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Sugar wars: what do they mean for the UK's post-Brexit state aid and tariff regimes?

Sugar wars:  what do they mean for the UK's post-Brexit state aid and tariff regimes?

Overview

The High Court has recently rejected an attempt by British Sugar to challenge aspects of the UK's post-Brexit sugar tariffs on the basis that they amounted to an illegal subsidy to its competitor, Tate & Lyle.  In this briefing, we look at the wider implications of the ruling for the UK's post-Brexit state aid and tariff regimes.

What's this case about and why is it important?

British Sugar argued that a lower tariff quota on raw cane sugar (introduced as part of the UK's new post-Brexit tariff regime) amounted to state aid in favour of its main competitor, Tate & Lyle.  But the case is of wider interest, beyond the sugar sector, because:

  • It's the real first test of whether the UK's temporary post-Brexit state aid/subsidy control regime actually "works" as intended;

  • It looks at whether the EU state aid rules applied (by virtue of the Northern Ireland Protocol to the Brexit Withdrawal Agreement); and

  • It also considers how far UK state aid/subsidy control rules can be used to challenge tariffs (as opposed to say, subsidies) – and tariffs affect products in many other sectors.

We look at each of these issues in turn below.

Does the UK's temporary post-Brexit subsidy control regime actually "work"?

Having left the EU, the UK is no longer subject to the EU State Aid rules (except as set out in the Northern Ireland Protocol – see below).  However, during negotiations over the Trade and Cooperation Agreement (TCA), the EU insisted that the UK should retain a domestic regime which allowed businesses to challenge the award of subsidies and other forms of state aid (even though many countries do not have such rules).  The UK committed to do so in the TCA and a Subsidy Control Bill is currently before Parliament, but is not yet in force. 

The UK's temporary subsidy control regime

Pending implementation of the Subsidy Control Bill, the European Union (Future Relationship) Act 2020 provides that – as a "stop gap" measure - the TCA state aid provisions will apply directly in the UK.  However, it is highly unusual for provisions of trade agreements to be capable of being enforced directly by businesses – they are normally only enforceable as between the states which are party to them (and in most cases, the only "remedy" open to businesses is to complain to their respective government about an alleged breach). 

All of which begs the question:  does the UK's temporary post-Brexit state aid regime actually work as intended?  Although the claim was ultimately unsuccessful, the British Sugar case suggests that the answer to this question is, broadly, "Yes".  In particular, the court did not take issue with British Sugar's attempted reliance on the provisions of the TCA (the challenge failed for other reasons, which are explained below).  It also accepted that the principles set out in the TCA were capable of applying not just to subsidies (which are the most "blatant" form of state support) but also to measures such as tax breaks where, instead of handing out money, the state elects to forgo revenue which would normally be due to it (British Sugar argued that the tariff quota fell into this category). 

Why is this important?

If the UK's "stop gap" approach had not worked, businesses would potentially have been left without an effective means of challenging decisions of UK public authorities to award subsidies or other forms of state aid.   That said, for reasons explained below, the UK's regime is not as powerful a constraint as the EU state aid rules.

It's also worth noting that when applying the principles in the TCA, the court relied on World Trade Organisation (WTO) case law, as opposed to authorities on EU state aid law.  This reflects the fact that the state aid provisions of TCA do not mirror the EU state rules precisely, but draw on a number of similar WTO concepts.  However, it does not necessarily mean that UK courts will disregard EU case law altogether;  for example, in areas where the TCA goes further than WTO subsidy rules, there will inevitably be limited WTO case law and UK courts may therefore look to EU cases for guidance.  To that extent, EU case law may continue to exert some influence on the UK's post-Brexit state aid regime.

For more on the UK's temporary post-Brexit state aid/subsidy control regime, see our detailed briefing.  We have also produced a detailed briefing on the Subsidy Control Bill.

What does the case tell us about the Northern Ireland Protocol and the EU state aid rules?

The Northern Ireland Protocol to the Brexit Withdrawal Agreement provides that the EU state aid rules continue to apply to the UK "in respect of measures which affect that trade between Northern Ireland and the [EU] which is subject to this Protocol" ("that trade" refers to trade in goods or electricity).  In certain respects, the EU state aid rules are stricter than the UK's temporary post-Brexit regime – in particular, they require state aid measures to be notified in advance to the European Commission for clearance (unless they fall within a "block exemption" or are "de minimis").  This makes it attractive for claimants to argue that the EU state aid rules apply – because if the court agrees and the UK authorities have not obtained prior clearance from the European Commission, the measure will be illegal (even if, ultimately, the Commission would have cleared it).  This is almost certainly one of the reasons why British Sugar argued that the Northern Ireland Protocol applied in this case.

Did the EU state aid rules apply in this case?

For reasons explained in Section 4 below, the court did not consider that the tariff quota amounted to state aid under the EU rules.  However, it went on to consider whether, if it was wrong on this point, the threshold in the Northern Ireland Protocol for the application of the EU state aid rules was met.  The court noted that in a subsequent declaration relating to the Protocol, the EU stated that "an effect on trade between Northern Ireland and the Union which is subject to this Protocol cannot be merely hypothetical, presumed, or without a genuine and direct link to Northern Ireland. It must be established why the measure is liable to have such an effect on trade between Northern Ireland and the Union, based on real foreseeable effects of the measure."  Among other things, the court found that there was no trade in raw cane sugar between Northern Ireland and the EU, nor was there any production of refined sugar in Northern Ireland (whether from cane sugar, as preferred by Tate & Lyle, or sugar beet, as preferred by British Sugar).  At best, any effect would be indirect and would involve very small volumes; the court took the view that the declaration was intended to prevent challenges based on "precisely this kind of argument".

If other courts follow this approach, it may prove relatively difficult to invoke the EU state aid rules based on the Northern Ireland Protocol.  However, some commentators have argued that the effect on trade referred to in the Protocol is low and that what really matters is the interpretation of this concept by the Court of Justice of the European Union (CJEU), rather than the English courts (since the CJEU would be the ultimate arbiter of this question under the Brexit Withdrawal Agreement).  In any event, it is likely that businesses wishing to bring similar challenges in future will continue to argue that the EU state aid rules are engaged because, for reasons explained above, they provide a more powerful tool than the UK's temporary post-Brexit regime (or indeed the proposed long term regime under the Subsidy Control Bill).

How far can state aid/subsidy control rules be used to challenge tariff measures?

The court considered whether the tariff quota was illegal under both the EU state aid rules and the UK's temporary post-Brexit subsidy control regime.  In both cases, it concluded that the answer was "no" - although in principle it appeared to accept that a measure allowing a particular business to benefit from lower tariffs could, in certain circumstances, be caught.

What is a tariff quota?

A tariff quota is where a state agrees to allow a certain quantity of a product to be imported either tariff-free or at a lower tariff than would normally apply. Once the quota has been "used up", normal tariffs would apply.  In this respect, it is similar to a tax break that is only available up to a certain threshold.  The tariff quota in this case allowed 260,000 tonnes of raw cane sugar to be imported into the UK duty free.  This was a new post-Brexit measure which the UK was able to introduce following its departure from the EU.  It applied in addition to various existing quotas allowing raw cane sugar to be imported duty free from certain African, Caribbean and Pacific countries.

Why did British Sugar's claim fail?

British Sugar argued that the tariff quota was introduced specifically to help Tate & Lyle (which had been a prominent supporter of Brexit) – and that as the only UK processor of raw cane sugar, Tate & Lyle was the only realistic beneficiary of the measure (because British Sugar manufactures its competing products from sugar beet, produced by UK farmers – on which it pays no tariffs, because the sugar beet is not imported).

Not a "selective" or "specific" measure

The key issue for the court was whether the measure was "selective" (in the language of the EU state aid rules) or "specific" (in the language of the UK's temporary post-Brexit subsidy rules).  It analysed these concepts separately and in the case of the UK's regime, focussed on decisions under the WTO framework (as opposed to, for example, drawing analogies with EU caselaw on selectivity).  However, its reasoning in both cases was similar, which suggests that in practice, "selective" and "specific" will often mean much the same thing.

There was some evidence that the UK Government was keen to "help" Tate & Lyle in particular.  However, this on its own was not enough.  Under both the EU state aid rules and the UK's post-Brexit regime, it was necessary to show that a business in a comparable position to Tate & Lyle would be treated differently as a result of the measure.  The court took the view that as British Sugar does not import raw cane sugar (but instead relies on sugar beet from UK farmers), it was not in a directly comparable position to Tate & Lyle.  It also noted that British Sugar was not put at a competitive disadvantage by the measure because it obtains all its raw material from UK farmers tariff free.  Moreover, if British Sugar (or others) wished to take advantage of the tariff quota in order to import raw cane sugar duty free, they would be free to do so (i.e. the quota had not been reserved solely for Tate & Lyle's benefit).

This outcome suggests that although a measure such as a tariff quota could in principle constitute a form of state aid/subsidy, such arguments are only likely to be accepted in fairly exceptional circumstances.

The bigger picture: the uneven impact of Brexit

Although British Sugar's state aid challenge was not upheld, it is perhaps not surprising that it felt aggrieved about evidence such as civil service emails noting that Tate & Lyle is "a national icon and is pro-brexit" and that "[n]ot doing something is likely to lead to Ministerial backlash, due to the lobbying reach of this company."  More substantively, it might also point out that whereas Tate & Lyle has arguably benefitted from Brexit (in the sense that the tariff quota was unlikely to have been available if the UK had remained in the EU), British Sugar's suppliers – UK farmers – may find life outside the EU more difficult;  if they exit the market in significant numbers, prices for UK-produced sugar beet may rise, which will obviously hurt British Sugar.   

Tate & Lyle might, however, respond that it has not been immune from adverse effects of Brexit;  for example, in its evidence relating to the Northern Ireland Protocol, it indicated that it expected its sales in the territory to fall.  This was because of "non-tariff barriers to entry in the form of additional regulatory requirements and the risk of reclaims of EU customs duty (or for businesses other than retailers or wholesalers, the need to pay that duty upfront and recover it)."  Those barriers are a direct result of the post-Brexit trade arrangements as between the UK mainland and Northern Ireland.

All this highlights the highly uneven impact of Brexit on business.  For every alleged winner (such as, in the view of some, Tate & Lyle), there will often be perceived losers elsewhere - and even for the alleged winners, the picture is often one of gains in some areas but losses in others.

For more coverage of the ongoing impact of Brexit, see our Beyond Brexit Knowledge Portal.

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