The draft directives provide further detail on the EU's negotiating position in relation to possible transitional arrangements.  They follow the Guidelines adopted by the European Council on 15 December 2017, which determined that sufficient progress had been made in phase one of the negotiations to allow talks to progress to the next phase.

Michel Barnier's statement that the transitional arrangements should not last beyond the end of 2020 has been grabbing the headlines.  The draft directives also confirm that the EU will argue that, during the transitional period, the entirety of EU law should continue to apply to and in the UK as if it were still a Member State, but that the UK should no longer be entitled to participate in the making of those EU rules.  If the EU gets its way, the UK will continue to participate in the Customs Union and the Single Market (including all four fundamental freedoms) during the transition.

On closer examination, the European Council Guidelines and draft directives contain a number of statements from the EU that we can expect to cause a stir once the negotiations get underway in the New Year.  Here are four things to look out for.

1.    Transitional arrangements to form part of the Withdrawal Agreement – so a separate legally binding agreement on transition in early 2018 looks less likely

The European Council Guidelines state that any transitional arrangements must form part of the Withdrawal Agreement.  This would appear to rule out the EU agreeing to a separate legally binding agreement on transition earlier in 2018.  If so, this could come as a significant blow to certain businesses, who have been holding out hope for legal certainty on the transitional arrangements to be agreed as early as possible next year so they can avoid initiating their Brexit contingency plans. 

The need to agree a document that gives sufficient certainty to businesses about the terms of transition as early as possible will be a key theme of the negotiations in early 2018.  Businesses cannot afford to wait until to the last minute to find out what the legal environment will look like in the UK post-March 2019, particularly when business-as-usual involves making decisions many months in advance.

The EU's stance means that the UK will need to be creative to find a way to give businesses confidence early on, so that many businesses do not feel compelled to follow through with their contingency plans.  It remains unclear whether a merely politically, as opposed to legally, binding agreement on transition will be enough for everyone.

2.    UK to be excluded from all EU bodies, offices and agencies – not just the EU institutions – during transitional period

The European Council guidelines and the draft directives assert that the UK, as a non-EU Member State, will no longer be entitled to participate in EU institutions, nor the decision-making of EU bodies, offices and agencies.  That the UK would be excluded from the EU Institutions (chiefly, the Council, European Parliament and European Commission) during the transitional period was expected and uncontroversial.  However, the exclusion of the UK from all EU bodies, offices and agencies could have implications for the enforcement and non-legislative development of EU regulation during the transitional period. 

Complete exclusion of the UK from EU regulatory bodies and meetings of regulatory committees during the transitional period would heighten the sense that the UK will have become a "rule-taker" during this period, as it would have lost its influence at all levels of the regulatory process.  This will be of particular concern to UK businesses in highly regulated sectors that are (and will continue to be during the transition) regulated by EU entities.  It would also arguably be contrary to the interests of the EU27, as UK industry and regulatory bodies provide key technical expertise and capacity in many sectors, such as the Medicines and Healthcare products Regulatory Agency in the life sciences sector.

The draft directives leave open the possibility of negotiating an exception whereby the UK would be invited to attend meetings of certain EU bodies, albeit without voting rights.  It will be vitally important for the UK Government to find a way to maximise its participation in these EU bodies during the transition, even if only on a restricted basis.

3.    The limited time to influence EU thinking on the future relationship is fast running out

The European Council has stated that it will adopt further guidelines outlining its position on the framework for the future relationship in March 2018.  Experience of the negotiations to date suggests that the Guidelines adopted by the European Council largely determine the possible scope of negotiations between the EU and the UK.

The UK therefore has a small amount of time to influence the contents of such Guidelines before they are agreed between the EU27 and become the extent of the mandate for the EU's negotiating team.  Once this happens, it is likely to be very difficult for the UK to convince the EU27 to amend them.  The UK Government will be keen to ensure its preferred outcome is not excluded by the EU27 Guidelines before they've even got to the negotiating table.

4.    Deal on framework of future relationship agreed under the Withdrawal Agreement likely to be political declaration, rather than legal agreement

The European Council Guidelines reiterate previous statements that the EU will only conduct "preliminary and preparatory" discussions with the aim of identifying only an "overall understanding" of the framework of the future relationship between the UK and the EU and that an agreement on a future relationship can only be finalised and concluded once the UK is no longer a Member State. 

The Guidelines also state that any deal on the future relationship negotiated within the scope of the withdrawal negotiations should be elaborated in a political declaration (as opposed to legal agreement) accompanying and referred to in the Withdrawal Agreement.  This is the clearest indication yet that the EU sees the 'real' negotiation of the future relationship not beginning in earnest until the UK has formally left, as a political declaration on Brexit day would amount to little more than a statement of intent. 

Given claims that the transition must end less than two years after Brexit, this delay in the commencement of formal negotiations on the future relationship will add further pressure on the UK to avoid the 'cliff edge' at the end of the transitional period.

The EU's latest Guidelines and draft directives demonstrate its relative strength in the negotiations and the manner in which it has so far tried to dictate the terms of Brexit to the UK, which it has done with relative success.  As talks move to the transitional arrangements and framework for the future relationship and with key moments set to occur in quick succession early in the New Year, businesses should be ready to engage as soon as possible to ensure their interests are represented in the negotiations.