Post-Brexit State aid rules in the UK

Earlier this month, the House of Lords’ EU Committee published a report considering the opportunities and challenges the UK faces post-Brexit in respect to competition and State aid matters. One of the areas that stands out is the discussion on post-Brexit State aid rules, where it is suggested that a UK-wide domestic State aid framework will be needed in order to meet WTO obligations, any future trade agreement with the EU and to avoid a ‘subsidy race’ within the UK.

The main ‘take-away’ points for businesses are:

• The EU State aid rules are likely to remain in place, at least during the agreed transition period post-Brexit;
• It is likely that existing European Commission State aid approval decisions for notified aid measures (both approved schemes and for individual projects) will continue to have effect, at least during the transition period;
• It is however unclear whether new “aid” measures would still be notified to the European Commission for approval during the transition period and whether the European Commission would continue to have powers to enforce the State aid rules against the UK during that period;
• There will be a need for the UK to establish its own domestic State aid authority, with the Competition and Markets Authority being considered for the role;
• After the expiry of the transition period, the UK Government and devolved administrations are likely to have more flexibility over funding;
• Even after the transition period, the UK Government is likely to adopt rules to regulate State subsidies in some form, both to ensure trade access rights and to maintain an internal ‘level playing-field’ across the UK.

Current thinking on incorporating the substantive EU State aid rules

The overarching aim of the EU State aid rules is to prevent businesses from receiving an unfair competitive advantage as a result of any form of State subsidies and to prevent ‘subsidy races’ which attract business in one State at the expense of another.

The rules are set out in Articles 107-109 of the Treaty on the Functioning of the European Union (TFEU). They prohibit all “aid” by Member States unless it is compatible with general areas of EU economic principles (e.g. regional development, promoting innovation, improving environmental standards and renewable energy, assistance to small and medium-sized enterprises). Currently, the EU has exclusive competence to decide whether aid is compatible or prohibited following notification and approval by the European Commission. Many aid measures benefit from approval under a block exemption regulation referred to as the General Block Exemption Regulation, or “GBER”, or are considered to be ‘de minimis’ (i.e. unlikely to have an impact on EU competition and trade).

Once the UK leaves the EU, the State aid rules will not apply to the UK and there will be no centralised approval system. The challenge facing the UK Government is what will replace the EU regime? On one hand, the UK Government and devolved administrations will have greater flexibility to determine their own policies on economic intervention, on the other had there is a need to ensure the UK does not undermine its trading alliances with the EU and globally by unfairly subsidising its own industries and incurring countervailing trade measures as a result. There is also a political recognition that subsidies and different forms of interventions by public bodies may distort competition within the UK, and particularly within the different devolved administrations.

For these reasons, it is the UK Government’s intention to preserve the general prohibition on unapproved State aid and the existing body of State aid law (as provided for in the EU (Withdrawal) Bill).

Position during the transition period

The House of Lords’ EU Committee report (the Report) points out that it remains unclear what will happen during the proposed two-year transition period and whether this will represent a period of phased change or a ‘standstill’ period when the current EU competition regime remains in place. Even (as seems likely) the rules remain in place there will need to be some form of transitional and institutional arrangement to decide who has jurisdiction over ongoing or ‘live’ cases and administrative proceedings relating to the period in which the UK was still covered by the EU State aid regime.

The Chair of the EU Internal Market sub-committee, Lord Whitty commented -

“The Government needs to provide clarity on what the transition period will look like, and on their longer-term policy for competition matters – particular in relation to State aid. To develop this policy, the Government will need to consult with the devolved administrations and local government as well as business and consumer groups”.

Principal findings on the future State aid policy

The House of Lords EU Committee reviewed written submissions and oral evidence, which included evidence from a number of important figures and interest groups. The Report points out whilst the EU (Withdrawal) Bill seeks to preserve the general prohibition on unapproved State aid but it does not clarify what the approval mechanism would be after Brexit.

The key conclusions in the Report on the implications for future State aid policy are:

• Limited obstacle to state funding: Although the EU’s State aid rules have been the source of some frustration in the UK, successive governments have found them flexible enough to support major projects (e.g. support for the construction of the Hinkley Point nuclear power station). Moreover, the UK spends less on State aid than comparable EU Member States. This suggests that the State aid rules have not proved an insurmountable obstacle to date to state funding but neither has it attempted to ‘stretch the rules’ to favour its own businesses.
• Impact on Future UK-EU FTA: EU trade agreements with third countries with usually contain some form of control on State aid as part of the condition for access to the Single Market. Therefore, any future UK-EU Free Trade Agreement is likely to include some form of substantive State aid provisions. There is also likely to be a correlation between the level of access the UK can hope to secure and the degree of coherence with the State aid regime that the UK would be required to maintain.
• WTO rules on subsidy: Even if no Free Trade Agreement is reached with the EU, the UK will still be bound by the obligations under the World Trade Organisation on Subsidies and Countervailing Measures (which permit countervailing measures in the form of enhanced tariffs to be imposed on imports of goods benefiting from unfair state subsidies). This is a less onerous system of control on subsidies than the EU regime (and it does not apply to services) but it is unlikely to impact significantly on the level of state support by the UK.
• Balance between industrial and trade policies: There may be domestic pressure with the UK for a more ‘interventionist’ approach with greater use of State aid measures at the national, devolved and local level. However, the Government will need to balance that against its “ambition to become and open, global trading nation after Brexit”.
• Avoiding domestic subsidy races: A key observation is that trade access is not the only policy consideration. The UK is also likely to have an interest in avoiding domestic subsidy races and distortions of competition between the different parts of the UK.
• Institutional implications: The Report also calls on the UK Government to clarify what the shape of the UK regime would be (taking into account, among other things the need for support and involvement of devolved administrations). It highlights calls from local authorities for a less burdensome and complex approval process. Importantly, A UK State aid authority may also be required to supervise any new State aid framework either by extending the remit of the Competition and Markets Authority or by creating a new entity.