An EU deadline for the government to remove sections of the Internal Market Bill expired on Wednesday.
The “letter of formal notice” could eventually lead to a court case against the UK at the European Court of Justice, the EU’s top court.
But the EU has not walked away from talks over a post-Brexit trade deal.
European Commission President Ursula von der Leyen said the UK would have until the end of November to respond to the EU’s concerns over the draft legislation.
UK-EU trade talks are continuing in Brussels this week. Prime Minister Boris Johnson has said both sides should “move on” if a deal was not reached by mid-October.
It’s not unusual for the EU to take legal action against countries and as soon as the U.K. acknowledged that its plan was in breach of the Withdrawal Agreement, such a move became inevitable. But officials on both sides say privately that they don’t want it to overshadow negotiations on a future trade deal. They hope that if they get an agreement on that, fuss over the legal action will quietly fade into the background.
The U.K.’s Internal Market Bill would grant the British government powers to not consult the EU in state aid cases involving the trade of goods between Northern Ireland and the rest of the EU. The U.K. had agreed to do the opposite when signing its divorce deal with the EU in January.
The bill would also potentially change requirements that Northern Irish firms complete export summary declarations when shipping goods to the mainland.
The dispute has prompted some analysts to suggest the U.K. and EU will ultimately fail to reach a trade agreement.
The absence of a deal before the end of the year would see the U.K. trade with the EU on World Trade Organization rules. This would mean higher costs and barriers for businesses on both sides of the English Channel, when compared with the current system.