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29th June 2016

Brexit - The Implications for Agriculture & Rural Business

The UK has voted to leave. What happens next?

The EU referendum is over – the UK has voted to leave. What happens next? Certain procedural steps have been well documented but as withdrawal from the EU is without precedent there is a lot that is unknown including the timescale for action – and so for how long we may need to deal with uncertainty.

The Process

The UK has voted to leave the EU, but the process is yet to formally start. To withdraw the Government must serve notice under Article 50 of the Treaty of the European Union. The EU has stated this must be a formal declaration either in a letter or in a speech. This will trigger a two year period to negotiate a new relationship with Europe. European leaders are pushing to begin the process quickly but the decision rests with the UK Government. The Prime Minister has indicated that the process will not be commenced until October and then by a new Prime Minister.

Once started, we will have to consider both international treaties and domestic legislation.

International Dimension

We will need to negotiate a fresh agreement which will govern our relationship with Europe. There are some models that could be considered as a precedent. Norway, Iceland and Liechtenstein are non EU countries but are (together with the EU countries) part of the European Economic Area (EEA). Membership of the EEA gives access to the single market for goods and services but in return members of the EEA have to accept the free movement of people, goods and services. The Swiss have a series of separate agreements with the EU that allow for access to the single market but the Swiss also accept the free movement of people and the EU have said the Swiss model is not viable going forward.

Other relationships exist; Turkey has a customs union with the EU; Singapore and Canada have free trade agreements. Neither of these requires the free movement of people but only focus on goods. Much of the UK’s export to Europe is of services and therefore a key concern for the UK government will be how to preserve access for our substantial financial services sector whilst addressing the concerns raised in the referendum debate especially around the issue of the free movement of people.

If the UK and EU do not reach an agreement by the end of the two years, the negotiating period can only be extended with the agreement of the UK and all remaining EU states. The Treaty does not allow any member state to withdraw the notice once given, although presumably the UK could remain a member if it reached agreement with all other member states. If no agreement is reached the UK will leave the EU and as things stand, trade will be governed by World Trade Organisation rules meaning those exporting to the EU would face export tariffs and would still have to comply with EU rules on product standards.  

National Laws

Many of our laws come from the EU. Under European Communities Act 1972 all EU Regulations have direct effect in the UK. All EU Directives have to be implemented in member states, and so much of the UK national legislation was introduced to implement EU Directives. There is also a wide body of case law that has built up interpreting EU Law applying EU legal principles.

EU Law is particularly relevant to areas such as employment, environmental protection and product standards which have a direct effect on farming and other rural businesses.

During the two year negotiating period these laws will continue to apply. At the end EU Regulations may cease to apply and the domestic Courts will not be bound by decisions of the European Courts. However unless domestic legislation has been introduced to replace all the EU legislation within that two year period, which seems a Herculean task, we would be left with a vacuum in many important areas. Therefore the probability is EU legislation would be preserved until replaced by appropriate national legislation.

The shape of the national legislation would depend on the nature of our relationship with the EU. If we remained in the EEA then certain EU legislation would still have direct effect. If we remained part of the single market under some other arrangement, the conditions of that arrangement would shape national legislation. For example if farmers were to access the single market for the sale of agricultural produce then the UK may need to accept many if not all of the controls that exist on the use of pesticides and GMOs, for example. 

Agriculture

The sale of goods domestically and internationally is at the core of UK agriculture. Therefore the cost of access to the single market is going to be of critical importance. UK agriculture together with many other businesses want tariff free access to single market but the cost would have to be weighed up; both in terms of contribution to the EU budgets and in accepting EU regulations and policies. Two of the key issues that emerged during the referendum debate were about reducing our contribution to the EU and control of borders. It remains to be seen how these issues will effect the UK’s negotiating position on free trade.

Certain sectors of UK agriculture also rely on seasonal workers, many of whom come from other EU countries. With so much emphasis on border control these sectors will be keenly interested on what these controls will be and their ability to access EU workers.

The UK will remain within the CAP until it leaves the EU, and so for at least two years the Basic Payment Scheme and agri-environment schemes will remain. Phil Hogan, the EU Commissioner for Agriculture, has stated a key aim is to simplify the CAP which could mean changes in the rules. If the UK has served notice to leave the EU it will not be a party to the negotiations on any change.

A key concern is what will replace CAP? Will there be any support for UK agriculture in the form or either direct or indirect payments? Many feel food is of such strategic importance it is bound to be supported, although there has been no indication from Government about the shape of UK Agricultural Policy post CAP and whether that will include a support element

Accordingly there are significant areas of uncertainty for UK agriculture and lobbying will have already begun by agricultural industry groups and other interest groups to try to ensure the Government protects their interests. However it will be difficult to be clear on the shape of UK Agricultural Policy going forward until we know the nature of our future relationship with the EU.

Importantly until they are replaced or repealed, all existing regulations will continue to apply in relation to production, sprays and habitat (amongst others). It is suggested that even after an exit, a trade deal may still include similar requirements before produce can be sold in to the Single Market.

Your Business

In the face of this uncertainty what can you do to protect your business? First of all remember UK agriculture is no stranger to change. The structure of the CAP has changed many times. The current CAP budget expires in 2020 and CAP may well change significantly as the EU deals with its the current fiscal issues. Therefore farmers would be facing changes no matter what the outcome of the referendum.

Stay informed. A new UK Agricultural policy will have to be developed and may change rapidly. Keeping up-to-date with developments is going to give you the best information available to help you plan your business.

Remain flexible. CAP payments are key to many farming businesses. Whilst there is uncertainty around what may replace the CAP and our trading relationship with Europe, it seems inevitable that many businesses will become cautious. However any period of change presents opportunity as well as challenges. For example this may result in more land coming to the market and so you want to consider if you are flexible enough to take advantage of this. Also one of the first effects of Brexit is a drop in the value of the pound. This should help exports and make imports more expensive.

Review your arrangements. Many tenancies, contract farming agreements and share farming agreements deal with Basic Payment Entitlements and other CAP payments. These need to be left as flexible as possible to deal with whatever may replace them.  

If in doubt take advice. Our experts at Hewitsons will be watching the changes as they develop so that we can guide our clients through what is going to be a challenging time.

For more information please contact your rural team by clicking here.

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