This briefing was updated on 12 February 2021.
As one of the key sticking points in negotiations leading up to the trade deal agreed on 24 December 2020, the future of the UK's state aid regime has been uncertain ever since it was determined that the UK was to leave the EU. However, with terms now agreed between the EU and UK on the control of subsidies in each jurisdiction, some clarity has been provided for UK and EU businesses alike on this contentious issue.
State aid and the EU-UK trade deal: the newly plotted level playing field - updated February 2021
This briefing was updated on 12 February 2021.
- How is state aid addressed in the trade deal agreed between the UK and EU?
- Since 1 January 2021, what are the rules governing the grant of state aid in the UK?
- What are the general principles of the new UK rules on subsidies?
- Are there any exemptions to the new UK subsidy rules?
- What rules apply to state aid granted prior to the end of the Brexit transition period?
- Can private parties challenge subsidies granted under the new UK rules?
- Can UK businesses still challenge state aid granted in the EU?
- What remains unclear about the new UK subsidy regime?
How is state aid addressed in the trade deal agreed between the UK and EU?
The Trade and Cooperation Agreement (the "TCA"), the legal document setting out the details of the trade deal agreed between the UK and EU, establishes a set of standards that must be met by both the UK and EU as regards the control of subsidies. Among these, the TCA identifies the principles that both the EU and UK must follow when determining whether subsidies are permissible or not, including a list of specific types of subsidies that must be prohibited. Further, the TCA requires both the EU and UK to provide a means for individuals and businesses alike to challenge subsidies granted in breach of the minimum standards established under the TCA.
SUBSIDIES VS STATE AID
Under EU law, the term state aid is used, while the TCA refers to subsidies. However, the definition of these terms under EU law and the TCA are broadly the same.
Under EU law and the TCA, the term "state aid" and "subsidy" are both capable of covering any advantage conferred on private businesses using state resources on a selective / specific basis (with selective and specific interchangeable in meaning), which has distorted or may distort competition.
The above definition of state aid and subsidy is potentially far-reaching but typically includes government grants, government loans (unless they are on market terms) and tax breaks.
The standards set by the TCA are generally accepted to have already been met by the EU. Accordingly, the principal purpose of the subsidy control provisions of the TCA is to lay out the foundations of the UK's future subsidy control regime.
The TCA contains special procedures for disputes between the EU and the UK concerning the alleged award of specific subsidies (or other state aid measures) in breach of the principles outlined above. An aggrieved party must first request consultations about the alleged state aid measure. However, if it has not received a satisfactory response within a specified (relatively short) period, it is free to take "appropriate remedial measures" on a unilateral basis. As is the case under the "rebalancing mechanism" for the level playing field, these remedial measures can be challenged through arbitration. Other issues – such as a failure by the UK to implement its own domestic state aid regime, as required by the TCA – can be dealt with through the general dispute resolution provisions of the TCA.
These dispute procedures can only be triggered by the UK or the EU; businesses have no formal role in the process, except potentially to lobby for a particular concern to be raised as a dispute (and to provide evidence to support it). That said, as explained further below, businesses may be able to pursue "self-help" remedies through the UK or EU courts in relation to specific state aid issues which affect them; they may also be able to complain to either the European Commission or the UK's proposed independent state aid authority (although at the time of the writing, it is unclear whether the UK's authority will be able to investigate complaints of this type – (see Question 8 for more detail).
Since 1 January 2021, what are the rules governing the grant of state aid in the UK?
As at the end of the Brexit transition period, EU state aid law no longer applies to state aid granted in the UK. Rather, any aid granted by a public body in the UK is now governed by the provisions of the TCA relating to subsidies, which automatically became UK law on 1 January 2021 by virtue of the European Union (Future Relationship) Act 2020.
While UK legislation specifically addressing the UK state aid regime is expected in early 2021, the UK Government is yet to pass any such laws. Accordingly, while guidance has been issued by the UK Department for Business, Energy & Industrial Strategy on, among other issues, the applicability of the TCA rules to UK businesses, there is currently a lack of clarity regarding the implementation and enforcement of many of the TCA subsidy rules in the UK (see Question 8 for more detail).
The northern Ireland protocol
Under the Northern Ireland Protocol, EU state aid law will continue to apply to any aid granted in the UK which may affect trade in goods or electricity between Northern Ireland and the EU.
In the guidance issued by the UK Department for Business, Energy & Industrial Strategy on this point, it is stated that the UK Government anticipates that for the substantial majority of subsidies granted in Great Britain, the Northern Ireland Protocol would not be engaged i.e. EU state aid law would not apply.
Further, the European Commission has confirmed that in order for the Northern Ireland Protocol to apply, a genuine, non-hypothetical and direct effect on trade between Northern Ireland and the EU must be established on the basis of real foreseeable effects of the aid granted. That said, a new UK-wide aid scheme for which suppliers of goods would be eligible would potentially fall within the scope of the Protocol's state aid provisions; as such, unless it fell within an EU state aid block exemption, it would need to be approved by the European Commission before it could be implemented.
What are the general principles of the new UK rules on subsidies?
The principles that must be followed in the UK when determining whether subsidies are permissible or not broadly reflect those employed for the same purpose under EU law. In summary, under the new UK rules, any grant of a subsidy in the UK must, in order to be lawful, (i) pursue a specific public policy objective, (ii) be proportionate and necessary, (iii) generate a change in economic behaviour that assists in achieving the objective, (iv) not compensate for costs the beneficiary could have funded itself, (v) ensure that there is no less distortive alternative, and (vi) ensure that positive effects outweigh negative ones.
In addition, the subsidies listed in the TCA as being expressly prohibited also mirror those banned under EU law.
LIST OF PROHIBITED SUBSIDIES UNDER THE TCA
The following subsidies are prohibited under the TCA and cannot therefore be granted by UK public bodies:
- unlimited state guarantees;
- rescue and restructuring assistance / assistance to banks, credit institutions or insurance companies that goes beyond that required to secure an orderly exit from the market (unless there is a credible restructuring plan in place);
- export subsidies other than short-term credit insurance for non-marketable risks;
- subsidies conditional on the use of domestic goods or services; and
- subsidies to air carriers for the operation of routes (save for some exceptions).
Are there any exemptions to the new UK subsidy rules?
The TCA rules governing subsidies, which now directly apply in the UK (see Question 2 for more detail), identify a number of exemptions, which again are akin to those established under EU law. For example, as is the case under EU law, aid granted to compensate for damage caused by natural disasters is out of the scope of the TCA subsidy rules.
In the same vein, the TCA also generally permits the grant of subsidies to undertakings carrying out tasks in the public interest, including public service obligations. This principle under the TCA is reminiscent of the exemption granted under EU state aid law for providers of services of general economic interest.
While there are many similarities in the exemptions granted under the TCA and EU state aid laws, two key differences should be noted. First, while both EU state aid law and the TCA exempt subsidies granted below a certain value threshold, the threshold set by the TCA is approximately double that set by the EU. Second, the TCA exempts all subsidies granted to the audio-visual sector, an exemption that does not exist under EU state aid law.
What rules apply to state aid granted prior to the end of the Brexit transition period?
For a period of 4 years following the end of the Brexit transition period i.e. until 31 December 2024, the European Commission may commence proceedings against the UK Government in relation to state aid granted in the UK prior to the end of the Brexit transition period where such aid may breach EU law. In other words, EU laws applicable to the grant of state aid before the end of the Brexit transition period will continue to apply to that grant, at the very least, for the next 4 years.
In addition, individuals and businesses are still able to bring claims in the UK courts in relation to state aid granted by the UK Government on the basis that, at the time it was granted, it breached EU state aid law. That said, any such claim must ordinarily be brought in the UK courts within three months of it being granted. Accordingly, time is fast running out in relation to any such claims, with the latest a claim could be brought in the UK courts being the end of March this year in most cases (unless, for example, the grant of aid was never publicised at the time, in which case a claimant might be able to persuade a court to allow it more time) .
Can private parties challenge subsidies granted under the new UK rules?
Under the subsidy provisions of the TCA, which are now part of UK law (see Question 2 or more detail), UK courts have the power to review compliance by public authorities, including the UK Government, with the TCA rules governing subsidies, as enshrined in UK law (see Question 3 for more detail).
Furthermore, under the new UK subsidy control regime, individuals and/or businesses are able to directly challenge subsidies granted by UK public bodies in breach of the TCA subsidy rules by bringing a claim in the UK courts, provided that they (i) are an interested party i.e. their interest may be affected by the grant of the subsidy (in particular competitors), and (ii) they have standing to bring such a claim. The ability of private parties to challenge subsidies granted by UK public bodies in breach of the subsidy rules under the TCA is expressly acknowledged in guidance issued by the UK Department for Business, Energy & Industrial Strategy.
UK courts are empowered to grant the following remedies where they find that a subsidy was granted by a public body in breach of TCA subsidy rules:
- An order to suspend, prohibit or require action from the public body in question;
- Award damages to those harmed by the subsidy award; and/or
- Order the recovery of the subsidy i.e. that it be repaid to the public body, provided that the proceedings to challenge the subsidy were commenced within the applicable time period, which under the TCA is stated to be no less than one month from the subsidy grant being made public.
Can UK businesses still challenge state aid granted in the EU?
In practice, there are two ways in which private parties can challenge state aid that appears to breach EU state aid law: (i) through making a complaint to the European Commission, or (ii) by bringing a claim in the courts of the relevant EU Member State on the basis that the public body that granted the aid in question failed to obtain prior approval from the European Commission.
It appears that a UK business, so long as it qualifies as an interested party, would still be able to bring a complaint to the European Commission regarding state aid. For these purposes, an interested party is defined as any person, undertaking or association of undertakings whose interests may be affected by the granting of the aid, in particular competitors of the beneficiary. That said, the European Commission has a discretion and not an obligation to consider complaints and may in practice decide to give higher priority to complaints raised by businesses from EU Member States.
The same principle applies in relation to challenging state aid in the courts. In other words, provided it is an interested party, a UK business should still be able to bring a private action in the courts of an EU Member State to challenge aid granted by an EU public body without prior approval from the European Commission.
What remains unclear about the new UK subsidy regime?
While the TCA provides some much needed certainty for UK businesses by establishing the baseline standards that the UK subsidy regime must meet, including the principles that must be applied when determining whether a subsidy is lawful, some of the details and practicalities of the new regime remain unclear.
The role of the UK's independent subsidy authority
Probably the most crucial aspect of the new regime that still lacks clarity is the proposed role of the independent subsidy authority that the UK Government is obliged to establish under the terms of the TCA. While the most obvious candidate for the independent authority is the UK Competition and Markets Authority (CMA) (as was going to be the case under proposals put forward by the Theresa May administration), the UK Government is yet to appoint the CMA (or any other body) as such (arguably in breach of the terms of the TCA). In addition, not only is the identity of the independent authority still unknown, so are the details of the functions it will fulfil. It is not yet determined whether the role of the UK's independent subsidy authority will involve the direct approval of proposed subsidies or be merely advisory, or indeed whether it will have the power to establish legally binding guidance on the types of subsidies that will be permissible under the UK regime, also known as safe harbours or block exemptions, that would allow businesses and public bodies to self-assess whether proposed subsidies are lawful or not.
WHY THE INDEPENDENT BODY'S ROLE IS IMPORTANT TO BUSINESS
Businesses may well be concerned that they could be ordered to repay any aid granted to them. As a result, they are likely to prefer a system where it is possible to obtain some form of prior assurance from the independent authority that proposed grants of aid to them comply with the TCA principles – otherwise they will only have their own assessment of the legal risk to go on when deciding whether to accept the proposed aid. This could be achieved by requiring the independent body to approve all aid before it is granted (as is the case with the EU state aid regime) or by giving it the ability to issue an opinion on aid in response to a request from public authorities or businesses. The TCA would allow the UK to pursue either approach – or to give the authority a more limited role.
Meanwhile, businesses which are not in receipt of aid will want to see that the market is not distorted by aid which favours their competitors. They will probably want the ability to complain to the authority where they believe that the state aid rules have not been complied with – which in turn would require the authority to have meaningful powers to investigate and hold UK public authorities to account. Without this, their only option will be to take enforcement action through the courts, which may prove to be complex, time-consuming and costly.
Uncertainties around private enforcement
Further, while the TCA provides private parties with the ability to challenge subsidies that breach the subsidy principles it establishes (see Question 6 for more detail), it does not set out how such a challenge can be brought and on what basis. For example, it is currently unclear what kind of private parties will have a standing to bring a challenge and, most importantly, what legal standard must be met for a challenge to be successful i.e. would it be sufficient to demonstrate that a subsidy has been issued in breach of the TCA principles or would a higher threshold need to be met, for example, that the public body who issued the subsidy had acted irrationally?
Legislation would help resolve uncertainty
The continued uncertainty around the details and practicalities of the new UK subsidy regime is a result of the UK Government failing to introduce any specific UK implementing legislation. In other words, the new UK subsidy regime is based solely on the minimum standards set by the TCA, as directly implemented into UK law (see Question 1 for more detail). While some guidance has been issued by the UK Department for Business, Energy & Industrial Strategy in this regard, clarity for businesses operating in the UK and UK public bodies alike on the application and functioning of the new UK subsidy regime is likely to only be provided through much-needed UK implementing legislation.
On 3 February 2021 the UK Government launched its public consultation on the UK's bespoke subsidy control regime and the UK implementing legislation that would need to come into force in this regard. The consultation invites views on whether any overarching principles or exclusions are needed in addition to those set out in the TCA. Most importantly, however, the consultation requests input from the public on the role and powers of the UK's future independent subsidy authority. We will provide updates on the outcome of the consultation and details on the proposed UK legislation as and when these are published.