Subsidy control – the new name for state aid
The EU UK Trade and Co-operation Agreement (TCA) was agreed by the UK government and EU Commission on the 24th December. All 27 EU Member States have approved it and it will have been approved by the UK Parliament before the end of 2020.
Amongst other things the UK has, under the TCA, committed to adopt a new subsidy control system (with an independent body / regulator). In view of the limited time available until 1 January we anticipate that the UK will retain, on a temporary basis, a modified form of state aid law (minus the role of the EU Commission or Court). Fortunately a detailed draft statutory instrument was previously produced which does just that. This temporary measure will subsequently be replaced by a new UK subsidy control system.
If you are about to award subsidy/aid in January the safest course of action is likely to be following state aid law (as this is unlikely to be unlawful even if state aid law does not apply). We will monitor changes and if in doubt please feel free to contact one of our team.
Subsidy Control – the UK's new name for state aid
References are as in the TCA – subsidy is dealt with in Chapter Three (Subsidy Control) of Title XI (Level Playing Field for Open and Fair Competition etal) with Articles being the same as sections in UK legislation.
The UK has committed to adopt a comprehensive subsidy control system with an [operationally] independent body/regulator. Until the UK system is published our working assumption is that this is likely to mean that the UK Government/ Parliament will be free (subject to TCA requirements) to set the subsidy rules and an independent regulator will monitor compliance.
The TCA does not require the regulator to pre-approve aid measures (which in principle differs from EU requirements). This would leave the UK government free to react quickly to crisis situations. In practice the UK government will need to regulate other public sector bodies (if only to ensure they don't place the UK in breach of its TCA obligations). The government could require other public bodies to give subsidy either in accordance with pre-approved conditions (similar in concept to pre-approved state aid style block exemptions) or otherwise to seek the independent regulators consent.
UK subsidy control to accord with TCA subsidy principles (Article 3.4)
EU/UK public subsidy obligations are based on the principles agreed between the two parties in the early autumn of 2020. Unsurprisingly they are consistent with both EU state aid law and WTO subsidy rules. We can expect new UK public subsidy regulations/laws to reflect these:
- Subsidies to support specific public policy objectives to remedy an identified market failure or to address an equitable purpose – i.e. social difficulties or distributional concerns
- Subsidies are proportionate and limited to what is necessary to achieve the objective
- Subsidies are designed to bring about a change of economic behaviour which is conducive to achieving the objective
- Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy
- There are no other appropriate policy instruments which might have the same effect as a subsidy
- On balance a subsidy's positive contribution [to achieving the objective] outweigh any negative effects – i.e. effects on trade or investment between the UK and EU
TCA specifics on subsidy control
Core state aid concepts (though not necessary the detail) are retained though translated to work in a domestic UK subsidy control system.
"Subsidy" is the new "state aid" - broadly the same meaning as the definition in Article 107 TFEU albeit using language which is more friendly to a common law legal system. It is also been rephrased to be relevant if it has an effect on trade (and investment) between the UK and the EU (Article 3.1).
"Economic actor" is the new term for "undertakings"
Subsidies will not be prohibited or subject to control if they deal with natural disasters or other exceptional non-economic occurrences (Covid19) – though they still should be proportionate.
Assistance to citizens as final consumers shall like state aid be permitted (Article 3.2).
"De Minimis aid" though the term itself ids not used, is defined as 325,000 SDR (which is a International Monetary Fund non-Euro neutral currency valuation) (Article 3.2(4)).
"Services of public economic interest" (SPEI) replaces state aid's Services of General economic Interest (Article 3.3) with the concept of a 'Public Service Obligation' retained. The principles governing SPEI are similar to those for SGEI – again the language is simpler and better reflects a common law system. Interestingly, though support for SPEI's is subject to the TCA subsidy principles (and must be proportionate) this is limited if complying with the principles obstructs the performance of the public service obligation in law or fact.
Article 3.5 (Prohibited subsidies and conditions) sets out subsidies which are prohibited or subject to conditions. Included are unlimited state guarantees (prohibited); rescuing failing economic actors is subject to conditions if there is a viable rescue plan or otherwise banned; export subsidies banned subject to limited exceptions as with state aid law; subsidies to use domestic content (banned); Cross Border projects (allowed subject to conditions); targeted energy and environment subsidies (allowed subject to conditions); as with state aid law subsidies for air carriers is banned unless as part of a public service obligation.
These should be read with the EU UK joint declaration on subsidy control which sets out mutual expectation of how subsidies might be applied in other areas.
Transparency – information about subsidies must be published (in most cases) within 6 months of being granted or sooner if an interest party indicates it may take legal action (Article 3.7).
Court action and recovery (Articles 3.10 and 3.11) – those who may bring actions "interested parties" are a narrower category than under state aid law – perceived to be economic actors but not ordinary citizens. The minimum time limits for a court challenge are a month from publication of the subsidy (though nothing prevents the UK from extending this). We anticipate that the UK Government will in any event require challenges to be made more promptly than state aid law's current 10 year period.
It is also possible that the UK's Independent Regulator will have specific additional and recovery powers which may extend beyond those applying to court proceedings. The Government could adapt its power under the Localism Act 2011 (which relates to EU proceedings) to require public bodies to cease subsidies (or procurement practices) which place the UK in breach of its TCA obligations.
The Northern Ireland Protocol means it will be subject to state aid law in certain areas and in others subject to the UK's new system.
The UK's new system
We support public consultation about the UK's new system. Proposals should respect the UK's government's desire to quickly respond to new circumstances together with providing sufficient certainty to the private sector, national, regional and local authorities.