A court judgment that rules affecting millions of EU citizens living in the UK under a scheme designed to settle their immigration status after Brexit are unlawful will not be challenged by the Government.

The Home Office has confirmed it will not appeal against a High Court judge’s ruling in December – despite previously indicating that it intended to do so.

Mr Justice Lane concluded that part of the European Union Settlement Scheme (EUSS) set up by the Home Office is based on an incorrect interpretation of the withdrawal agreement between the UK and the EU.

The scheme would have seen more than two-and-a-half million EU citizens face automatically losing their right to residence in the UK if they did not make a further application for settled status or pre-settled status within a five-year time period.

The court challenge had been brought by the Independent Monitoring Authority (IMA) – the watchdog set up by the Government to look after EU citizens’ rights in Britain after its exit from the union.

The IMA’s case was supported by the European Commission and the 3million, which is a grassroots organisation representing EU citizens in the UK.

The 3million said the High Court ruling has “averted a ticking time bomb”.

The organisation tweeted: “We welcome this uncommon decision by the Home Office not to pursue an appeal. The judgement has averted a ticking time bomb. EU citizens navigating the complexities of securing settled status have been dealing with uncertainty long enough.

“It is now vital that the Secretary of State urgently develops plans to secure the residency rights of EU citizens and we stand ready and willing to work with them to achieve this.”

The group said the Government needs to take a “pragmatic approach, to safeguard the rights of vulnerable people”, including children and elderly in care, as well as victims of domestic abuse.

The Home Office said the judgment is now law and that the department is working on its practical implementation on as simple and straightforward a basis as possible.

A spokesman said: “After careful consideration, we have informed the court that we do not wish to pursue the appeal against the recent judgment relating to the EU Settlement Scheme. We are working to implement the judgment as swiftly as possible and will provide an update in due course.

“Those with pre-settled status are encouraged to apply for settled status as soon as they are eligible, so they can obtain secure evidence of their right of permanent residence in the UK.”

At a High Court hearing in London in November, lawyers for the IMA said the settlement scheme was “incompatible” with the withdrawal agreement negotiated between the UK and EU in relation to its effect on some EU citizens and their family members, as well as those from countries in the European Economic Area (EEA) and the European Free Trade Association (EFTA).

Robert Palmer KC told the court that millions of EU citizens living in the UK risked losing their rights and being treated as “illegal overstayers” as a result.

The barrister said the affected cohort is about 2.6 million people who were living in the UK before the end of the transition period in 2020 and were granted “pre-settled status” – a limited form of leave to remain in the UK – after applying under the EUSS.

Under the Home Office’s rules, those people would lose their right to lawfully live in the UK unless they make a further application within five years.

Mr Palmer said the result of the loss of their rights is that they would be “exposed to considerable serious consequences affecting their right to live, work and access social security support and housing in the UK, and will be liable to detention and removal”.

He told the court: “If a person with such status does not make a further application for settled status or pre-settled status, the effect of the scheme is that that person will automatically lose their right to residence in the UK, making them an illegal overstayer who is liable to detention and removal.”

Mr Palmer said those people would lose all rights of residence, including the right to work, to rent a home and to access healthcare.

In his ruling, Mr Justice Lane said that, if the Home Office’s interpretation of the law was correct, “a very large number of people face the most serious uncertainty”.

He added: “If they lose legal status in the United Kingdom, their continued physical presence here will depend on the view taken by the defendant on whether to enforce immigration control by insisting on the individual’s removal.

“Someone who makes a belated application for further leave will not know whether the defendant will accept the late application.”

He concluded the Home Office had wrongly interpreted the law on both issues challenged by the IMA.