Cross-border issues
Post-Brexit, both the Channel Tunnel and the border between Northern Ireland and the Republic of Ireland will become an external border of the European Union.
The Channel Tunnel was established under the terms of the 1986 Treaty of Canterbury between the British and French Governments, and is overseen by the Channel Tunnel Group (appointed under the terms of a 100-year concession contract). Both agreements operate on an international legal basis, so are independent of the UK’s EU membership.
Border controls are already in place in France and the UK, by virtue of the UK not being a part of the Schengen area. However, special arrangements (‘juxtaposed controls’) exist for passengers and vehicles travelling by train to and from France and Belgium.
In 1994, the Sangatte Protocol enabled British border force officers to carry out passport checks in France and Belgium for Eurotunnel users. This was subsequently extended to Eurostar passengers in 2001, following the agreement of an additional protocol. This has enabled the UK to carry out its rail-related immigration control and customs checks from within French territory.
Although not inextricably linked to the UK’s membership of the EU, recent reports suggest that certain French politicians may not be in favour of retaining these arrangements following Brexit. This poses potentially significant risks to the operation of services through the Tunnel, as well as to wider border control.
There are huge political sensitivities surrounding the imposition of border controls between Northern Ireland and the Republic of Ireland.
Any border controls would affect the train service that runs from Dublin to Belfast. It would be easier to maintain the status quo if a Partial Brexit is negotiated (as free movement of goods and labour would continue). A Full Brexit, however, would be more likely to result in some form of passport and customs check being required at the border. This would increase costs for all railway operators, and thus passengers and freight hauliers, while having a negative impact on cross-border rail journey times.
Another potential implication of Brexit is a second Scottish referendum on independence. While the occurrence and outcome of this is far from certain, it is worth considering how Scottish Independence could affect the UK rail industry.
The ScotRail franchise, which covers most of the internal services in Scotland, is let by Transport Scotland. The network itself is managed by Network Rail, and it is unclear whether the Scottish element of NR would be hived off so that the Scottish Government had control of all rail infrastructure in Scotland.
Route separation and the requirement for separate Scottish financial information means that Network Rail already has a distinct Scottish operation. This could make severability easier, although many issues remain far from clear, such as how Network Rail’s debt might be attributed between the two entities.
From a regulatory perspective, the ORR is currently the economic regulator for the UK railway network, but an independent Scotland would need to establish its own approach to economic regulation.
If a separate self-contained Scottish rail regulator was created, this would have particularly significant consequences for cross-border services. Train companies running Anglo-Scottish services may have to deal with two regulators and two sets of regulatory standards governing their services. This includes franchises let by the DfT such as East Coast, TransPennine and CrossCountry, as well as the ScotRail franchise which operates services to Carlisle. Ultimately, the increased costs of regulatory compliance would be passed on either to passengers or the taxpayer on both sides of the border.
If Scotland retained its membership of the EU (which is a likely motivation for seeking independence), it is also possible that passport checks would be required at the border. As noted above, this would increase both costs and journey times. There are currently eight million journeys across the Anglo-Scottish border every year.
The cross-border implications for rail following Brexit are significant, even if they are potentially more manageable when compared with other forms of transport (due to the defined nature of routes and smaller traffic volume). The resulting outcomes, however, will be heavily dependent on the political environment.
Taxation
Taxation will have implications for rolling stock manufacturers, maintainers and hauliers who depend on international goods. The UK tax position will remain the same until the UK actually leaves the EU, and the post-EU tax position will depend upon what is negotiated as part of the exit deal.
If the UK does not manage to negotiate a free trade agreement with the EU, under which goods may be imported from the EU to the UK without customs duty, the arrival of goods into the UK from EU countries should trigger the payment of import duties. This is because the UK reverts to WTO rules if no agreement is reached, and as a consequence the movement of goods from the EU to the UK would be treated as an import. The amount of import duty would depend upon the goods being brought into the UK.
Whatever deal is reached between the UK and the EU, it is likely that the UK will keep a system of VAT in place. As a consequence, it is likely that there would be “import” VAT imposed when goods arrive in the UK from EU countries (the VAT is at standard rate, which is currently 20%). Import VAT is currently due on goods that arrive from outside the EU.
Any ‘import’ VAT is likely to be recoverable (if the importer is registered for VAT in the UK, or under a system comparable to the ‘13th Directive’ reclaim, where recovery is allowed if the jurisdiction of the supplier has a system of VAT and that system allows recovery for UK businesses on a similar basis). However, even if recovery is allowed there would be a cash-flow cost, as import VAT is payable before it can be recovered.
Funding
The issue of foreign investment in a post-Brexit Britain is one that is the subject of much discussion.
In the rail industry, EU grant funding of major capital projects was in the region of £100 million over the last five years. This has included a number of infrastructure developments related to the Trans-European Network - Transport (TEN-T) initiative. A number of these projects may not be completed until after the UK withdraws from the EU, and a question mark therefore remains over their status and whether repayment may be required.
In particular, this uncertainty may be felt by the rail freight industry, since several key projects (such as the development of improved links to the Port of Felixstowe) have relied in part on European grants. In addition (as noted in the ‘Freight Network’ section below), the UK Government’s challenge to the Commission’s extension of the European Rail Freight Corridor may also have an impact on projects related to the development of the Strategic Freight Network.
While such projects could still be within its remit, the European Investment Bank has expressed its concern over the continued viability of some UK projects in which it was intending to invest. Most notable of these is HS2. It remains to be seen whether any form of Brexit will ultimately have an impact on the Bank’s willingness to lend to them.
The fall in the value of the Pound has made the UK a cheaper proposition for overseas investors, which may counteract some of the potential downturn in commercial activity.
In relation to rolling stock finance, the Luxembourg Protocol creates a global legal framework which will recognise and regulate security interests over such assets. The Protocol is expected to come into force later in 2016, following a consultation period. The UK’s accession to the Protocol is independent of its membership of the EU, and will therefore not be directly affected by a Full Brexit.
