The flaw in the Benn Act

There is a flaw in the European Union (Withdrawal) (No.2) Act 2019 (the “Benn Act“) and, if MPs want to avoid us leaving without a deal, they may need to take counter-measures.

The flaw arises in circumstances where the Prime Minister brings a Withdrawal Agreement (“WA”) to Parliament for approval. And it arises from the mismatch between the provisions of the Benn Act and those of the European Union (Withdrawal) Act 2018 (the “2018 Act“).

What follows is a slightly simplified description of the flaw, to aid readability.

To avoid the PM having to request an extension from the EU under section 1 of the Benn Act the Commons must approve the WA. If they do, on or prior to 19 October, the obligation in the Benn Act to request an extension falls away.

However, the provisions of the 2018 Act specify further preconditions, beyond approval by the Commons of the WA, before the WA can be ratified and No Deal avoided.

Those preconditions are set out in section 13(1) of the 2018 Act and include the passing of a further Act implementing the Withdrawal Agreement (the “Further Obligations”).

Summing up, if the Commons approves the WA but these Further Obligations are not satisfied before 31 October 2019, then two consequences follow. First, the Benn Act will not apply to require the PM to request an extension from the EU. And, second, we will leave with No Deal.

So, imagine the PM says privately to the ERG ‘support my WA and I will deliver No Deal.’ In those circumstances, with the help of some Labour MPs, the Commons might approve even Theresa May’s WA.

The PM would thus have escaped the obligation in the Benn Act to request an extension and could deliver No Deal.

He could, for example, again suspend Parliament (subject of course to the outcome of this week’s Supreme Court hearing). There is some evidence (see below) that he plans to do this. And we would leave without a deal.

Indeed, even without again suspending Parliament, he may well be able to deliver No Deal simply by refusing to put before the Commons an Act implementing the Withdrawal Agreement. In such circumstances the Further Obligations would not be satisfied in advance of 31 October 2019 and we would leave with No Deal.

I had been discussing the above privately with trusted MPs and friends. However, because there is circumstantial evidence, set out below, that the PM’s office is aware of this flaw, I am putting it into the public domain in the hope that MPs consider what counter-measures they may wish to take.

The best way to bypass the flaw is for MPs to refuse to approve any motion for a WA on or before 19 October. Those who want the Withdrawal Agreement should refuse on the basis that, by voting for it, they may well be delivering No Deal.

In those circumstances, I believe the Courts, likely in consequence of proceedings afoot in Scotland, will enforce the Benn Act and require the PM to request an extension.

However, nothing is certain. There may be other flaws I have failed to spot. And the EU may refuse an extension. The situation now, as has always been the case, is that the only absolutely certain way to avoid No Deal is for Parliament to legislate to change the default if no agreement is reached from No Deal to revoke.


The circumstantial evidence is:

A story, reported in today’s Mail on Sunday, that a further suspension of Parliament is planned.

Reports that the Prime Minister is meeting members of the ERG privately.

Widely reported briefings that the Prime Minister plans to put a re-heated version of Theresa May’s Withdrawal Agreement before Parliament.

Inclusive Ownership Funds – is the FT’s analysis correct?

On Monday, as we moved one step closer to a General Election, the FT launched a brutal attack on a flagship Labour policy.  Labour, in one of “the biggest state raids on the private sector to take place in a Western democracy”, will “confiscate” shares. Turning the rhetorical dial up to 11 it said “Labour would expropriate £300bn.”

Labour’s Inclusive Ownership Funds (IOF) policy requires a large company – defined as one with 250 employees or more – to transfer 1% of its shares each year into a fund on trust for its workforce, up to a maximum of 10%. The transfers will be effected either by a gradual dilution of the original shareholders – via annual scrip dividends – or by purchasing shares on the open market for the benefit of the IOF.

The case for IOFs is a holistic one. In a closely held briefing document – even a promise to write a supportive piece did not precipitate the delivery of a copy from the Shadow Treasury Team but I have my sources – Labour points to the declining labour share of national income, the concentration in ever fewer hands of financial assets, and the scope for decision making with a longer timescale that can follow from enhanced employee share ownership.

But what about the money? The aggregate value that would come to be held in IOFs might not much matter. It’s a figure that follows from the scope of the policy – something Labour’s rather hazy on. This might not surprise you because questions about geographical reach get very tricky very quickly but on any view it’s very significant.

A better way of looking at the policy might be to analyse its consequences for affected investors. The effect of diluting shareholders via scrip dividends would be a gradual reduction in their dividends of 10% over the course of a decade. Not ideal, perhaps, but not catastrophic either. And this diminution might be more than compensated – Labour gives some evidence for this effect – by the productivity gains resulting from a share-owning workforce.

A sharper criticism of the proposals – the foundation for the vigorous language of “expropriation” and “confiscation” – is the share of profits going to the Government. Under Labour’s plans each worker would receive an annual payment from her IOF capped at £500 with dividends over that cap going to the Government.  Clifford Chance, authors of the report on which the FT story is based, say this means £9.4bn – or 88% of total projected annual dividends paid to IOFs – would find their way to the State. Labour, on the other hand, gives an equivalent figure of £1.1bn.

The resolution of this divergence depends, again, on geographical scope. Clifford Chance says that global firms will pay dividends on global profits with the small number of UK employees quickly capping out at £500 and vast surpluses to the Government. There are some signs Labour might confine the policy to UK profits but this is still a forceful criticism.

Policy making in the tax sphere is notoriously difficult for any Opposition; it requires complex modelling of data and access to closely held and expensive tax expertise. And the problem is especially stark for the present Labour Party which has not sought or maintained good relations with the tax drones inclined to help on this stuff. What Labour has done is recognise its difficulty with a promise to consult to ensure that the implementing legislation is “robust and widely supported”.

What we’re left with is a policy of uncertain application, which will be hugely difficult to implement, and will have a number of distortive effects (go long outsourcers who will help keep your headcount below the magic number). But it will also deliver an important advance in how our economy is structured, a form of widely held employee share ownership.

Ultimately the question we, as voters face in a General Election might just be whether we’re ready to commit to an inclusive capitalism – or are just embarked on what Larry Summers described as a “rhetorical embrace”.

Note: I was an adviser on tax policy to Labour under Ed Miliband – and have (although not recently or in connection with this policy) advised the present Shadow Treasury Team.