10 minute read 5 Feb 2021
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Brexit: What the deal means for State Aid and UK subsidies control

By Phil McDonnell

Associate Partner, UK&I Law, Ernst & Young LLP

Member of the EY Commercial and Digital Law team, also handling antitrust and EU law. Former English high jump record holder but exercise now limited to looking after the garden.

10 minute read 5 Feb 2021
Related topics Brexit Tax Law

The new subsidy regime brings opportunity for the UK Government and businesses but with the potential for reduced legal certainty.

In brief
  • The UK is setting up a new domestic subsidy regime with new rules defined, in part, by the terms of the UK-EU Trade and Cooperation Agreement.
  • The new system is intended to be a clear departure from the EU State Aid regime which will no longer apply.
  • The Government wants the new rules to be tailored to better support start-ups, small businesses and new industries.

State Aid and the UK’s future subsidy policy has been one of the much-discussed elements of Brexit. The rules which define the boundaries of what will be possible for this, and future, UK governments to enact will now be set by the UK-EU Trade and Cooperation Agreement (TCA) in conjunction with the UK’s obligations set out in the Northern Ireland Protocol, other trade agreements with third-countries as well as the WTO Agreement on Subsidies and Countervailing Measures. The UK’s own Internal Markets Act 2020 sets out some of the domestic legislative requirements.

It will take some time before the true extent of these changes is felt and understood. Until the UK establishes the detailed rules for a domestic subsidy regime (as required to comply with its obligations under the TCA), Great Britain (as separate from Northern Ireland due to the provisions set out in the Northern Ireland Protocol) will, in effect, be operating under an interim regime.

The UK has announced a consultation, seeking 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 UK-EU Trade and Cooperation Agreement.
  • 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.
  • How the system could seek to introduce exemptions consistent with our international obligations, such as ensuring subsidies of low value, those given to support natural disaster relief or in response to global economic emergencies.

Main features of the TCA subsidies regime

  • What is a subsidy?

    While some of the terminology is different, a subsidy under the TCA looks very similar to a State Aid.  A subsidy is defined as:

    • Financial assistance which arises from the resources of either the UK or EU (Member States);
    • Confers an advantage on an economic entity engaged in offering goods or services on a market;
    • Is specific (i.e., benefits the recipient 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 EU.

    Subsidies may include direct grants, loans, loan guarantees, foregoing of revenue, the provision or purchase of goods or services, and tax measures.

  • Prohibited subsidies

    The TCA prohibits certain categories of subsidies if they have, or could have, a material effect on trade or investment between the UK and the EU including the following:

    • Unlimited state guarantees. These are defined as subsidies in the form of a guarantee of debts or liabilities of the beneficiary without any limitation as to the amount of the debts and liabilities or the duration of the guarantee;
    • Rescue and restructuring subsidies. These are defined as support for restructuring an ailing or insolvent business without a credible restricting plan in place (particular rules apply to banks, credit institutions and insurance companies);
    • Export subsidies. These are any subsidy that is contingent upon export performance relating to goods or services (subject to certain exceptions);
    • Domestic content subsidies. These are subsidies which are contingent on the use of domestic over imported goods or services.

    All four of these categories will be familiar to EU State Aid lawyers.  The interest will be around what constitutes a “material” effect on trade or investment between the UK and the EU.

  • Other subsidies

    For all other subsidies (with some exclusions considered below), the UK is committed under the TCA to adopt a system which ensures that the granting of a subsidy respects the following principles: subsidies must:

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

    Again, much of what is contained in these principles is the same as is found in EU State Aid law.  For example, the concept of proportionality finds a concrete expression in the intensity levels permitted under EU block exemptions; requirements (c) and (d) are about incentive effects; and requirement (f) is an articulation of the balancing test under EU law.

    The critical starting point, however, is the underlying policy objective.  This is where government policy of the day will drive the types of permissible subsidies and it is if (or when) UK policy diverges from that of the EU that the TCA disputes regime is likely to come into play.  In a non-binding Joint Declaration on Subsidy Control Policies, the UK and EU recognised that subsidies may be granted for the development of disadvantaged or deprived areas or regions (regional aid), to airports, road infrastructure projects, ports and for research and development (all areas covered in detail by EU block exemptions).  But we would expect that this list is not exhaustive.

  • Measures excluded from subsidy control

    Excluded from some or all of restrictions set out in the EU TCA are subsidies which:

    • Are of a social character targeted at final consumers;
    • Are granted on a temporary basis to respond to a national or global economic emergency, but they must be targeted, proportionate and effective in order to remedy the emergency;
    • Are under 325,000 Special Drawing Rights (around £345,000) over any period of three fiscal years to any one beneficiary; or
    • Relate to the audio-visual sector.

    Special rules relate to subsidies granted for the performance of particular tasks in the public interest, including public service obligations.

    There are also specific provisions in the TCA addressing tax measures, both through what tax measures are within the general scope of subsidy control and through specific exemptions for taxation.  

  • How will subsidies be regulated in the UK?

    This is a key area of change. Under the terms of the TCA, the UK is required to:

    • Establish an operationally independent authority with an appropriate role in its subsidy control regime;
    • Ensure that the courts are competent to:
      • Review decisions of an authority granting a subsidy for compliance with the above principles;
      • Review decisions of the independent authority;
      • Impose effective remedies in relation to (i) and (ii) (including awarding damages or ordering recovery of the subsidy from the beneficiary); and
      • Hear claims from interested parties in respect of subsidies; and
    • Have in place an effective mechanism of recovery in respect of subsidies.

    Questions that immediately arise include:

    • What role and powers will the “independent authority” have?
    • Who will be the independent authority (e.g., will it be the Competition & Markets Authority as previously envisaged)?
    • What kind of guidance will the independent authority issue?

    Will the independent authority be able to give binding approval to a subsidy (which would provide legal certainty before committing to a project) and if so, how would that work without a system of prior notification?

What does Brexit mean for the UK’s subsidy policy?

The UK has undoubtedly achieved a high degree of flexibility and independence over its subsidy policy which creates new opportunities for the Government and UK businesses.  However, that has come at the price of reduced legal certainty: without block exemptions (which under the EU regime covers the vast majority of State Aid situations) or a system for up front approval of a subsidy, granting authorities and beneficiaries are left to assess themselves whether their subsidy is lawful.

The Department for Business, Energy and Industrial Strategy (BEIS) consultation on the new domestic subsidy regime is now underway, but the following features are already worthy of note:

  • There are currently no block exemptions (safe harbours), frameworks or guidance notes for the UK regime and the UK has yet to appoint/create an independent subsidy control authority.
  • There is no obligation on the UK to create a system for pre-notification.
  • Granting authorities will have to carry out a self-assessment of whether their subsidies are lawful (the inevitable consequence of not having a system of pre-notification).
  • In carrying out that self-assessment, creating a contemporaneous, documentary audit trail will be critical.
  • Complainants (“interested parties”) may seek judicial review of the decision to grant subsidies and the courts can order repayment of unlawfully granted subsidies.
  • The concept of a subsidy is little different from that of a State Aid.
  • The relevance of the subsidy rules for UK tax legislation has its own complexities which we will cover separately.

The Government’s consultation will run until 31 March 2021. Subject to the outcomes of this consultation, the Government has promised to bring forward primary legislation to establish in domestic law a system of subsidy control that works for the entirety of the UK.

In advance of new legislation, for the vast majority of cases, we expect that it will not be difficult to conclude that a subsidy is lawful: for the time being, granting authorities could default to following EU block exemptions, frameworks and guidance if they want to be as certain as they can be that they will not be challenged in the courts where the TCA applies.

There appears to be a presumption on the part of the EU that its State Aid regime complies with the TCA and so UK granting authorities would not be criticised for following EU rules (at least until UK-specific ones are developed).

Similarly, only the largest projects are likely to engage the UK’s obligations under other trade agreements or the WTO rules.  The critical point in these “standard” cases, whether under the TCA or otherwise, is for granting authorities to document fully at the time of award the reasons why they have concluded that the subsidy is lawful.

There are three main “non-standard” situations to look out for:

  • Those cases where a granting authority wishes to flex and go beyond what would currently be permitted under EU State Aid rules and where it will need to conduct a deeper and thorough self-assessment;
  • Those cases subject to the Northern Ireland Protocol which remain subject to EU State Aid rules (and the jurisdiction of the European Commission and CJEU); and,
  • Subsidies under the EU Multilateral Financial Framework 2020-2024 which the UK continues to participate in (under the Withdrawal Agreement) and where EU rules will continue to apply.

Support EY can offer

EY has a team of lawyers, economists, financial consultants and policy advisors to assist on subsidies matters.  We can help by:

  • Providing legal advice on the subsidies regime, how it works and how it applies (or does not apply) to potential subsidies.
  • Assisting both granting authorities and beneficiaries in carrying out the new self-assessments and advising on the documentary evidence required to support subsidy decisions.
  • Advising on the grants and incentives process (including policy and economic trends, incentive planning and grant applications).
 

For further information, please contact this article's authors or your usual EY contact.

Summary

Whilst it will take time for the UK to establish detailed rules for the new subsidy regime, impacted business should monitor and consider participating in the consultation announced on 3 February 2021.

About this article

By Phil McDonnell

Associate Partner, UK&I Law, Ernst & Young LLP

Member of the EY Commercial and Digital Law team, also handling antitrust and EU law. Former English high jump record holder but exercise now limited to looking after the garden.

Related topics Brexit Tax Law