out.