Brexit, the UK Internal Market Bill and devolution

The United Kingdom Internal Market Bill has featured regularly in the news since its introduction, most prominently due to its interaction with the Northern Ireland protocol of the Withdrawal Agreement. However, it is also controversial for its potential effect on devolution.

This article will explain how the bill is intended to work, and how it would interact with the devolution settlement. Parts 2 and 3 below will respectively explain the mutual recognition and non-discrimination principles the bill sets out; part 4 will then assess its relationship to devolution. As so much has been written about it elsewhere, the provisions relating to the Northern Ireland protocol are not the focus of this article. 

Introduced in the UK Parliament on 9 September 2020, the bill seeks to establish a set of rules said to be intended to support the “internal market” for goods and services in the UK once the constraints imposed by EU law fall away (i.e. when the Brexit transition period expires at the end of the year). These rules would in large part, though not entirely, reflect the constraints that EU law (and particularly article 34 TFEU) currently places on the ability of the various legislatures and governments within the UK to affect the free movement of goods. While EU law focuses on trade between member states, the EU free movement rules also significantly reduce the scope for measures that would restrict intra-UK trade.

The UK Government's objectives for the bill, according to the white paper published in July 2020, are to provide frictionless trade, fair competition and the protection of business and consumers. The bill sets out two “market access principles” that are to be used to achieve these aims, which are the principles of mutual recognition and non-discrimination. Enactment of these principles would mean that regulators, local authorities, the devolved legislatures and governments, and the UK Government (and perhaps even the UK Parliament) will be constrained in their ability to impose new regulations that affect goods and services. These proposed restrictions on the post-Brexit freedom of action of the devolved institutions, including the Scottish Parliament, have created controversy.

The bill will confer functions on the Competition & Markets Authority to monitor and report on the functioning of the internal market. The CMA will also be able to consider and report on the impact of specific regulation, either at the request of the government that proposes to make it or has made it or (after it has been made) at the request of another government within the UK that considers that the regulation has or will have a detrimental effect on the internal market. The CMA will not be able to strike down legislation, but its views and recommendations are likely to carry significant political weight in any inter-government disputes.

Passage through the House of Commons completed on 29 September, after Government amendments to clarify some aspects of the bill's intended operation. It is currently making its way through the House of Lords, where it is expected to have a more difficult passage.

The bill establishes a mutual recognition principle, the effect of which would be that goods that satisfy the regulatory requirements of the part of the UK in which they are produced (or into which they are imported) can also be sold in any other part of the UK, with any “local” requirements that would otherwise prohibit their sale being disapplied.

This principle covers outright prohibitions on the sale of goods, and conditions that, if not complied with, result in a prohibition on sale. The types of regulatory activity covered by the mutual recognition principle include requirements relating to:

• the characteristics of the goods themselves, such as their nature, composition or quality;
• their presentation, including descriptions, packaging and labelling;
• aspects of their production, such as the materials of which, method by which or place at which they were produced (including the rearing of animals or growing of plants);
• the identification or tracing of an animal;
• the inspection, assessment, registration, certification, approval or authorisation of the goods;
• documentation or information concerning the goods; and
• anything else that must or must not be done to (or in relation to) the goods before they can be sold.

The list can be varied by the Secretary of State, after consulting the devolved authorities.

There are limited exceptions to the mutual recognition principle, including:

• legislation reasonably necessary to prevent or reduce the movement of a pest or disease, or of unsafe food or feed;
• certain regulations relating to chemicals and pesticides;
• certain rules on the movement of fertilisers;
• controls on the composition, content marking, labelling and packaging of fertilisers and animal feed, as long as they can be justified by reference to the health or safety of humans, animals or plants, or to the environment; and
• taxes, rates, duties etc.

The Government amended the bill in the Commons to make clear that the mutual recognition principle will also not apply to “manner of sale” requirements, meaning a statutory requirement governing the circumstances or manner in which goods are sold.

The examples given in the bill are where, when, by whom or to whom goods are sold, and the price or other terms on which they may be sold. The exception to that carve-out is that a measure that is worded as a manner of sale requirement, but appears to be an attempt to circumvent the mutual recognition principle, will not escape the principle. The illustration given is an “unusually restrictive condition such that it would be impossible to comply with the condition and have a practical chance of selling the goods”.

Minimum pricing?

The exclusion of manner of sale requirements will have been prompted at least in part by the argument over whether the mutual recognition principle would mean that Scotland's alcohol minimum pricing regime could not have been introduced under the bill (note that the bill would not invalidate the existing regime, as it makes an exception for legislation that is already in force). That argument was based on the claim that the mutual recognition principle would mean that goods would have to be capable of sale in Scotland at the same price as in England. That was a debatable contention, as it would depend on price being treated as an inherent part of the characteristic or presentation of a product in the same way as its packaging, ingredients and composition. Regardless, the UK Government's amendments have now made clear that price regulation is to be covered by non-discrimination (see part 3) rather than mutual recognition.

Some examples

The following hypothetical examples illustrate how the mutual recognition principle might apply to goods.

1. The Scottish Parliament passes an Act that requires all prepacked “energy drinks” products (e.g. containing more than 30mg of caffeine per 100ml) to display a “high caffeine” warning on their packaging. This requirement relates to the presentation of goods, so would be covered by the mutual recognition principle. If there is no equivalent requirement in England, energy drinks produced in England or imported into England from outside the UK could be sold in Scotland without displaying the high-caffeine warning. Given that the vast majority of energy drinks will be produced outside Scotland, the principle would mean that most or even all products could be sold without that warning.
2. By contrast, if the Scottish Parliament instead legislated to make sales of energy drinks to under-16s illegal, that would be a “manner of sale” requirement (governing to whom the products may be sold), and so would not be within the scope of the mutual recognition principle.
3. The UK Government makes an order prohibiting the sale in England of alcoholic drinks with an ABV of over 50% (assuming for the sake of the example that an Act of Parliament already gives the Government that discretion). As this requirement relates to the characteristics of goods, it is within the scope of the mutual recognition principle. If an equivalent requirement is not in place in Scotland, Scottish-produced alcohol with a higher ABV (which would include a number of Scotch whiskies) could still be sold in England. In addition, alcohol producers from outside the UK who shipped products with more than 50% ABV into Scotland could similarly move their products on to England and sell them there. However, the restriction would still apply to drinks produced in England.

These examples illustrate the difficulty any one part of the UK would have in unilaterally imposing and enforcing requirements covered by the mutual recognition principle. To have real effect, such requirements would need to be implemented on a UK-wide basis.

The bill also establishes a mutual recognition principle for services, and for professional qualifications and regulation. Accordingly, a business or professional authorised to provide services in one part of the UK should under this principle be able to provide them throughout the UK without requiring additional permissions, authorisations or accreditations. There are a number of exceptions to this principle, however, so differential regulations would still be possible in various areas including the provision of healthcare services, legal services and social services.

The principle of non-discrimination would generally prohibit legislation in one part of the UK that would discriminate against goods from another part. It applies to (in summary) goods that:

• are produced in that other part of the UK;
• are produced by a business based in that part (i.e. regardless of where the goods are actually produced);
• are imported into that part; or
• contain components (including parts, ingredients and constituent materials) that were produced in, produced by a business based in, or imported into that part.

Legislation will be covered by the non-discrimination principle if it relates to: 

• the circumstances or manner in which goods are sold; their transportation, storage, handling or display; 
• their inspection, assessment, registration, certification, approval, authorisation, etc.; and/or 
• the conduct or regulation of businesses that engage in the sale of certain goods or types of goods. 

Again, this list can be modified by the Secretary of State after consulting the devolved authorities.

The bill makes the principle of non-discrimination secondary to the principle of mutual recognition, meaning that if a regulation is covered by the mutual recognition principle, the non-discrimination principle is not relevant. As noted above, the Government amended the bill in the Commons to specify that price is an example of “the circumstances or manner in which goods are sold”, and so price regulation (which would include measures such as Scotland's minimum alcohol pricing regime) is covered by the non-discrimination principle rather than the mutual recognition principle. 

The bill provides that legislation that contravenes the non-discrimination principle is “of no effect” if and to the extent that it discriminates against “incoming goods” (i.e. it cannot be enforced against those goods, and could potentially be disapplied and even struck down by a court). It prohibits both direct and indirect discrimination, subject to some limited exceptions (and with more scope to justify the latter than the former). As with mutual recognition, there is an exception for pre-existing legislation.

Discrimination and permitted exceptions

Direct discrimination occurs if a requirement in one part of the UK applies differently between goods from that part of the UK (“local goods”) and materially identical goods from another part of the UK (“incoming goods”), and thus puts the latter at a disadvantage. The only exception to the prohibition on direct discrimination is a restriction that can reasonably be justified in response to a public health emergency.

Indirect discrimination covers requirements that do not directly discriminate against incoming goods in favour of comparable local goods but nevertheless put the former at a disadvantage compared to the latter (e.g. because the incoming goods incur higher compliance costs than the local goods). However, indirect discrimination will only be prohibited if it has an adverse market effect, in that the disadvantage placed on incoming goods causes a “significant adverse effect on competition in the market for such goods in the United Kingdom”.

Indirect discrimination will also be permitted if it can reasonably be considered a necessary means of achieving a legitimate aim, meaning the protection of the life or health of humans, animals or plants, or the protection of public safety or security (the Secretary of State can add other legitimate aims to that list). This includes essentially the same public health exemption on which the UK Supreme Court relied to find that Scotland's minimum alcohol pricing regime was permitted under EU law.

The prohibition on indirect discrimination will also not apply in the specific circumstances that the statutory provision that applies in one part of the UK is contained in or made under an Act of Parliament and the same provision or a substantially identical provision also applies in the other part of the UK, again by virtue of an Act of Parliament (either the same Act or different Acts). This means that where the UK Parliament has imposed the same rules on multiple parts of the UK, this will not fall foul of the prohibition on indirect discrimination, even if those rules would in fact result in indirect discrimination against goods from other parts of the UK.

As with mutual recognition, the non-discrimination principles (direct and indirect) also do not apply to legislation that is reasonably necessary to control the movement of pests or disease, or to the imposition of taxes, rates, duties and the like.

Some examples

The following hypothetical examples illustrate how the non-discrimination rules might apply to goods.

1. The Scottish Parliament passes an Act requiring that alcoholic drinks produced outside Scotland can only be sold on licensed premises for consumption on those premises.
   Scottish-produced alcoholic drinks can continue to be sold via off-sales. Because this is a manner of sale requirement, concerning where the goods may be sold, the mutual recognition principle does not apply. As the rule specifically limits where non-Scottish goods can be sold, and puts them at a disadvantage compared to materially identical Scottish goods, it is an example of direct discrimination. (If this seems like an unlikely example, that perhaps illustrates how rarely issues of direct discrimination might be likely to arise.)
2. The UK Government makes an order requiring large retailers in England to charge a levy on dairy products based on the “food miles” they travel to get to a retail outlet, in the interests of reducing carbon emissions in the food supply chain.
   This is a requirement relating to the transportation of goods and the price at which they are sold, therefore is covered by non-discrimination rather than the mutual recognition principle. It is not directly discriminatory by reference to the part of the UK in which the dairy products are made – for example, cheese from the Borders would be subject to a lower levy in Newcastle stores than cheese from Cornwall. However, it would, on the whole, make goods produced in Scotland likely to be more expensive in English stores than equivalent English goods.
   It would therefore put the former at a disadvantage compared to the latter, in a way that would have a significant adverse effect on competition in the market for dairy products in the UK, and so would be indirect discrimination. Because the order was not made by reference to health, public safety or security, it could not be justified. It would therefore be of no effect, at least to the extent that it indirectly discriminated against non-English goods.
3. The Scottish Parliament requires all food produced in Scotland to be produced in a particular way and, separately, imposes a minimum price on products by reference to the amount of sugar they contain – the more sugar per 100g, the higher the price above which they must be sold.
   The food production legislation increases standards but also substantially increases costs. The mutual recognition principle means that it is not possible to require that goods can only be sold in Scotland if they are produced in the same way, and so goods from the rest of the UK (“rUK”) have a competitive advantage in Scotland due to their lower production costs.
   The sugar pricing legislation is advanced as a health measure but has the effect of removing that competitive advantage from rUK products, as the minimum price means they can no longer benefit from their lower production costs by undercutting equivalent Scottish products.
   As this legislation concerns pricing, it is a manner of sale requirement and so is covered by the non-discrimination principle. On its face it applies to all products equally, so it is not direct discrimination. However, it disadvantages rUK products compared to Scottish products. If we assume that this causes a significant adverse effect on competition in the various markets for sugary products in Scotland (which any challenge to the legislation would have to establish), it would be indirect discrimination. It would therefore have to be justified on the basis that it could reasonably be considered a necessary means of achieving the aim of protecting health, which in particular would depend on whether it was likely to achieve its objective and whether that objective could be achieved via alternative means that did not put rUK products at such a disadvantage. If it could not be justified then it would be of no effect (at least to the extent it discriminated against Scottish goods).
   This example is of course analogous to the challenge taken against the minimum pricing of alcohol legislation under article 34 TFEU. The legislation imposing higher production costs on Scottish goods is part of the hypothetical example to illustrate that a price regulation is unlikely to be discriminatory unless it removes a competitive advantage arising from lower production costs.

Service providers

The Bill also prohibits both direct and indirect discrimination in the regulation of service providers, subject to broadly the same tests as apply to goods. A service provider therefore should not be regulated differently, or put at a disadvantage by regulation, in any part of the UK as a result of it providing its services from a particular part of the UK, or of it (or its members, partners, officers or staff) having a registered office, place of business or residence in a particular part of the UK. 

Indirect discrimination again requires an adverse market effect, and will not apply to regulation reasonably necessary to achieve a legitimate aim (which for services also includes the efficient administration of justice). As with the mutual recognition principle, various types of service are exempt from the non-discrimination rules, including debt collection, healthcare, transport, waste and water supply and sewerage services.

As noted in part 1, the bill would in large part reflect the constraints that EU law (and particularly article 34 TFEU) currently places on the ability of the various legislatures and governments within the UK to affect the free movement of goods, and so continue to limit the scope for barriers to intra-UK trade post-Brexit.

However, it is important to remember that the devolved institutions would not (in the absence of the bill) simply have carte blanche to put up barriers once EU law ceases to apply. In the Scottish Parliament's case, the Scotland Act 1998 specifies a number of “reserved matters” on which the Parliament cannot competently legislate. Many of these reserved matters would prevent the Parliament, even once unconstrained by EU law, from introducing differential regulation that would affect trade within the UK.

These areas include: financial services; data protection; gambling; regulation of companies, partnerships and other types of business association; competition; IP; import and export control; consumer protection; products covered by EU technical standards; product safety and liability; product labelling; weights and measures; telecoms and internet services; energy regulation; transport; professional regulation of architects, health professionals and auditors; medicines and medical supplies; and health and safety. A post-Brexit Scottish Parliament will therefore still be subject to significant constraints on its ability to legislate in many of the areas that could otherwise create barriers to intra-UK trade.

Constraints on devolved powers

There are nevertheless a number of key areas of regulation that are not reserved. This includes entire policy areas such as environmental regulation and public procurement, and also exceptions to some of the above reserved matters. For example, food and drink are expressly excluded from the reservations of import and export control, product safety and liability, product labelling and certain aspects of consumer protection. EU law is therefore the main constraint on devolved competence in these areas, and once it ceases to apply significant barriers to trade would become legally possible in the absence of the bill (or something like it).

One of the chief areas of controversy is that the Scottish Government believes that restraints in those areas should be agreed between the different governments using common frameworks on a voluntary basis, whereas the UK Government considers that a legal fallback is necessary. What is unclear, however, is whether and how the bill would affect future UK Parliament legislation that was contrary to the market access principles. The usual principle is that an Act of Parliament cannot constrain Parliament's ability to make future Acts, but it is possible that the courts might treat the bill as a “constitutional statute”. They would then only recognise legislation purporting to breach the market access principles if that legislation expressly made clear that it was to apply notwithstanding the Internal Market Act. That is not an approach one would expect the current UK Government to favour, given that it was how the courts sought to read the supremacy of EU law consistently with the principle of parliamentary sovereignty, but the absence of clarity in the bill would leave the matter for the courts to decide in future cases. 

A further controversy arises from the limited exceptions to the market access principles. Article 34 TFEU is limited by article 36, which allows for free movement to be restricted by reference to human, animal or plant health; public policy or public security; public morality; the protection of national treasures with artistic, historic or archaeological value; or the protection of industrial and commercial property. The bill makes only the first two grounds available as potential justifications for indirect discrimination (see part 3), and the exemptions to the mutual recognition principle are narrower still (see part 2). The bill could therefore result in the devolved institutions having somewhat less scope to regulate in non-reserved areas than they currently do under EU law. The argument over its potential application to alcohol minimum pricing was a reflection of that concern.

The bill may in particular clash with the Scottish Government's policy desire to “keep pace” with EU law, which it is pursuing through the UK Withdrawal from the European Union (Continuity) (Scotland) Bill. That bill would enable the Scottish Government to use secondary legislation to keep Scots law aligned with EU law post-transition (in non-reserved areas), but the Internal Market Bill would make it more difficult to impose (or at least enforce) certain regulations in Scotland if the rest of the UK did not follow suit.

The bill should not undermine legislation that is already in place before it comes into effect, as that will not be subject to the market access principles. However, the principles will apply if existing legislation is substantively changed in future.

There are other ways in which the bill interacts with devolved powers, in particular by making the regulation of state aid (though not the granting of state aid) a reserved matter. There had previously been a disagreement between the different governments over whether state aid was already reserved, so the UK Government is using the bill to put it beyond doubt. The bill further provides that the UK Government can provide financial assistance for economic development, infrastructure, culture, sport, education and training directly in any part of the UK. While it almost certainly already has those powers, their express restatement in the bill has also provoked arguments with the devolved administrations, who consider that such spending should be done by them through existing financial transfer mechanisms such as the Barnett formula.

The bill will continue to receive significant attention as it passes through Parliament, not only in relation to the provisions concerning Northern Ireland and the Withdrawal Agreement but also in terms of its interaction with devolution. As the minimum pricing amendment shows, there may be scope for changes that will ameliorate at least some of the areas of dispute. However, the debate and the arguments will surely continue both before and after the bill is enacted.