The UK’s new subsidy control regime 

United Kingdom

From 1 January 2021, the EU State aid rules no longer apply to funding and other forms of support measures granted to business by UK public authorities. The only exceptions to this are for aid that is caught by the Northern Ireland Protocol (“NI Protocol”) and for awards of funding that include contributions from EU Structural Funds.

In place of the EU State aid rules, as part of the new 11th-hour EU-UK Free Trade Agreement, the UK has committed to introducing its own domestic subsidy control regime, which must respect certain key principles designed to ensure a ‘level playing field for open and fair competition and sustainable development’ between the UK and the EU. These new provisions are set out in Chapter 3 of Title XI of the new Trade and Cooperation Agreement agreed with the EU on 30 December 2020 (the “TCA”).

Importantly though, this new domestic UK regime does not have to be based on an ‘ex ante’ system requiring measures amounting to ‘aid” (or ‘subsidy’ as newly defined) to meet the requirements of block exemption regulations or otherwise be notified and approved prior to being granted. The UK would therefore appear to have significant flexibility when designing its new domestic subsidy regime. This is likely to be particularly welcome given the need for public funding and other forms of support needed to drive economic recovery from the current COVID-19 pandemic.

An awkward feature of the 11th-hour nature of the TCA is that these new subsidy regime commitments have already been enacted directly into UK law from 1 January 2021. This is despite the fact the UK is unlikely to introduce a domestic subsidy regime until later this year. According to guidance published by BEIS on 31 December, this means UK authorities must now put in place their own processes to ensure the principles the UK has committed to are respected when granting new forms of subsidy. BEIS indicates that authorities themselves should apply the new TCA provisions on subsidy control alongside the provisions of the NI Protocol and other international commitments on subsidy control, including the WTO agreements on subsidies and countervailing measures and on agriculture. This requires authorities to pick their way through provisions of several international treaties in order to self-assess the compliance of their subsidies. Initial reactions seem to suggest authorities are reluctant to attempt to do this, especially with the potential risk of legal challenge, and are more likely to base their assessments as if they were applying the previous EU State aid rules, at least until such time as there is clearer and more workable guidance.

The Trade and Cooperation Agreement – requirement for ‘a level playing field’

The TCA (available here) was signed on 30 December 2020, and the UK’s European Union (Future Relationship) Act which incorporated the TCA into UK law received royal assent in the early hours of 31 December 2020. One of the sticking points which delayed agreement being reached was the concept of the so-called ‘Level Playing Field for Open and Fair Competition and Sustainable Development’ set out at Chapter 3 of Title XI of the TCA. This was driven by an EU concern that the UK should not be permitted to unfairly subsidise its businesses, or permit them to engage in anticompetitive practices that would not be acceptable under EU competition law rules, in a way that would give them an unfair competitive advantage when trading into the EU under the new arrangements.

On competition laws, the TCA requires the UK to maintain its domestic competition law prohibitions on anti-competitive agreements and abuse of a dominant position, and its merger control regime. In the short to medium term, the indications are that the UK is unlikely to diverge significantly from its current position of strong alignment with the EU competition law rules. By contrast, the provisions on subsidies require the UK to introduce its own domestic subsidy control regime, ensuring that the granting of subsidies is controlled within a framework of rules that meets a prescribed set of principles. On the face of it, this would appear to give the UK greater flexibility to introduce a domestic subsidy control regime that is less stringent than that applied under the EU State aid rules.

Requirements for a new domestic UK subsidy control regime

While the TCA adopts a familiar set of principles that the UK must commit to, the terminology and structure of the rules the UK must adhere is very different.

The concept of ‘subsidy’ replaces ‘State aid’

The concept of ‘subsidy’ replaces ‘State aid’ a recognition that the UK is no longer in the EU Single Market. ‘Subsidy’ is however defined in terms very similar to the concept of ‘aid’, meaning that what would have been considered ‘aid’ before 31 December 2020 is likely also to be considered a ‘subsidy’ from 1 January 2021.

Specific exemptions

There are specific exemptions, including for subsidies. These include:

  • subsidies granted ‘to compensate the damage caused by natural disasters or other exceptional non-economic occurrences’;

  • subsidies ‘of a social character that are targeted at final consumers’ rather than businesses;

  • subsidies granted ‘on a temporary basis to respond to a national or global economic emergency” so long as “targeted, proportionate and effective” (which the UK Government has stated will be the new basis for Temporary Framework support resulting from the COVID-19 pandemic;

  • subsidies of more than 325,000 Special Drawing Rights (approx. £350,000) given to a single beneficiary over 3 years must meet (a new form of De Minimis rule);

  • subsidies that are subject to the provisions of the WTO Agreement on Agriculture and subsidies related to trade in fish and fish products;

  • subsidies ‘related to the audio-visual sector’.

There are also specific provisions covering ‘services of public economic interest’, which reflect the EU principles governing subsidies for the provision of services in the general economic interest (SGEIs).

No requirement for an ‘ex ante’ subsidy control regime

Perhaps most importantly, there is no requirement for a general prohibition on the granting of subsidies, thereby (necessarily) requiring that subsidies be notified and approved by the relevant authority in advance or otherwise granted within the terms of existing approved schemes or block exemptions. In other words, the UK is not required to implement its own ‘ex ante’ subsidy regime.

Principles

Instead, the TCA simply commits the UK to implementing, ‘an effective system of subsidy control that ensures that the granting of a subsidy respects the following principles’:

  • subsidies pursue a specific public policy objective to remedy an identified market failure or to address and equity rationale such as social difficulties or distributional concerns (‘the objective’);

  • subsidies must be proportionate and limited to what is necessary to achieve the objective;

  • subsidies must be designed to bring about a change in the behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided;

  • subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;

  • subsidies must be an appropriate public policy instrument to achieve a public policy objective that objective cannot be achieved through other less distortive means;

  • subsidies’ positive contributions to achieving the objective outweigh any negative effect, in particular the negative effects on trade or investment between the EU and the UK.

Specific prohibited subsidies and subsidies subject to conditions

Notwithstanding these principles, the UK must however respect specific rules in relation to a prescribed list of ‘prohibited subsidies and subsidies subject to conditions’. These include:

  • subsidies in the form of an unlimited guarantee of debts or liabilities (prohibited);

  • subsidies for rescue and restructuring (prohibited unless based ‘on a credible restructuring plan’ and ‘contribute to an objective of public interest by avoiding social hardship or preventing a severe market failure’);

  • subsidies to restructure banks, credit institutions and insurance companies (prohibited unless inter alia based on ‘a credible restructuring plan that restore long-term viability’);

  • subsidies contingent upon export performance (‘export subsidies’) (prohibited except if paid in relation to (a) short-term credit insurance for non-marketable risks; or (b) export credits and export credit guarantee or insurance programmes (akin to those permitted under WTO rules);

  • subsidies contingent upon the use of domestic content (prohibited);

  • subsidies for large cross border or international cooperation projects, such as for transport, energy, environmental, R&D and first deployment projects to incentivise the emergence and deployment of new technologies but excluding manufacturing (prohibited provided they have wider benefit and relevance through spill-over effects that do not exclusively accrue to the State that grants the subsidy, the relevant sector and beneficiary);

  • subsidies in relation to energy and environment (permitted provided they meet the principles and are ‘aimed at, and incentivise, the beneficiary in, delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market or increasing the level of environmental protection compared to the level that would be achieved in absence of the subsidy’; in addition, subsidies must ‘not relieve the beneficiary from liabilities arising from its responsibilities as a polluter under [UK law]’); and

  • subsidies to air carriers (prohibited unless they (i) are for start-ups; (ii) where there is a public service obligation; or where (iii) the route provides other benefits to society).

Enforcement and remedies

The TCA requires the UK establish ‘an operationally independent authority or body with an appropriate role’ in its new subsidy control regime. At this point there is no indication from the UK Government as to who that authority or body should be, though under the previous Theresa May administration that authority was to be the Competition and Markets Authority (“CMA”) – and there is already in place a previous set of draft legislation and rules under which that role could be taken up by the CMA. There is however no requirement in the TCA for the relevant authority or body to have specific enforcement powers, including any specific powers to investigate subsidies and make recovery orders – similar to the powers of the European Commission under the EU State aid rules.

The principal remedy provision provided for (required) under the TCA is to ensure its ‘courts or tribunals’ are competent to: (i) review subsidy decisions by granting authorities; (ii) decisions of the independent authority or body; (iii) to impose remedies that are effective including suspension, prohibition; (iv) to award damages; and (v) to order recovery.

The UK Government’s position appears to be that in respect of the principles for awarding subsidies any legal challenge should be pursued by way of judicial review proceedings, but that position may change when formal proposals are advanced for the new domestic UK subsidy control regime.

What is the position ahead of the UK implementing its own domestic subsidy regime?

On 31 December, BEIS published a set of guidance for public authorities on the TCA, and the relationship between that and the UK’s other subsidy control obligations under other international treaties, including the WTO rules on subsidies.

The position is complicated, but the result of the TCA is essentially that, in place of the EU State aid rules that continued to apply through the transition period, there are now two new parallel international commitments made by the UK in relation to State aid / subsidy control, which public authorities must comply with from 1 January 2021:

  • The (limited) continued application of EU State aid rules under the NI Protocol to the UK-EU Withdrawal Agreement: which applies to aid measures which could affect trade in goods and electricity between NI and the EU (see below); and

  • The new TCA rules on subsidy control– a key issue being that these commitments have already been given the force of law within the UK by virtue of the Section 29 of the European Union (Future Relationship) Act 2020, meaning that public authorities have to comply with those international obligations from 1 January 2021 despite the fact the UK Government has still to consult on and implement its new domestic subsidy regime.

According to the BEIS guidance, when granting new aid, public authorities therefore now need to identify:

  • Whether any new aid measure could fall within the scope of the NI Protocol, in which case compliance with EU State aid rules is still required; and

  • Whether any new aid measure could constitute a ‘subsidy’ under the TCA, in which case they must undertake an assessment against the principles in the TCA, record this compliance assessment, and take a view as to any potential risk of challenge (either in terms of judicial review action from a competitor or other interested third party, or in terms of the subsidy attracting retaliatory measures from the European Commission or another country with which the UK has a Free Trade Agreement or relevant WTO agreement).

While perhaps of little practical significance for most UK aid granting bodies, the BEIS guidance requires authorities to consider the application of the NI Protocol and TCA provisions alongside other pre-existing international commitments on subsidies, the most relevant of which is the WTO Agreement on Subsidies and Countervailing Measures (ASCM) and the WTO Agreement on Agriculture (AoA).

As a result, the BEIS guidance advises authorities to follow a new 5-step approach to subsidy assessment:

  1. Determine whether a measure is a subsidy and what international obligations are relevant;

  2. Evaluate whether the measure is a prohibited subsidy;

  3. If you are in scope of the TCA, assess the subsidy against the principles;

  4. Assess the likelihood of triggering a dispute under the WTO ASCM rules and other FTAs; and

  5. Record the award of the subsidy.

In terms of recording decisions granting subsidies, the TCA requires that within six months or any subsidy being granted (or rolled over if an existing subsidy) the following information will need to be placed on an official website or public database:

  • 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 it; and

  • The amount of the subsidy or amount budgeted.

Under the TCA, if any interested party (such as an aggrieved competitor of the aid recipient or a trade association) contacts a granting authority to explain that they are considering an application for judicial review of a decision relating to the granting of a subsidy, the awarding authority is required to provide within 28 days sufficient information to allow the applicant to determine whether or not the principles have been complied with. The BEIS guidance has included a suggested template that authorities can use to record their decision-making and justifications for granting subsidies to meet the requirements of the TCA.

Within the next six months, BEIS is required to launch a database to which authorities will be able to submit details of their awards. BEIS says that instructions on how and when to record information on the database will be communicated when it is launched. Until then, authorities are strongly advised to keep full and accurate records of awards made, their decision making and justifications.

What about the Northern Ireland Protocol?

To avoid a hard border on the Island of Ireland, Northern Ireland remains in the EU’s Single Market. Under Article 10 of the NI Protocol in the UK-EU Withdrawal Agreement, the EU’s State aid regime continues to apply to the extent that any subsidies provided in the UK affect trade in goods or electricity between Northern Ireland and the EU.

In its guidance, BEIS has sought to emphasise the statements made by the EU that ‘an effect on trade between Northern Ireland and the Union which is subject to this Protocol cannot merely be hypothetical, presumed or without a genuine, 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 the real foreseeable effects of the measure’. Based on that, BEIS says that a starting assumption for subsidies granted to recipients outside of Northern Ireland should be that the NI Protocol does not apply. Nevertheless, with respect to any project in the UK where Northern Ireland subsidies could have a credible effect on cross-border trade, the possibility of a test case being brought by an aggrieved third party must be taken seriously.

Comment

As is immediately apparent from the BEIS guidance issued on 31 December 2020, there is likely to be a period of uncertainty pending the introduction of a new domestic UK subsidy regime pursuant to the TCA.

The BEIS guidance attempts to pull together the UK’s international obligations on subsidies in light of the new TCA provisions. While the UK is no longer bound by the EU State aid rules it is likely to take at least six months before authorities and business have a clearer idea as to precisely what rules apply to any given situation. It is therefore understandable that many granting authorities appear to be taking the view they will continue to use the EU State aid rules as a reference point when assessing whether grant funding or other support complies with the incomplete and fragmented set of subsidy rules we are currently left with pending the introduction of a more comprehensive UK domestic subsidy regime.