Where is the UK on State aid and subsidy control post-Brexit?

Rather surprisingly, State aid control became one of several seemingly intractable issues in the EU-UK trade negotiations. Surprising, partly because successive UK governments have not shown much appetite for using State aid, but also because it had initially seemed that State aid control post-Brexit would be uncontroversial. So how did State aid control become so troublesome, and where is the UK now on subsidy discipline? Click here for the full story, or carry on reading for the key milestones.

The Journey

Under the May government plans were in hand for a smooth Brexit in State aid terms. The 2018 Withdrawal Agreement (WA) provided that EU State aid rules would apply to the UK for measures affecting trade between the UK and the EU. In preparation, a Statutory Instrument mapping EU State aid rules into UK law was tabled and the Competition and Markets Authority was primed broadly to fulfil the Commission’s role within the UK. However, successive failures to reach Parliamentary agreement on the WA culminated in the resignation of Theresa May and her replacement with Boris Johnson who committed to renegotiate the Withdrawal Agreement with the EU.

Johnson’s renegotiation resulted in two main changes on State aid issues. First, the provisions on State aid were dropped from the 2019 Withdrawal Agreement itself; and second, a new protocol provided that the EU State aid rules would continue to apply to Northern Ireland. All other commitments on distortions of trade and competition were relegated to the accompanying Political Declaration.

It soon became apparent that the Johnson government had a very different take on State aid which would involve “a whole new approach, based on World Trade Organisation commitments on restricting harmful subsidies”. Also “immediate steps to ensure that a new state aid regime is designed and ready to be in place by 1 January 2021” were indicated. The about-turn is widely attributed Dominic Cummings, then senior adviser to Johnson and his perception that remaining in the EU State aid orbit would constrain his technology policy ambitions. There were early warnings from State aid specialists about the risk of “reach back” from the NI protocol into GB, but these did not gain traction at the time.

Meanwhile, the Commission mandate reiterated the view that the EU State aid rules should apply in the UK where aid affected trade with the EU.

The House of Lord European Select Committee thus concluded “the UK and EU positions on State aid are essentially incompatible, and have recently hardened.”

The landing zone

Almost 10 months of fractious negotiations ensued, with State aid frequently making headline news. The UK and EU ultimately agreed the Trade and Cooperation Agreement (TCA) on Christmas Eve with ‘subsidies’ among the last issues to be settled (the term ‘State aid’ is absent from the TCA).

The Subsidies chapter is longer and far more prescriptive than those in the EU agreements with Canada and Japan; and there are two other immediately striking features. First, is how much the definitions, scope and exceptions echo the EU State aid provisions and case law; and second, is the ‘conscious uncoupling’ of the text from EU vocabulary – so ‘State aid’ becomes ‘subsidy’, ‘undertaking’ becomes ‘economic actor’ and a firm ‘in difficulty’ becomes ‘ailing or insolvent’. The outcome is thus rather contradictory in being both recognisable and unfamiliar.

More specifically, the TCA sets out: what a subsidy is; what is excluded from the scope of the chapter or prohibited under it; special conditions for some types of subsidy; and, crucially, six principles to be applied to subsidy design and decisions to determine their lawfulness. It requires an independent body in the EU and the UK with an ‘appropriate role’ in subsidy control and provides for transparency and consultation between the parties. There are also provisions for remedies and sanctions. Within the parties these include some requirement for beneficiaries to repay unlawful subsidies, but there is also scope for ‘remedial’ and ‘rebalancing’ measures that could involve the imposition of tariffs or quotas.

The subsidy chapter does not apply to agriculture, fish or fish products, the audio-visual sector, or to subsidies of less than 325,000 SDR (about €385,000) over three years.

As mentioned, echoes of the EU State aid rules resonate in the TCA. So, subsidies of a social character, compensation for damage caused by natural disasters and proportionate responses to global economic emergencies are generally acceptable. Conversely, unlimited State guarantees, subsidies to firms in difficulty in difficulty or for exporting are generally prohibited.

The centrepiece

The core element from a practitioner perspective is that each party must have an effective system of subsidy control which respects six key principles. These mirror the European Commission ‘common principles’ on which basis it assesses notified aid proposals (ie. those that fall outside the General Block Exemption Regulation and therefore require notification).

The six principles in the TCA are that subsidies should, in summary:

  1. pursue a specific public policy objective -ie identified market failure or equity rationale;
  2. be proportionate and limited to what is necessary to achieve the objective;
  3. be designed to change the economic behaviour of the beneficiary;
  4. not result in windfall gains; and
  5. be an appropriate instrument, and not used where less distortive instruments could be.
  6. In addition, the positive contributions of subsidies should outweigh any negative effects, especially on trade or investment between the UK and the EU.

The EU and the UK each determine how to implement their own subsidy control systems in domestic law and must do so in a way that ensures that the lawfulness of an individual subsidy is determined by the principles.

The key difference between the parties is that the EU has a substantial body of case law, Regulations, guidelines and Decisions that give practical effect to these principles across a range of policy areas. By contrast, the UK has actively repudiated this framework and context – by the time the TCA was agreed, the UK government had already revoked all EU legislation on State aid with effect from the end of the transition period.

Flying blind?

So where does this leave UK awarding bodies? A consultation launched on 3 February concludes end March but seems unlikely to produce a substantive outcome much before the summer. Meanwhile, on New Year’s Eve, BEIS issued guidance ‘on the UK’s international subsidy control commitments from 1 January 2021’. This recalls the need to respect the WTO rules, the various UK FTAs and the TCA. However, apart from the Northern Ireland protocol, it gives no real interpretative information. Thus, assuming there are no NI protocol implications, a UK practitioner poised to offer a subsidy to a GB firm over the de minimis amount (about £385,000 over 3 years to the same beneficiary) must consider whether it affects or could affect trade or investment between the EU and the UK; if so, they must apply the six principles outlined above and record the justification for the award decision on this basis.

Anecdotal evidence suggests that some UK practitioners are unsettled by the absence of legal certainty implicit in the current ‘bare bones’ guidance and are staying close to EU definitions and practices even though they have no formal place in UK law. Thus, ironically, unshackled from EU obligations, some are nevertheless seeking shelter in them.

Final destination?

Perceptions of the TCA subsidies chapter and its implications for the UK vary. Some view the TCA as a massive deregulation of subsidies in Great Britain and think that there are now no significant constraints on the UK’s subsidy rules. An alternative view is that is it is a substantial continuation of the EU State aid rules coupled with a regime which deters the use of subsidies because of the lack of legal certainty.

There is also a spectrum of views on future UK subsidy control policy. At one end is a tabula rasa vision in which subsidies below a given threshold are considered not to cause harm; above this amount, awarding bodies interpret the key principles and enforcement is through the courts in the event of complaints. Under this view regional aid maps, definitions of SMEs and eligible costs etc would all be irrelevant. At the other end, a pragmatic continuity approach could see the UK ‘rebadging’ aspects of EU State aid policy, using an adapted GBER; a subsidy authority would assess subsidies exceeding the ‘safe harbour’ threshold based on the six principles.

While this debate plays out, and the UK and devolved governments ponder the consultation and responses to it, three wider issues and questions merit reflection.

First, how troublesome have the State aid rules really been for UK policymakers? State aid control has rarely been controversial in the UK which has been one of the Commission’s staunchest supporters in this area. The UK has spent less and has had fewer recovery orders than comparable Member States. While the rules have doubtless been extremely irksome at times, there is scant evidence that they have been a major constraint on policy designs and objectives. The UK has paid a high price in additional trade friction to ‘go solo’ on subsidies. Will this new-found freedom be worth it?

Second, it will be hard to find the balance between flexibility and certainty in subsidy control. While abandonment of some arcane elements of the EU rules will be welcomed, a legislative vacuum is likely to have a chilling effect on policy implementation. A bare bones approach is unlikely to be enough and rules and guidance are apt to grow like barnacles on a boat in response to demands for policy predictability and shelter from litigation. The UK may yet end up closer to the EU approach than might currently be assumed.

Last, there are internal territorial and spatial aspects to subsidy discipline which risk being the source of considerable tension. These include, but are not limited to the following: first, the absence of a single UK-wide regime and the uncertainty surrounding the reach-back of the NI protocol into GB; second, the designation of subsidy control as a matter reserved to Westminster and the implications of this for the devolved administrations; and third, the implications for regional policy – how will the UK balance the integrity of its internal market and the risks of competitive-outbidding with widening regional disparities? And what, if anything, can the UK learn from the EU which has grappled with these issues since the late 1960s?

So, where is the UK now on State aid and subsidy control? The short answer is that it has yet to reach its final destination. However, it seems likely that the UK will be on its subsidy control journey for some time to come, and certain that elements of the EU State aid rules will remain in the luggage compartment.

 

Fiona Wishlade, February 2021

Fiona Wishlade is a Director of the European Policies Research Centre which is based both at the University of Strathclyde and the Technical University of Delft. She specialises in research on EU Competition Policy and State aid – EPRC publications on EU competition policy and State aid control are available here

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