BREXIT poses a “fundamental challenge” to the future of the United Kingdom, a House of Lords committee warns today and urges Theresa May’s Government to raise its game on involving the Scottish Government more about its EU exit strategy.

The Lords EU Committee notes how relations between the governments in London and Edinburgh are “highly strained,” despite the prospect of another independence referendum having receded, and calls on them to put aside their differences and work constructively together.

It stresses a successful Brexit settlement “cannot be imposed by the UK Government, it must be developed in partnership with the devolved governments”.

The committee declares: “No durable solution will be possible without the consent of all the nations of the UK.”

It says it is now time for the UK Government to “bite the bullet” and replace the 40-year-old Barnett Formula, which is based in population, with one based on need.

The report notes how peers heard “compelling evidence that the existing population-based method of allocating funding to the devolved jurisdictions will not adequately recompense them in the long term for the loss of EU funding”.

The committee also highlights Scotland’s “significant reliance” on EU migration to meet labour market needs and demographic challenges and while it does not support devolving immigration policy fully to Holyrood, it calls for “maximum flexibility” from the UK Government, saying it should use its forthcoming Immigration Bill to “look for opportunities to enhance the role of the devolved institutions in managing EU migration in ways that meet their specific needs”.

Peers note: “Local and regional economic and demographic needs rather than central targets should drive decision-making.”

The report points to an enhanced role for the intergovernmental Joint Ministerial Committee[JMC].

However, as The Herald reported last week, the political impasse in Northern Ireland has meant this process has ground to a halt. Instead, Whitehall has approached Nicola Sturgeon’s administration to establish a series of bilateral summits to ease Brexit strains and help co-operation on the flagship EU Withdrawal Bill. The first meeting could take place in Edinburgh next month.

Tensions have risen between London and Edinburgh after the First Minister described the flagship legislation as a “power grab” and made clear she could not recommend Holyrood consenting to it; thus, raising the prospect of a full-blown constitutional crisis between the two governments.

UK Government insiders have bemoaned “another predictable process row” from the SNP administration while David Mundell, the Scottish Secretary, has insisted Brexit will lead to significant new powers transferring from Brussels to Edinburgh, describing it as “far from being a power grab, it will be a power bonanza”.

Lord Jay of Ewelme, the committee Chairman, said Brexit’s impact on the UK would be “profound and unpredictable”.

Referring to Ms Sturgeon’s declaration last week that she could not recommend Holyrood consenting to the EU Withdrawal Bill, he noted how British politics was “pretty toxic” at present and there was the prospect of a “deep and bitter” intergovernmental dispute ahead.

“We can’t afford this. The UK Government must respect the devolved institutions. It’s not enough saying it's listening to them; it's actually got to take account of what they say and adjust its approach to accommodate their specific needs.

“Equally, the devolved administrations must work with, not against, the UK Government to get the best Brexit for the whole of the UK," added the Crossbench peer.

Stephen Gethins for the SNP said the committee report showed there was now a “real additional danger of a cash grab” from Scotland following Brexit in addition to the already feared power grab.

The party’s Europe spokesman decried Whitehall’s “top-down approach” and agreed it should not impose a Brexit settlement on the devolved governments.

“That means sitting round the table with Scottish ministers and those from other devolved administrations in JMC meetings, which this report makes clear should be resumed and also by giving the devolved governments a seat at the negotiating table,” he added.

A UK Government spokesman said the repeal bill would not take away any decision-making powers from Holyrood immediately after Brexit but, to protect the UK internal market, some powers being transferred into UK law would “be held temporarily to allow intensive discussion and consultation with the devolved administrations”.

He added: "As the Secretary of State has made clear, it is our expectation that the outcome of this process will provide a significant increase in the decision-making power of each devolved administration and we are committed to positive and productive engagement."