The draft agreement on the U.K.’s withdrawal from the EU (the Draft Withdrawal Agreement), published on November 14, 2018, still sets out the only agreed terms of the divorce element of the U.K.’s withdrawal — despite the delays and extensions.

It provides for a transition period (currently up to December 31, 2020 — although this date will presumably be amended to take account of extensions to the Article 50 process) during which it will be ‘business as usual’. The Draft Withdrawal Agreement also contains a Protocol designed to maintain an open border between Northern Ireland and the Republic of Ireland, should the U.K. leave the transition without securing a deal to govern its future relationship with the EU (this is known as the Irish backstop).

This article considers some of the implications of Brexit under the Draft Withdrawal Agreement on State aid. It outlines key aspects of EU State aid rules, describes the current state of play with regard to a future U.K. State aid regime, and explores some of the issues that may arise with its implementation, in particular, in the event the controversial backstop comes into play.

THE CURRENT STATE AID LEGAL FRAMEWORK 

The EU State aid rules prohibit public authorities from granting subsidies (in any form) that selectively advantage a business in a way that could potentially distort competition and trade in the EU. The prohibition was originally designed to ensure a level playing field for trade in the internal market and to prevent a company from gaining an unfair competitive advantage through government subsidies. 

Despite the general prohibition, the rules do enable aid to be granted lawfully in certain circumstances in order to benefit the economy and to support other important policy objectives (e.g., in areas involving research, development, innovation, the environment, etc.). 

The State aid legal framework only exists at the EU level. Unlike in antitrust and merger control there is no national law equivalent — nor is State aid control common internationally. State aid is defined in the Treaty on the Functioning of the European Union, which is interpreted by the European Courts and enforced by the European Commission (EC). Aid measures must be block exempted or notified to and approved by the EC before being implemented.

As with other Member States, there was previously no U.K.-specific legislation relating to State aid and the U.K. did not have a national agency for State aid enforcement.

STATE AID IN A POST-BREXIT ENVIRONMENT 

While it is unclear whether the U.K. and EU will agree on an all-encompassing deal for a future relationship, it is clear that the U.K.’s future arrangements relating to State aid will be an important part of the discussion, and inextricably linked with the terms of any future trade deal. 

The U.K. government’s stated policy is that “the UK strongly supports a rigorous state aid system — this is good for taxpayers, consumers, and for businesses,” and in a guidance paper on State aid published in August 2018, committed to incorporating the existing EU State aid framework, rules and guidance into U.K. law, even in the event of a no-deal Brexit.

The Draft Withdrawal Agreement reflects this, but also provides that the EC and EU institutions will remain competent to handle State aid procedures concerning the U.K. during the transition period (and in respect of aid granted and procedures initiated during the transition period). 

Introducing The State Aid (EU Exit) Regulations 2019 into Parliament in January 2019, the U.K. government has confirmed that the Competition and Markets Authority (CMA) will take on the EC’s monitoring and enforcement functions in respect of State aid and will have powers equivalent to the existing powers of the EC. The Regulations “transpose [ ] the EU State aid regime into domestic law and, in the event of no deal, gives the CMA the function of being the UK state aid enforcement authority, in place of the European Commission,” and do not materially alter the substance of the EU framework.

The Regulations also require that the CMA adopt existing EU guidelines as statements of policy, to be published prior to the U.K.’s departure. Minimal changes to existing guidance is intended to ensure that such guidelines are understood by stakeholders and operable from the exit date. The Regulations are currently awaiting Parliamentary approval and are not yet in force they would not be needed except in a “no deal” outcome as, under the Draft Withdrawal Agreement, the U.K. would enter the transition period upon departure and the EC would retain jurisdiction. 

CONSEQUENCES OF THE ‘BACKSTOP’ AGREEMENT 

Assuming the Draft Withdrawal Agreement is ratified and the U.K. leaves under its terms, the most interesting implications for State aid arise from the Irish backstop. Either because it comes into force directly or because of the way its presence colors the future relationship.

In the backstop scenario, the U.K. and the EU will be a “single customs territory,” which is comprised of an EU customs territory and a U.K. customs territory. 

EU law (including in respect of State aid) will apply to the U.K. “in respect of measures that affect that trade between [NI] and the [EU]” such that, while the backstop is in place, the EC and European Courts will retain competence to decide State aid in cases that affect trade between NI and the EU, in accordance with EU law. 

In addition, and concurrently, the CMA will have competence to decide State aid cases in respect of those measures granted by the U.K. that affect trade within the U.K. customs territory (i.e., including between NI and Great Britain), also in accordance with EU law. 

This is significant because under the EU rules the EC/European Courts take a very expansionist approach as to what “affects trade between Member States.” In particular, it is established that there is no requirement to demonstrate actual effects. Rather measures need only be capable of affecting trade between Member States, and the effect need not be significant. As a result, this part of the test usually receives only a cursory examination before being deemed satisfied, particularly in respect of measures concerning liberalized markets with cross-border trade. This approach played a major part in expanding the EC’s jurisdiction in State aid into policy choices the Member States might reasonably have thought would be for them.

This concept creates a concern for companies that operate from the U.K. across the EU. Under the backstop, the U.K. and the EU will be a “single customs territory.” If the EC (supported by the European Courts) continues to take a broad interpretation to measures that affect trade across borders, it would mean that a U.K. aid measure relating to a business in Great Britain would require approval not only by the CMA, but also by the EC on the basis that the measure affects trade within the single customs territory.

Under the backstop, the balance of procedural rights very strongly favors the EC. The EC is under an obligation only to “ensure that the United Kingdom is kept fully and regularly informed of the progress and outcome of the examination of that measure.”5 While the CMA’s decision in any such case will be without prejudice to the EC’s decision, meaning the EC would effectively have the final say on all U.K. government aid measures. The CMA is also required to exchange views and information with the EC on a case-by-case basis in respect of procedures it initiates, giving the EC the opportunity to comment in such cases.6 The CMA will also consult the EC on all draft decisions and give the EC up to three months to communicate its opinion, and will not adopt any decision until it has received the opinion and taken it into account.7 The EC can stop the clock on this three-month period in order to request additional information to the extent required to formulate its opinion.8 It is likely that in practice the CMA will be so closely supervised by the EC as to exclude independent decision making or differential views on the treatment of evidence.

Aside from the additional burden that this would place on companies during a dual review process, it could result in challenging situations where the EC opposes aid that the CMA could approve. As such, decisions are inextricably tied to policy considerations and priorities, it is easy to see how the system is likely to result in political conflict. 

Given that the U.K. is not permitted to leave the backstop without the agreement of the EU, and the future relationship is anticipated as “building on the level playing field arrangements provided for in the Withdrawal Agreement,” the likelihood of the U.K. having a differentiated State aid regime (even procedurally or though operation of discretion) is low.