Written evidence from the Isle of Man Government[1]

Executive Summary

• The Isle of Man is not part of the United Kingdom (UK), and is not included with the UK’s membership of the European Union.
• A Protocol attached to UK’s Treaty of Accession allows for the Island to be part of the EU Customs Union and permits the free movement of industrial and agricultural goods in trade between the Island and the EU. The Isle of Man must apply the same treatment to all natural and legal persons of the EU.
• The Isle of Man’s existing relationship with the EU is dependent on the UK’s membership of the EU, and its future relationship with the EU depends on the nature of the UK’s new relationship.
• The opportunities Brexit creates for the Isle of Man are difficult to assess at this stage, but the inclusion of the Island within any Free Trade Agreements concluded by the UK with Third Countries will be explored in further detail and may provide opportunities for the Island.
• The risks Brexit creates for the Isle of Man may include –
• Loss or reduction of access to the EU market with the Island potentially being outside of the customs union, or facing limited access to the single market, which may include tariff barriers, administrative obstacles, or non-tariff barriers
• Reduced ability to ‘interact’ with the EU (free movement of people , transport links and other limitations)
• Loss of UK influence within the EU
• The impact of potential negative effects on the UK economy in general, and the City in particular
• The Isle of Man Government does not envisage any change in the underlying constitutional relationship between the Island and the UK as a consequence of Brexit.
• The UK Government and the Ministry of Justice have engaged effectively on Brexit, notwithstanding the lack of clarity at this stage as to the UK’s negotiating position.

1 – Introduction

The Isle of Man is not part of the United Kingdom. It is internally autonomous and self-governing, with its own independent legal, administrative and fiscal systems. The Island’s parliament, Tynwald, legislates for the Island. It is a Dependency of the British Crown, with Her Majesty The Queen as Sovereign. The Lieutenant Governor is the personal representative of Her Majesty The Queen in the Island.

The relationship between the Isle of Man and the EU is set out in Protocol 3 to the UK’s Act of Accession by which the UK became a member of the EU and not within the EU Treaty (as amended) itself[2]. The Isle of Man’s relationship is dependent, therefore, on the UK’s membership of the EU.

The Protocol allows the Island to be part of the EU Customs Union which permits the free movement of industrial and agricultural goods in trade between the Island and the EU. Under Protocol 3 (and section 2(1) of the European Communities (Isle of Man) Act 1973) EU customs legislation and legislation concerning the trade in agricultural products applies directly to the Isle of Man as part of the law of the Island. The Isle of Man must apply the same treatment to all natural and legal persons of the EU. Apart from the requirements of Protocol 3, EU rules do not apply to the Island. In addition, the Island's relationship with the Union allows it to trade with countries in the European Economic Area[3] similarly to its trade with the Union itself.

The Isle of Man is not, therefore, part of the EU, nor is it included within the UK’s membership of the EU. It is for this reason that Isle of Man (or Channel Islands) residents did not participate in the referendum, whereas those living in Gibraltar did.

The broader relationship – beyond the scope of Protocol 3

The impact of EU legislation and policies on the Island does, however, go beyond the scope of the Protocol, as follows –

 UK agreements/relations – there are several policy areas where, because of bilateral agreements with the UK, EU rules may be applied in order to stay in step with the UK, such as on Customs and Excise/VAT.

 Transactional issues – there are many instances where goods produced must meet EU standards if they are to be sold to EU consumers. Journeys begun or ending in the EU are also subject to EU rules and those providing services to customers in the EU may need to meet EU standards or demonstrate effective equivalence.

 Voluntary or reputational issues – the Isle of Man may choose to adopt EU measures and legislation voluntarily – as it has in respect of certain environmental standards – or indeed for reputational reasons, for example, when it adopts EU sanctions measures.

 Global standards – there are several examples where the Isle of Man has adopted global standards which have been agreed or implemented by or in conjunction with the EU.

What will happen to Protocol 3 when the UK leaves the EU?

When the UK leaves the EU, it is likely its Act of Accession will be repealed, and Protocol 3, which is attached to it, will fall away. This will not happen immediately.

No Member State has ever left the EU, and so there is no precedent for the UK to follow, but the Treaty on European Union envisages at Article 50 that the UK would have two years – from notification of its intention to leave – to negotiate a withdrawal agreement.

In very simple terms, when the UK ceases to be a Member State, no matter what happens, it is envisaged that the Isle of Man’s relationship with the EU will need to be rebuilt.

The Isle of Man’s Future Relationship with the EU 

The EU Treaties allow only for sovereign states to become members of the EU, as does the Convention establishing the European Free Trade Association. Similarly, the EU can only sign association agreements with sovereign states  – such as those currently being negotiated with the so-called ‘micro-states’ of Andorra, Monaco and San Marino. 

It is not possible, therefore, for the Isle of Man to either become a Member of the EU, or to join EFTA and accede to the European Economic Area (EEA) Agreement, or to sign an association agreement with the EU, in its own right.

The Isle of Man’s relationship with the EU has, therefore, up to this point been dependent upon the UK’s continued membership of the EU – and the retention of Protocol 3. Following the UK’s decision to leave the EU, the Island’s future relationship will be dependent upon the new relationship negotiated by the UK on its own behalf.

Negotiations

As is noted below (see Section 4 on the constitutional relationship between the Island and the UK), the UK is responsible for the Isle of Man’s international relations.

Any negotiation with the EU regarding the Isle of Man’s future relationship will fall to the UK to conduct, with the Isle of Man contributing to the negotiations through – or as part of – the UK delegation. As was suggested by the House of Commons Justice Committee in its 2010 report on the Crown Dependencies, and accepted by the Ministry of Justice, in certain circumstances, representatives of the Crown Dependencies may appear as part of a UK delegation, and may deal with international bodies directly. This has been the case in respect of Isle of Man officials appearing before the EU Code of Conduct Group and certain UN Committees.  

What is clear is that the Isle of Man must identify what it would wish to secure from any re-configuration of the UK’s relationship with the EU and work alongside the UK (and  in collaboration with the Channel Islands) to secure this, as any such arrangements would form part of the UK’s withdrawal agreement/new relationship. 

Whilst the UK’s future relationship with the EU following the vote to leave remains far from clear, the position of the Isle of Man is similarly difficult to predict.

The legal and constitutional positions that remain relatively clear are that –

• Protocol 3 in its present form will fall away
• The Island’s European Communities (Isle of Man) Act 1973 will need to be repealed, and new legislation drafted to reflect any new relationship, and guaranteeing any vestigial rights and obligations as required
• Whilst the Isle of Man and the UK remain bound by the terms of the 1979 Customs & Excise Agreement, which inter alia makes both territories a single indirect tax area, any trading relationship that the UK enters into must automatically extend to the Isle of Man in so much as it relates to the common duties.
• This will fall to the UK to negotiate, on behalf of the Island, with the EU
• The Isle of Man will contribute to or potentially form a part of the UK negotiating team for this element of the negotiations

2 – What opportunities and risks does Brexit create for the Crown Dependencies?

The Isle of Man is not part of the EU, and so the disadvantages of EU membership which were set out by the Leave campaign did not apply to the Isle of Man. The sovereignty of the Island’s parliament was not significantly diminished as a result of the UK’s EU membership, the Island has never paid into the EU budget, and it is able to limit migration – albeit indirectly – through controlling access to employment and benefits.

Opportunities & risks identified by Isle of Man Government

Isle of Man Government Departments, Statutory Boards and Offices were asked to identify opportunities and risks which may flow from the UK’s withdrawal from the EU.

Many more risks were identified than opportunities and the ability of the Isle of Man to take advantage of the opportunities presented by the UK withdrawing from the EU appears to be relatively marginal.

Opportunities – Free trade & Free Trade Agreements

The Leave campaign envisaged that the main opportunity of withdrawal from the EU, would be to negotiate a new free trade agreement with the EU, and also, with other fast-growing economies.

Whilst the Isle of Man could, in theory, negotiate such agreements in its own right, it would need to do so on the basis of entrustment from the UK and there are a number of practical reasons why it might be very difficult to do so;

• The Isle of Man, even if it were entrusted to do so, is not able at present to conclude Free Trade Agreements with third countries because it remains bound by its EU obligations as set out in Protocol 3. This means that as the Island is still part of the EU’s customs union, it is required to apply the EU’s Common External Tariff which itself reflects the EU’s trade agreements with third countries. If the Isle of Man was to conclude Free Trade Agreements with other countries there is also a possibility that doing so would be against EU law, which could result in the UK being subject to challenge in the European Court of Justice, if the UK were to grant the Island such entrustment.
   
• From a practical perspective, it is also not possible for the Isle of Man to negotiate different tariffs (from the UK) whilst retaining its current Customs and Excise Agreement with the UK.
   
• From a financial perspective, the negotiation of trade agreements often prove lengthy and complex – the Isle of Man does not currently have available the necessary expertise to undertake such independent negotiations, and this expertise would be costly to acquire. In addition, Free Trade Agreements deal primarily with tariffs and quotas as they apply to goods. The Isle of Man is a small economy which trades, primarily, in services. It must be accepted that Isle of Man would find it difficult to secure favourable trade deals with other, much larger, economies, for which the benefits of entering into such a deal would be minimal.

For these reasons, therefore, especially bullet 2 above, it would appear appropriate for the Isle of Man to be included within the scope of agreements between the UK and other countries, rather than negotiate any agreements in its own right.

This may offer opportunities for the Isle of Man to benefit in two ways –

• Firstly, as a Member State the UK was bound by EU wide Free Trade Agreements with third countries, and could not negotiate its own agreements. The effect of this situation was that those agreements could only extend to include the Isle of Man as far as the scope of Protocol 3, and other provisions did not include the Island. The effect of UK withdrawal from the EU, and the potential for it to negotiate its own agreements is that the Island could be included within their scope, subject to the agreement of both parties.
   
• Secondly, the City of London and UK financial services industry – and potentially other sectors - may look to expand their outlook to focus on non-EU trade and in particular markets where Isle of Man business expertise may be valued. 

Risks

Many risks have been identified, but the main types of risks identified can be grouped, very broadly speaking, into four main headings –

• Loss or reduction of access to the EU market – this includes at a basic level, being outside of customs union, and more broadly, limitation of access to the single market, which may include tariff barriers, administrative obstacles, and other non-tariff barriers
   
• Reduced ability to ‘interact’ with the EU, which includes limitations on the free movement of people (access to labour supply), transport links and other limitations
   
• Loss of UK influence within the EU, which will not only remove the Isle of Man’s key supporter, but also remove the UK’s more liberal voice in terms of development of new standards. This will potentially impact on the future development of EU policy, and particularly where the Island currently benefits from equivalence (e.g. SEPA and Data Protection, and potentially other areas in the future)
   
• The impact of potential negative effects as they are felt in the UK, recession and/or inflation, currency fluctuations – causing increased costs of goods imported from the EU, poorer prospects for the City, and potential difficulties for parents of Isle of Man institutions
   

3 – What in the view of the Isle of Man should the UK Government prioritise in its negotiations with the EU over its terms of exit?

The Isle of Man Government’s stated view on the UK’s withdrawal from the EU is that it would wish to maintain its existing relationship with the UK, and sees no reason why the UK’s withdrawal from the EU will not have any impact on the underlying constitutional relationship, on the Customs and Excise Agreement and revenue sharing arrangements, and on the right of free movement of people between the Island and the UK.

Beyond that, the Isle of Man would seek to maintain the ability to trade freely with the EU, and will monitor closely the position regarding free movement of people. This is of particular concern to the Island, as there is a need to retain the ability to allow for in-migration of workers to meet shortages of particular skills. 

In addition, whilst it is accepted that the Island is reliant upon the UK position in relation to EU customs union, the Island would wish to explore the potential to remain in the EU customs union & VAT system and associated simplifications.

Any other elements of the UK ‘deal’ will be considered on their merits.
 

4 – How will the constitutional position of the Crown Dependencies be affected by Brexit?

The constitutional position of the Isle of Man is underpinned by two pillars which will remain in place following the UK withdrawal from the EU. 

Firstly, the relationship with the Crown and the role of the UK Government remain as set out in Part XI of Volume 1 of the Report of the Royal Commission on the Constitution, published in 1973 and known as the Kilbrandon Report, which sets out the role of the Crown in relation to its Dependencies.

The Crown's responsibilities include:

• ultimate responsibility for the "good government" of the Islands;
• the ratification of Island legislation by Order in Council (Royal Assent)
• international representation, subject to consultation with the Islands prior to the conclusion of any agreement which would apply to them;
• ensuring the Islands meet their international obligations; and
• defence.

Secondly, in relation specifically to the application of international treaties and agreements all international agreements signed by the United Kingdom are deemed not to apply to the Crown Dependencies, unless otherwise stated as set out in a 1950 memorandum setting out the “Position of the Channel Islands and Isle of Man in relation to Treaties and International Agreements”.

The memorandum explained that” any treaty or international agreement to which His Majesty’s Government in the United Kingdom may become a party after the date of the present despatch will not be considered as applying to the Channel Islands or the Isle of Man by reason only of the fact that it applies to the United Kingdom of Great Britain and Northern Ireland, and any signature, ratification acceptance or accession on behalf of the United Kingdom will not extend to the Islands unless they are expressly included”.

In relation to the EU, by the time the United Kingdom came to negotiate its accession to the EEC it was clear, therefore, that the Isle of Man would not necessarily be included within the United Kingdom’s accession, without wishing to be.

As things then stood, the Treaty of Rome stated that “Article 227(4) specifically applies the Treaty to all European territories for whose external relations member states are responsible”. 

The Isle of Man and the other Crown Dependencies requested that special terms be negotiated on their behalf. The Treaty was subsequently amended, dis-applying the terms of Article 227(4) to the Crown Dependencies, and setting out the special and limited relationship between the Community and the Islands, the terms of which were attached to the UK’s Act of Accession to the Treaty.

The Protocol was, therefore, negotiated and operates in a manner which is in accordance with the two constitutional principles established above. UK withdrawal from the EU, and the loss of Protocol 3, does not alter these underlying principles.

It is on the basis of the existing constitutional relationship that the Isle of Man would wish to be included – subject to the content and extent of the new relationship – within the UK’s future relationship with the EU. And it is on the basis of the principle of the extension of international agreements to the Isle of Man – at the discretion of the Isle of Man Government – that the Isle of Man would wish to be able to assess the benefits of participating in that new relationship, or potentially seeking some form of modified relationship, if that were desirable, and agreeable to the UK and EU.

It must be stressed that the Isle of Man Government policy remains to retain its status as a Crown Dependency, and to maintain the existing Customs and Excise relationship with the UK. 

5 – How effectively is the UK Government, and particularly the Ministry of Justice, engaging with the Crown Dependencies on Brexit?

The UK Government’s engagement with the Isle of Man Government has been effective so far in enabling the Island to provide input in respect of its own priorities, and some detail on the potential impact of UK withdrawal from the EU on various sectors of the economy.

The UK Government is still in the process of assessing fully the impact of EU withdrawal, across numerous policy areas, and Isle of Man Government has been included in the process via direct contacts in the Cabinet Office, the Department for Exiting the EU, and also, at inter-Departmental level. The Ministry of Justice, in reflection of its more recent function, has supported and offered assistance in facilitating direct contact between Isle of Man and UK Government Departments ensuring that the latter are aware of the necessity of consulting with the Crown Dependencies, and facilitating contact where necessary.  

Engagement is a two way process, and the Isle of Man Government trusts that when the time comes for consultation on the developing UK position, that this engagement will evolve and develop.

18 November 2016