The terms of the referendum are set out in the European Union Referendum Act 2015 (2015 Act), which was passed in December 2015. The 2015 Act is the result of the government’s commitment to hold a referendum by the end of 2017. Although the UK has been a member of the EU since 1973 and been allowed opt-outs from adopting the euro and joining the Schengen border-free area, as well as in the areas of justice and home affairs, deep-rooted anti-EU sentiment within the Conservative party led to the pledge to hold a referendum in the party’s 2015 general election manifesto. Prime Minister David Cameron promised that the referendum would be held after reforms of the EU had been agreed.

It is these reforms that have been the subject of negotiations over the past few months. On 3 February 2016, in response to the UK’s proposals for reforms, Donald Tusk, the Council President, published a letter and six draft documents on a new settlement for the UK within the EU (www.consilium.europa.eu/press-releases-pdf/2016/2/40802208284_en_635900896800000000.pdf).

The proposed reforms fall under four headings: economic governance; competitiveness; sovereignty; and social benefits and free movements (see box “Proposed reforms”).

If the referendum result is in favour of the UK leaving the EU, there is no formal procedure under UK law for the government to initiate the process for withdrawal. For example, there is no fixed period within which the government would be required to serve the notice which starts the process for withdrawal set out in Article 50 of the Treaty on European Union (Article 50).

Article 50 allows an EU member state to serve an irrevocable notification of its intention to leave the EU to the Council. Following a withdrawal notification, there is a two-year negotiation period to conclude a withdrawal agreement.

A withdrawal agreement must be approved by the European Parliament and a qualified majority of the Council, excluding the withdrawing member state. Withdrawal takes effect on the earlier of the date of conclusion of a withdrawal agreement or the date two years after the initial notification to the Council, unless the Council and the withdrawing member state agree an extension. It is therefore possible, at least in theory, that withdrawal could occur at the end of the two-year period without an agreement having been concluded.

The purpose of the withdrawal agreement is:

Where rights and obligations are being terminated, transitional arrangements may be needed to avoid unnecessary disruption to existing arrangements.

The implications for the UK of leaving the EU would be considerable:

In many areas, UK law is heavily derived from EU law and the way in which EU law provisions have been implemented into UK law is very complex, often involving a combination of amendments to existing primary legislation, new primary legislation, secondary legislation and other rules, such as the rules of the Financial Conduct Authority and the Prudential Regulation Authority in relation to financial services.

For at least a transitional period, assuming that there would not be a desire or capacity to rewrite UK law from scratch, provisions derived from EU law would probably be retained and directly effective EU regulations deemed to continue. However, it would still be necessary to ensure that these laws function properly in the new situation. For example, where EU institutions have direct administrative powers, these would need to be replaced by alternative arrangements, and the scope and meaning of legislation or rules referring to the EU may need to be clarified.

Similarly, businesses and other organisations and individuals would need to consider their own private contractual or other arrangements to ensure that they still operate as intended in the changed circumstances, or whether they need to take steps to change anything as a result of the different political climate and any consequential commercial impact on their affairs.

There is no comparable example of a member state leaving the EU and the government has not given any public indication of the nature of the post-withdrawal relationship that the UK might seek to have with the EU. A number of different models of relationship with the EU could be considered (see box “Opt-out options”).

However, there are drawbacks to all of the existing models, so it seems most likely that the UK would need to form a new kind of relationship with the EU and other member states.

As well as negotiating a new relationship with the EU, in the event of withdrawal, the UK would simultaneously need to put in place trade arrangements with other non-EU countries with whom it currently deals on EU negotiated terms. Since the EU has exclusive competence in the area of trade policy, the EU’s existing trade agreements with third countries are entered into by the EU as a block rather than by the individual member states, and so the UK would not, unless otherwise agreed, continue to participate in them on withdrawing from the EU.

Any new trade agreements would require separate negotiations with the relevant countries. The UK alone may not have the same negotiating power as the EU, which represents a much larger market, so both the timing and terms of what future arrangements might be achieved are difficult to predict.

Withdrawal from the EU would be a complex, lengthy and uncertain process. In developing a new relationship, much would depend on the attitude that the EU and other countries take to a post-withdrawal UK and how co-operative all parties choose to be.

Disentangling the UK from EU law and regulation would raise many detailed technical issues. Businesses that are affected by the UK’s membership of the EU would need to consider the implications of uncertainty and potential change on their operations and strategy.

Key issues include:

Businesses will also need to consider the impact of the UK’s withdrawal on a range of other areas, including free movement of capital, data protection rules, competition and consumer policy, research and development, energy policy, environmental laws, agriculture and fisheries, and regional aid.

Of less direct impact on businesses, but also of importance, will be the implications for criminal and civil judicial co-operation, and foreign and defence policy.