As we described in our blog post published following the June 2016 referendum, the draft Withdrawal Agreement makes it very likely that the UK domestic State aid system introduced after Brexit will closely mirror the EU regime. Adherence to some form of subsidy control (i.e. State aid rules) is a major consideration for any agreement with the EU on market access as demonstrated by the recent free trade agreements concluded by the EU and other third countries.

Even in the event that the Withdrawal Agreement does not overcome the political hurdles mentioned above and results in a "no deal" outcome, the UK government has already announced that it will incorporate EU State aid rules into domestic legislation under the UK's European Union (Withdrawal) Act 2018 (EUWA), including existing block exemptions.

Therefore, despite political uncertainty about the application of EU competition rules, the path for businesses with operations in the UK and in continental Europe is relatively straightforward: continuing compliance with State aid rules will inevitably remain a requirement for UK companies (and non-UK companies engaging in activities in the UK). Therefore (and as the future relationship between the UK and the EU hopefully becomes clearer in the coming weeks and months), it would be advisable for such businesses to continue business as usual whilst actively staying abreast of any policy announcements made in London or Brussels.

1. The draft Withdrawal Agreement

(a)  Continued EU State aid control during the transition period (and beyond)

The draft Withdrawal Agreement provides for a dedicated chapter on State aid. According to the agreement, the European Commission's State aid control over the UK would not immediately come to an end but, instead, would be phased out over a period of four years after the end of the transition period. During this period, the European Commission will retain its competence to initiate State aid proceedings for aid granted before the end of the transition period. The European Commission's competence extends to all ongoing procedures initiated during that time. Considering the length of State aid procedures, EU State aid control might in practice remain for longer than four years.

(b)  UK competence for enforcing State aid control after the end of the transition period

At the end of the transition period, the EU's competence to investigate new cases affecting the UK will come to an end, however the application of EU State aid law will not. The mechanism provided in the draft Withdrawal Agreement (Annex 8) anticipates that EU State aid law will continue to apply to measures which affect trade between the UK and the remaining EU member states. However, enforcement competence would transfer from the European Commission to the UK.

This concept follows an earlier proposal by the UK government for maintaining an ambitious "common rulebook" with the EU on State aid following the UK's exit from the EU. To give effect to this rulebook, the UK would commit to a process of "ongoing harmonisation" whereby any new or amended State aid rule proposed by the EU post-Brexit would be incorporated into UK law (subject to parliamentary approval) and "due regard" would be paid by the UK courts to the case law of the Court of Justice of the EU regarding the interpretation of State aid rules.

The draft Withdrawal Agreement provides for the incorporation into UK law of the following:

(i)    The primary EU State aid rules under Articles 107-109, 93 and 106 of the Treaty on the Functioning of the EU (TFEU);

(ii)   Acts referring to the notion of aid - i.e. the "Notice" on the notion of aid, the "Communication" regarding services of general economic interest and the "Notice" on guarantees;

(iii)  The block exemption regulations including the General Block Exemption Regulation;

(iv)  The procedural rules;

(v)   The compatibility rules for specific sectors (e.g. guidelines for agriculture, rescue and recovery aid, R&D aid and many more); and

(vi)  The Directive on transparency of financial relations between Member States and public undertakings.

2. Possible implementation of the Withdrawal Agreement in the UK

In order to transfer State aid competence from the European Commission to the UK at the end of the transition period, the draft Withdrawal Agreement introduces the concept of an "independent authority". The UK has already announced that the Competition and Markets Authority (CMA) will take on this role.

Due to its experience and understanding of markets as the UK's competition regulator, the CMA will act as the new State aid regulator post-Brexit. The government has pledged to provide the CMA with the financial, human and IT resources it needs to take on this new role. An additional £23.6 million was recently allocated to the CMA for 2018-19 to prepare for Brexit.

Following the end of the transition period (likely 31 December 2020), the CMA will be responsible for enforcing the common rulebook and approving aid notifications. The government has stated that the CMA will be granted a full suite of enforcement powers, similar to those of the European Commission, including the power to open investigations and seek further information. As for domestic enforcement, the UK government proposes that State aid appeals post-Brexit should be made through the Competition Appeal Tribunal and the UK courts.

The government has recognised the importance of the CMA's independence with the UK being required under the draft Withdrawal Agreement to ensure the CMA's objective decision-making powers in its new role as a State aid regulator.  However, it remains unclear how aggressively the CMA will enforce State aid rules immediately after it takes over from the European Commission as State aid regulator, particularly in view of limited resources and the drastically increased workload that can be expected post-Brexit.

Dispute resolution: With regard to the application of the common rulebook, the government has stated that there should be a "robust provision for dispute resolution" in place to resolve disputes between the CMA and the European Commission including "recourse to [an] independent arbitration panel". The draft Withdrawal Agreement introduces the concept of a "Joint Committee" which will be responsible for the implementation and application of the Withdrawal Agreement. If the Joint Committee cannot find a mutually agreeable solution, the EU or the UK may request the establishment of an arbitration panel.

The UK's future relationship with the European Commission: The government has proposed maintaining a "robust regulatory dialogue between the CMA and DG Comp" following Brexit in order to "share best practice and discuss developments in case law". This chimes with the UK's commitment to a process of "ongoing harmonisation".

The involvement of the devolved administrations (Wales, Scotland and Northern Ireland): The government has stated that it is "engaging" with the devolved administrations in planning a future UK-wide State aid regime and is working with these entities to produce technical notices. The government has recognised that such engagement is crucial and that "[f]ailing to implement a UK-wide regime of State aid control when the UK leaves the EU would mean there would be no legal framework to prevent subsidies that distort trade within the UK". Further consultation with the devolved administrations will take place as part of the forthcoming review of the UK's competition regime.

These proposals are set out in the UK government's Letter to the House of Lords' EU Internal Market Sub-Committee (published on 28 March 2018), its Response to the House of Lords' EU Internal Market Sub-Committee report on UK competition policy after Brexit (published on 29 March 2018), and its Framework for the UK-EU partnership (published on 25 July 2018). 

3. Alternative proposals for a "no deal" scenario

As the political situation is still in a state of flux and it remains unclear at this stage whether the draft Withdrawal Agreement will ultimately be agreed, we should also reflect on the implications of a "no deal" scenario. While the UK, in a "no deal" scenario, would only be bound by WTO rules on subsidies and could therefore operate more flexibly than under the EU State aid rules, it seems unlikely that the current UK government would choose such a path. Maintaining tight control of subsidies may not only be required for fiscal reasons to deal with the effects of a disorderly exit from the EU, but may also serve as an encouraging sign from the UK for any future trade agreement discussions.

Therefore, the UK government has already stated that it strongly supports a "rigorous" State aid system. In the event no withdrawal agreement is reached with the EU, a UK-wide subsidy control framework will be created to ensure the continuing control of anti-competitive subsidies. This would likely involve the unilateral incorporation of EU State aid rules into UK domestic legislation under the EUWA, including replicating existing block exemptions (e.g. the Agricultural Block Exemption Regulation and the Fisheries Block Exemption Regulation). Substantive State aid law in the UK in this case would therefore not materially differ from that negotiated under a negotiated exit. However, in a "no deal" scenario, the CMA would immediately take over the regulation of State aid in the UK from 30 March 2019 onwards.

Moreover, the government has recommended that if no deal is reached with the EU, the WTO Agreement on Subsidies Countervailing Measures (ASCM) will act as a backstop for subsidy control following the UK's exit from the EU.

These proposals are set out in the UK government's Guidance on State aid if there's no Brexit deal (published on 23 August 2018) and further elaborated in a speech by the CMA's Director for State Aid (published on 30 October 2018).

4. Differences in outcome between the negotiated settlement and a "no deal" scenario

There are three significant differences in outcome between the situation under the draft Withdrawal Agreement and a "no deal" scenario:

(i)      Start date for CMA oversight of State aid procedures – If a negotiated settlement is agreed with the EU, the switchover will happen on 31 December 2020. However, if no agreement is reached, the switchover will take place immediately on 30 March 2019.

(ii)     Transition period – If the negotiated settlement with the EU includes an agreement to implement a transition period, the European Commission will continue to manage the process for approving and monitoring aid during the transition period and, as described above, for a further four year phase-out period. However, if no deal is agreed, any aid approved by the European Commission before 30 March 2019 (including block exemption approvals) will remain valid. Any aid not yet approved by the European Commission will have to be re-submitted to the CMA.

(iii)    Ongoing harmonisation – If no exit agreement is reached, the UK will not be required to follow the proposed "common rulebook", nor will it be bound to align its guidance with that of the EU or reflect future amendments to EU rules in domestic legislation.  By contrast, the draft Withdrawal Agreement provides for an express duty of cooperation between the European Commission and the CMA as an independent authority.

5. Open questions

With these different scenarios in mind, we have identified three main open questions that we consider to be relevant for the future UK national State aid system, regardless of whether the Withdrawal Agreement is agreed or not:

• Independence of the CMA: Can a domestic regulator such as the CMA, established and funded by the government, effectively "police" State aid decisions made by the government? The political dimension of State aid is a sensitive issue given what Brexit proponents (on both the left and right) promised and/or expected from a UK freed from EU rules.  Given the political uncertainty brewing and the possibility of a general election before 29 March 2019, the future of a UK State aid regime is far from settled.
• Effective enforcement: Given the economic proximity of the UK and the EU, both sides will likely want to ensure that the other side effectively enforces its State aid rules. In this respect, the proposed post-Brexit cooperation between the CMA and the European Commission in this field could potentially benefit from the long-standing relationship of the two authorities via participation in the European Competition Network (ECN). It nevertheless remains to be seen how effective the CMA will be at enforcing State aid rules post-Brexit given, its limited resources (and experience) and its significantly increased workload (across all areas of competition law enforcement) post-Brexit.
• Dispute resolution: How will disagreements be settled between the CMA and the European Commission regarding the application of the "common rulebook"? While the draft Withdrawal Agreement provides for a system of review by the Joint Committee and the possibility of arbitration, this may eventually result in less stringent State aid control compared to the current system under the supervision of the European Courts.

6. Next steps and consequences for businesses

The UK government published a statutory instrument on State aid in autumn 2018. Further State aid guidance is expected to be published by the CMA in early 2019 and, of course, detailed discussion about the political fate of the Withdrawal Agreement continues.

In the meantime, as a matter of law, all companies active in the UK (or UK companies active in the EU) are still bound by EU State aid rules. While many important questions regarding a future national State aid system will undoubtedly be discussed, we believe that EU State aid rules will continue to be of importance for British companies and for EU-27 companies doing business in Europe.  In particular, the EU State aid rules provide the only relevant guidance for any newly arising UK State aid questions. Therefore, it is likely that the CMA and UK courts, absent any national decisions, will turn to EU case law in order to interpret the new UK rules. Businesses are well advised to continue monitoring EU State aid law and to review their business conduct in the light of any future EU State aid law developments.

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