The new UK subsidy control regime: the effect of Brexit on state aid

 

The UK’s new ‘subsidy control’ regime is gathering pace, but the continued effect of EU state aid rules in certain circumstances remains contentious.

As we reported in State Aid post Brexit, as of 1 January 2021, the UK is no longer bound to follow EU state aid rules (except as provided for in the Northern Ireland Protocol to the EU-UK Withdrawal Agreement (the “NI Protocol”)). In place of these rules, the EU-UK Trade and Co-operation Agreement (“TCA”) requires the UK to develop and maintain its own system of ‘subsidy control’.The Department for Business, Energy and Industrial Strategy (“BEIS”) has now launched a consultation to seek views from businesses and public authorities on the best way to design a subsidy control system that works for the UK economy. In the meantime, granting authorities and recipients are still required to comply with their obligations on subsidy control despite a new regime not having been implemented as yet.

The European Commission (the “Commission”) stakeholder notice on state aid

The effect of Brexit on the application of EU state aid rules in the UK is the subject of a recent notice to ‘stakeholders’ published by the Commission, which is contentious from a UK standpoint.The notice explains the legal position at the expiry of the Brexit transition period on 31 December 2020, in relation to the Commission's continuing competence over ongoing procedures concerning aid granted by the UK, and the Commission’s power to initiate new administrative proceedings concerning aid granted before the end of the transition period (if such proceedings are started within four years of the end of the transition period).The notice goes on to address the rules applicable to Northern Ireland from 1 January 2021. Article 10 of the NI Protocol provides that EU state aid rules apply to any UK measure that affects trade between Northern Ireland and the EU. The notice also states that the notion of "effect on trade" in the NI Protocol must be “read in light of the same notion in Article 107(1) of the Treaty on the Functioning of the European Union” and reiterates the Commission's view that “aid granted by the UK to undertakings that are not located in Northern Ireland may also fall under Article 10 of the NI Protocol if the potential of an effect on the relevant trade between Northern Ireland and the Union can be demonstrated”.In other words, any aid granted to a UK undertaking which trades with Northern Ireland could fall within the scope of the NI Protocol. This position seems to be at odds with guidance issued by BEIS (see below).

Guidance on complying with the UK’s international obligations on subsidy control

BEIS has also issued guidance to help granting authorities understand the UK’s international obligations on subsidy control. The guidance covers the World Trade Organisation (“WTO”) subsidy rules (as set out in the Agreement on Subsidies and Countervailing Measures (“ASCM”)), and subsidy related commitments contained within the UK’s Free Trade Agreements (“FTAs”) (including the TCA).The guidance sets out a five-step process that public authorities should follow on a case-by-case basis when awarding subsidies after 1 January 2021:

Step 1: Establish whether a measure is a ‘subsidy’ and, if so, what international obligations apply.

A public authority must first establish whether their proposed support is likely to be considered a subsidy under WTO ASCM rules, and if it is, whether that subsidy is considered "specific" and, therefore, potentially actionable. The WTO ASCM rules only apply to the provision of goods and define a subsidy as a measure which:

• is given by a public authority;
• makes a financial contribution; and
• provides a benefit to the recipient.

Public authorities should then further investigate whether their proposed subsidy is considered within scope of the UK's FTAs, such as the TCA. The definition of a subsidy under the TCA builds on the WTO ASCM definition above but draws in elements that are common with the EU definition of state aid. It states there will be a subsidy where there is financial assistance arising from resources of the parties (followed by a non-exhaustive list):

• which confers an economic advantage on one or more economic actors;
• which is specific insofar as it benefits certain economic actors over others in relation to the production of certain goods or services; and
• has or could have an effect on trade or investment between the UK and the EU.

Akin to the de minimis provision under the EU state aid rules, the TCA only applies to subsidies over the value of 325,000 special drawing rights (approximately £350,000) given to a single beneficiary over a three-year period; this threshold is set higher, at 750,000 special drawing rights, for services of public economic interest.Public authorities also need to consider the EU definition of state aid if their proposed measure falls within the NI Protocol (see “NI Protocol”).

Step 2: Evaluate whether the proposed measure is a prohibited subsidy.

If it is established that the proposed measure is a subsidy, public authorities should assess whether their subsidy could be considered prohibited or awardable subject to certain conditions.

The WTO ASCM set outs two categories of prohibited subsidies:

• subsidies dependent on export performance; and
• subsidies contingent on the recipient using domestic rather than imported goods.

In addition, several FTAs – including the TCA – prohibit two additional types of subsidies:

• subsidies in the form of unlimited state guarantees; and
• restructuring subsidies if the beneficiary does not have a valid plan in place to return the company to viability.

The TCA also sets out a number of subsidies which are subject to conditions:

• subsidies in relation to energy/environment;
• subsidies given to air carriers; and
• subsidies for large cross border or international projects.

Step 3: If in scope of the TCA, ensure the subsidy meets the terms of the principles.If a proposed measure falls within scope of the TCA, the subsidy must meet the following general ‘principles’:

• pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns (the “Objective”);
• be proportionate and limited to what is necessary to achieve the Objective;
• be designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the Objective and that would not be achieved in the absence of the subsidy being provided;
• not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
• be an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means; and
• have positive contributions to achieving the Objective that outweigh any negative effects, in particular the negative effects on trade or investment between the UK and the EU.

Public authorities must consider these principles in the design and granting of subsidies on a case-by-case basis. Failure to do so could leave a public authority open to judicial review in the UK.For public authorities whose subsidy is in scope of the TCA, the guidance provides a template to record how they have complied with the above principles in designing their subsidy.

Step 4: Assess the likelihood of triggering a dispute or unilateral remedies under the WTO ASCM rules and other FTAs.

Public authorities then need to assess the subsidy against the WTO ASCM rules and other UK FTAs, regardless of whether their proposed measure is in scope of, and compliant with, the terms of the TCA.Funding bodies are advised to consult the following checklist to help guide their assessment of the risk of WTO or FTA action:

• value of the subsidy and the intervention rate: substantial subsidies are more likely to raise concerns than small subsidies. The same is true for high intervention rates;
• historically sensitive sectors: sectors such as steel, automotive and aerospace have previously been the focus of WTO action;
• international competitors: if enterprises within the sector that the subsidy is targeted at usually compete with companies from outside the UK this will increase the WTO and FTA risk; and
• impact on trade: if the proposed subsidy impacts the sales volume, prices or profits of international producers of similar goods, in the UK or foreign markets, this will raise the risk of WTO or FTA action. In the case of the TCA, impact on investment should also be considered.

The more items on the checklist that apply to a proposed subsidy, the more likely that a trade partner could decide to take action against the subsidy.

Step 5: Record the award of the subsidy.

The TCA states that the following information should be made transparent by being made publicly available, on an official website or a public database, within six months of granting a subsidy:

• the legal basis and policy objective or purpose of the subsidy;
• the name of the recipient;
• the date of the grant, the duration of the subsidy and any other time limits attached to the subsidy; and
• the amount of the subsidy or the amount budgeted for the subsidy.

BEIS is developing a transparency database where public authorities will be asked to register information on the subsidies they award. On 31 January 2021, it launched a web-based service to search for subsidies awarded by the UK government since 1 January 2021.NI Protocol Tensions are growing over the use of Article 16 of the NI Protocol which allows either the EU or UK to suspend any part of the agreement that causes "economic, societal or environmental difficulties".

For now, however, Article 10 of the NI Protocol continues to apply EU state aid rules in full to the UK in relation to measures that have an actual or potential effect on trade in goods between Northern Ireland and the EU. To help public authorities reach a view on whether the NI Protocol applies to a proposed measure, the guidance explains that “subsidies granted in Great Britain are only in scope of Article 10 where there is a clear benefit from and a genuine, direct link between the subsidy and companies in Northern Ireland”. This is a divergent interpretation to the one taken by the Commission in its stakeholder notice.

New UK subsidy control regime

BEIS has now launched a consultation to seek views on the best way to design the UK’s new subsidy control regime. The consultation seeks views from businesses and public authorities on a number of areas, including:

• whether the UK should apply its own additional principles on subsidy control, as well as those set out in the TCA;
• how best to ensure transparency across the system;
• the possible roles and responsibilities of the independent body that will oversee the new system;
• how this independent body could have some role in supporting enforcement of the principles, alongside normal judicial review standards; and
• how the system could seek to introduce exemptions consistent with the UK’s international obligations, such as ensuring subsidies of low value, those given to support natural disaster relief or in response to global economic emergencies.

The consultation will run until 31 March 2021. Subject to the outcomes of the consultation, the Government will then bring forward primary legislation to establish in domestic law a new bespoke system of subsidy control.

Conclusion

Public authorities will need to make sure that they are meeting their obligations under the new rules. Beneficiaries will equally be concerned about complying with the new rules to avoid the risk of recovery challenges seeking clawback of state subsidies.Until the new system is up and running, it will be important for both granting authorities and beneficiaries to work through the five-step process for each proposed subsidy award and seek legal advice where necessary.Meanwhile, the consultation is an opportunity to shape the UK’s new subsidy control regime.

As always, Freeths LLP are very happy to give advice on these aspects. Please get in touch with Andy Maxwell to discuss anything in this article.

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