Scotland post-Brexit – A Year on from the Referendum

Background

While on a UK-wide basis in the EU Referendum there was support by 52/48% for Leave, there were variations across the UK and in Scotland there was a 62/38% vote in favour of Remain. There are many factors that may explain why the referendum result was so different in Scotland. Scotland’s view of Brexit has undoubtedly been affected by the Scottish Parliament, where all the prominent politicians argued strenuously for a Remain vote, and also by the Scottish Independence Referendum in 2014. There are a number of important legal and constitutional issues in Scotland as a result of Brexit. There are also particular sectors of the Scottish economy sensitive to the outcome of Brexit.

UK Brexit Negotiations and Scotland’s Position

The UK Government formally triggered Article 50 on 29th March 2017. While the issue of Northern Ireland and its border with the Republic has been highlighted as a key issue in negotiations to date, the impact of Brexit on other devolved administrations has received relatively little attention. Nonetheless the question of differential deals for the devolved UK nations, the impact of the European Union (Withdrawal) Bill, and the continuing prospect of a second Scottish referendum are all likely to have implications for both the private and public sector in Scotland.

During the EU Referendum the Scottish National Party (SNP) campaigned for the UK to remain in the EU. In addition, its manifesto for the earlier Scottish Parliament Elections in May 2016 provided that if “Scotland is forced out of the EU against its will” it would seek a second Scottish Independence Referendum.

In the immediate aftermath of the EU Referendum, Nicola Sturgeon indicated that the Scottish Government would actively look to preserve continuity of membership of the EU for Scotland. In December 2016, and following input from the Scottish Government’s Standing Council for Europe, chaired by Professor Anton Muscatelli, the Scottish Government published its "Scotland's Place in Europe" paper setting out what it would like to see happen in the context of Brexit.

This paper argued for Scotland to retain membership of the Single Market through EEA membership, either for the UK as a whole or through differential arrangements for Scotland as part of the UK. The paper also favoured membership of the EU Customs Union but suggested that, in order for Scotland to maintain access to the UK market and avoid any hard border between Scotland and the rest of the UK, Scotland would follow whatever position the UK adopted. The UK Government’s official response was issued in March 2017 and highlighted the legal and practical complexities of getting buy-in from the relevant interested parties as grounds for the UK Government being unwilling to pursue a differential arrangement for Scotland.

It is interesting to note that while not supporting the type of differentiated deal set out in the Scottish Government’s paper, the House of Lords has since suggested that post-Brexit differentiation in areas such as immigration may be worth considering. The prospect of differential deals for Northern Ireland and Gibraltar are also likely to reignite calls for Scotland to have its own differentiated deal.

Meanwhile, the result of the General Election for in the UK may have increased the chances of a ‘soft’ Brexit and in Scotland may have diminished any immediate calls for a second Scottish Independence Referendum.  This, together with a likely period of transition post-Brexit may help ease some of the immediate uncertainties for business.

 

Scotland, Henry VIII and the European Union (Withdrawal) Bill  

The publication by the UK Government of the European Union (Withdrawal) Bill in July 2017 exposes certain important constitutional and legal issues which will require discussion between the UK and Scottish Governments and which will have an impact on the economy and business in Scotland.

At the heart of these uncertainties is how the Withdrawal Bill impacts on the devolved powers of the Scottish Parliament.  The Bill seeks to repeal the European Communities Act 1972 (with effect from “exit day”) while providing a framework by which the substance of EU law can be translated and retained in UK law beyond the UK’s exit. Much of the substance is to be achieved through detailed secondary legislation using so-called “Henry VIII” powers, intended to allow primary legislation to be amended by secondary legislation without recourse to further parliamentary scrutiny. The Bill also seeks to set out some key jurisprudential principles around how former EU law is to be interpreted and modified.

The Scotland Act 1998, which established the Scottish Parliament, provides that the Scottish Parliament cannot contravene EU law. Section 11 of the Withdrawal Bill seeks to amend the Act so that from the UK’s exit from the EU this restriction applies to “retained EU law” (i.e. re-enacted into UK law pursuant to the Bill). As mentioned below, this gives rise to a requirement to seek the approval of the Scottish Parliament to this change to the Scotland Act pursuant to what is known as the “Sewel Convention”.

The Bill also deals specifically with areas to be repatriated from the EU that have already been devolved within the UK, including Scottish agriculture, fishing, public procurement and environmental law. In these devolved areas, the Bill provides that the default position is that all powers being repatriated from the EU revert to Westminster. Therefore under the Bill there is no automatic repatriation of powers to the Scottish Parliament unless and until there are further Orders in Council granted by Westminster to allow that. The implication is that in devolved areas the UK Government may seek to retain a level of ongoing control. Both the Scottish and Welsh Governments have voiced concerns over how this operates.

The powers pursuant to the Withdrawal Bill to translate EU law will apply in devolved areas. This is an additional reason why the approval of the Scottish Parliament would normally be sought as a result of the Sewel Convention. However, controversially, as a result of “Henry VIII” powers, the secondary legislation used to amend the Act would not normally fall within the Sewel Convention, thereby circumventing approval by the Scottish Parliament. There is also the potential difficulty that implementing EU law will not fully recognise the distinctiveness of Scots law and, as has happened previously, Westminster legislation could create unintentional difficulties in Scots law.  

There is likely to be considerable debate about the Withdrawal Bill at both Westminster and Holyrood as a result.  Depending on the eventual extent of further devolution of powers and additional budget that may be required, there will need to be a reconsideration of the Scottish Fiscal Framework that supports devolution and/or the Scottish Parliament’s tax raising powers.

 

Legislative Consent of the Scottish Parliament to UK Brexit

The Withdrawal Bill itself is silent on the application of the Sewel Convention. Given the exceptional circumstances of Brexit the UK Government may have been justified in arguing that the Convention did not apply. However, this is likely to have given rise to difficult political and constitutional issues.

Interestingly, the explanatory notes to the Bill make it clear that the UK Government accepts that the Sewel Convention applies and that it intends to seek legislative consent motions from the Scottish Parliament (and the other devolved assemblies).

The explanatory notes to the Bill suggests there are a number of reasons why the consent of the Scottish Parliament (and other devolved assemblies) is required. However, the principal reason is that the Bill seeks to amend the powers of the Scottish Parliament under the Scotland Act 1998 by removing the requirement to comply with EU law. This had been included when the Scottish Parliament was created. Section 11 of the Bill seeks to provide that the Scottish Parliament must instead comply with “retained EU” law (re-enacted into UK law pursuant to the Bill) from exit day. The introduction by the Bill of a framework to allow secondary legislation to alter the law in devolved areas also triggers the Sewel Convention.

As the term suggests, the “Sewel Convention”, as a constitutional convention, takes the form of a political as opposed to a legally binding undertaking. Under Section 28(7) of Scotland Act 1998, the UK Parliament, as a sovereign legislature, retains the power to make or unmake any law for Scotland. However, applying the Sewel Convention as a legislative consent motion would be needed when Westminster legislation touches on devolved matters. In addition, the Convention has come to apply to any alteration of the actual powers of the devolved administrations.

Section 2 of the Scotland Act 2016 inserted a new subsection (8) into Section 28 of the Scotland Act 1998. This gave statutory recognition to the Convention by stating: “But it is recognised that the Parliament of the United Kingdom will not normally legislate with regard to devolved matters without the consent of the Scottish Parliament.” The Scottish Government was allowed to intervene in the appeal by the UK Government to the Supreme Court in the case of Miller v Secretary of State for Exiting the European Union regarding Brexit which was heard in December 2016 and where judgment was handed down in January 2017. The judgment in that case confirmed in effect that transposing the Sewel Convention directly into the Scotland Act 1998 did not alter its status, which remained as a political and constitutional convention. It did not therefore have the force of law and its application was not reviewable by the courts.

It seems unlikely at present, given the reaction to the Bill of the Scottish Government, that the Scottish Parliament would pass the relevant legislative consent motion. Were the approval of the Scottish Parliament (and/or other devolved administrations) withheld, the UK Government would nevertheless as a matter of law be able to proceed with Brexit and implementing the Withdrawal Bill. This does not, therefore, amount to a right of veto. It is clear nevertheless that this would give rise to political and constitutional issues which may be hard for the UK Government to ignore, particularly if it is seen to undermine the Scottish devolution settlement and becomes an additional pretext for a second Scottish Independence Referendum.

 

Brexit Impact in Scotland

In general the free movement of EU citizens is the main issue facing the Scottish economy as a result of Brexit. Scotland has not historically experienced the same levels of inward EU migration as many other parts of the UK. Local demographics and relatively smaller numbers of people of working age retained in Scotland mean that Scotland’s economy could be more sensitive than many other parts of the UK to the withdrawal of EU freedom of movement. Trade bodies in Scotland including CBI Scotland and the Scottish Chambers of Commerce have been consistent in highlighting the need for ongoing access to the EU labour force in any post-Brexit arrangements.

The effects of Brexit could also apply differentially to Scotland given the make-up of its economy. In particular there are a number of sectors which are disproportionately significant to Scotland which could be markedly affected by Brexit.

Scotland has a large financial services sector which along with the industry in the rest of the UK has had to react to the prospect of Brexit without any real clarity on what the detailed implications may be. It is clear that for those companies already operating into the EU establishing some sort of EU hub may be an attractive option to deal with the uncertainties. For example, within the last few months The Royal Bank of Scotland and Standard Life Aberdeen have confirmed they intend to maintain EU operations in Amsterdam and Dublin respectively and many others are actively looking at similar options.

The fishing industry in Scotland generally welcomes Brexit and the UK’s withdrawal from the Common Fisheries Policy. Brexit is seen as giving greater access to UK fishermen to UK waters. There are, however, uncertainties as to what will replace the CFP and the extent of ongoing access rights for EU fishermen that may be agreed as part of Brexit negotiations. The relevant UK Minister, Michael Gove, has suggested that EU fishing fleets will retain some access to UK waters.

The agricultural sector is significant to Scotland as has been the associated level of EU subsidy in Scotland. Scottish farming accounts for approximately 18% of UK’s overall Common Agricultural Policy funding under the EU system. This is more than double Scotland’s per-capita entitlement. Any UK replacement of the Common Agricultural Policy and system of farm subsidies beyond Brexit which is administered through the Scottish Government will require to be funded either through UK or Scottish Government funding.  There has also been increased recognition that any new post-Brexit trade agreements with countries such as the US are also likely to affect the market for UK farming and for the food and drink sectors as a whole.

The Scotch whisky industry was in general against Brexit. The Scotch Whisky Association has, however, recently been more positive, taking the view that improved trading with non-EU countries could compensate for any loss of EU trade. In particular the SWA is keen to see that any new trade deal with India, seen as a key growth market for Scotch whisky, includes reduced tariffs on Scotch whisky from their current level of 150%.

Renewable energy is another area of particular significance in Scotland which has to a greater extent relied upon EU driven targets, including a target of getting 15% of all energy from renewable sources by 2020. The UK being free to develop its own energy priorities could change this landscape. The industry in Scotland has benefited from various forms of EU sourced financial support for new projects. UK Treasury assurances should mean that ongoing projects are not prejudiced, but there will be some question marks for funding of future renewables projects.

Scotland also has a disproportionately significant university sector which presents some specific challenges arising out of Brexit. There are doubts as to the continuing availability of EU funding and collaboration for university research. Recent data has also suggested that post-EU Referendum student and teaching applications from the EU to UK universities have reduced, potentially placing additional funding and resourcing pressures on the sector.

 

Conclusion

Article 50 has been triggered and we are now in the midst of Brexit negotiations against a two-year timeline for conclusion of Brexit negotiations. There remains, however, many uncertainties as to the outcome of those discussions and, with transition becoming a key issue, when and in what form Brexit will happen.

We have now also seen the introduction of the European Union (Withdrawal) Bill. This draft legislation leaves much of the detail to follow and partially for that reason will be the subject of much debate at Westminster. Given that the UK Government will be seeking the approval of the devolved administrations, the Scottish Parliament will have the opportunity to debate the Bill. Whatever the final form of the legislation, it is likely to lead to the reshaping of the intra-UK constitutional arrangements and Scottish devolution in particular.

Ahead of us we still have a lengthy Brexit process, the outcome of which is both constitutionally and politically uncertain. A clear Scottish dimension has developed.  The outcome of Brexit is set against the economic priorities in Scotland and the potential for a Second Scottish Independence Referendum. While it is clear that Brexit will impact Scotland as well as the rest of the UK, at a constitutional as well as economic level, the extent of this impact still remains unclear.

 

August 2017