UK State aid and COVID-19

United Kingdom

Correct as of 15:15 on 27 March 2020. This article will be updated as developments arise.

While the situation continues to develop on a daily basis, we have outlined here the series of support measures announced by the UK Government last week and how these sit alongside the EU State aid rules, which continue to apply in the UK until the end of the Brexit transition period.  It is unclear at this stage whether the UK Government has notified any of these measures to the European Commission for approval under the ‘Temporary Framework’ for emergency aid adopted by the Commission last week in response to COVID-19.  The Commission is however now approving significant support measures being notified by many Member States. 

UK Government support package

The UK Government announced last week an unprecedented sweeping set of measures to support the economy:

  • a Coronavirus Job Retention Scheme (for all UK businesses).

  • deferring VAT and Income Tax payments (for all UK businesses).

  • a Statutory Sick Pay relief package for SMEs (for all UK based businesses).

  • a 12-month business rates holiday for all retail, hospitality and leisure businesses in England.

  • small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief (England).

  • grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000 (England).

  • a Coronavirus Business Interruption Loan Scheme to support UK-based SMEs which will provide two separate aid schemes: (i) guarantees that cover 80% of loans for SMEs with turnover of up to £45 million per year to cover their working and investment capital needs. This scheme will be implemented through the British Business Bank, a national promotional bank; and (ii) direct grants to support SMEs affected by COVID-19. The overall budget for this scheme is £600 million. 

  • the Covid Corporate Financing Facility (“CCFF”) for larger businesses, a fund that will be operated by the Bank of England to purchase short term debt issued by firms making a material contribution to the UK economy designed to support these firms in paying salaries, rents and suppliers.

  • the HMRC Time To Pay Scheme, accessible if your business pays tax to the UK government and has outstanding tax liabilities.

The devolved administrations in Wales, Scotland and Northern Ireland have all announced similar packages of measures to the extent that the UK Government’s measures are not UK-wide.

Position under EU State aid rules

While the UK is no longer a Member State of the European Union, EU State aid rules continue to apply in the UK during the transition period.  

The European Commission adopted two measures last week to provide a framework within which Member States and the UK can adopt support measures: 

  • Firstly, an initial communication on a coordinated economic response to the COVID-19 outbreak setting out the types of measure Governments could be taking within the scope of existing EU State aid rules. These included, measures to support businesses generally (e.g. deferring taxes, or subsidising short time work across all sectors), these falling outside the State Aid rules as not conferring any ‘selective economic advantage’ on one particular business or sector.  The Commission also said that Member States and the UK may provide compensation to companies for damages suffered due to the COVID-19 outbreak without this being considered State aid, suggesting that this would provide a solution to compensate airlines for damages suffered due to COVID-19 disruption. 

  • Secondly, the Commission adopted a new ‘Temporary Framework providing a basis for approving new emergency aid measures pursuant to Article 107(3)(b) TFEU, which is permitted where aid is needed to remedy ‘a serious disturbance in the economy of a Member State’. Considering the COVID-19 outbreak affects all Member States, the Commission considers aid is justified and can be declared compatible with the internal market, for a limited period, to remedy the liquidity shortage faced by business and to ensure that disruptions caused by the COVID-19 outbreak do not undermine their viability, especially the viability of SMEs.  

The Temporary Framework provides for five types of aid which can be granted by Member States and the UK:

  1. Direct grants, selective tax advantages and advance payments:  This applies to schemes to grant up to €800,000 to a company to address its urgent. liquidity needs.

  2. State guarantees for loans taken by companies from banks:  This allows for the provision of State guarantees to ensure banks keep providing loans to the business customers who need them to cover immediate working capital and investment needs.  Guarantees of up to 6 years may cover up to 90% (if the State supports the same risk as the financial institution) or 35% (if the risk is supported first by the State) of the amount of the bank loans which are based on the operating needs of the companies (established on the basis of the wage bills or liquidity needs or up to 25% of the total turnover of the beneficiary in 2019).  The guarantees may relate to both investment and working capital loans. 

  3. Subsidised public loans to companies:  This allows for the granting of loans with favourable interest rates to companies to help businesses cover immediate working capital and investment needs.  The interest rate of these loans must be equal to no less than the rates prescribed by the Commission.  The maximum loan amount is based on the operating needs of the companies (established on the basis of the wage bills or liquidity needs or up to 25% of the total turnover of the beneficiary in 2019).  Loans of up to 6 years may relate to both investment and working capital needs.

  4. Safeguards for banks that channel State aid to the real economy: This allows banks and financial institutions to be used as intermediaries to channel support to businesses, providing that such aid is considered as direct aid to the banks' customers, not to the banks themselves, and gives guidance on how to ensure minimal distortion of competition between banks.

  5. Short-term export credit insurance:  Allowing for additional flexibility on how to demonstrate that certain countries are at risk, and enabling short-term export credit insurance to be provided by the State where needed.  

Only companies that encountered difficulties after 31 December 2019 are eligible for aid under the Temporary Framework to ensure that it is not used for public support unrelated to the COVID-19 outbreak.

All aid schemes provided for by the Temporary Framework have to be notified by the Member States and the UK to the Commission prior to implementation and will be authorised until 30 December 2020. 

The Commission encourages notification of national framework aid schemes, especially when countries delegate extensive competence to their regions. 

Comment

Clearly, a number of the support measures being introduced will not constitute State aid, such as those measures of general application applying equally to all UK businesses.  So, neither the Coronavirus Job Retention Scheme or deferring VAT and Income Tax payments should constitute State aid.  Other measures however, including direct grants and support measures for particular sectors, such as the leisure and hospitality and transport sectors, are likely to be considered forms of aid requiring to be notified and approved under the European Commission’s Temporary Framework. The Commission has already approved a number of support measures under the Temporary Framework, processing many of these within 48 hours. On 25 March the Commission approved under the Temporary Framework the two separate UK State aid schemes for SMEs under the Coronavirus Business Interruption Loan Scheme.