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Subsidy Control in the UK: Key Takeaways from the UK-EU Trade and Cooperation Agreement and the Recently Launched UK Government Public Consultation

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On 24 December 2020, the EU and the UK concluded the Trade and Cooperation Agreement (the “TCA”).1 The TCA, which is still subject to formal ratification by the EU, has been provisionally applied since 1 January 2021. One of the major issues of contention in the negotiations was to what extent the UK would be required to continue to follow the EU’s State aid rules when granting aid to businesses after the end of the transitional period on 31 December 2020.2 As explained in more detail below, the TCA does not contain such a requirement, but instead provides for a new set of substantive and procedural rules on subsidy control. The UK government is now consulting on the design of a new subsidy control regime for the UK that will meet its obligations under the TCA and other international commitments.3

Key takeaways

  • Despite its withdrawal from the EU on 31 January 2020, the UK was formally required to apply EU State aid rules as part of a transition period ending on 31 December 2020.
  • From 1 January 2021, EU State aid rules no longer apply in the UK, except in respect of measures that affect trade between Northern Ireland and the EU (as provided under the Protocol on Ireland/Northern Ireland).
  • The TCA does not require the UK to continue to follow the EU’s State aid rules. However, it does provide for a new set of substantive and procedural rules on subsidy control. These rules mirror to a significant extent the EU State aid rules, although there are material differences (e.g. different or new terminology). These differences create the potential for divergence between the EU’s State aid regime and the UK’s new subsidy control regime.  
  • The TCA provides that the new subsidy control regime shall be domestically enforced in the UK by an independent authority (presumably the Competition and Markets Authority) and courts, although the precise role of the authority and the enforcement regime are not specified. The TCA also sets out a number of mechanisms intended to resolve disputes between the EU and the UK in relation to the subsidy control provisions of the TCA, including information and consultation, unilateral retaliatory measures and arbitration.
  • On 3 February 2021, the UK government launched an 8-week public consultation, seeking views from businesses and public authorities on how the new subsidy control regime should be best designed.

1. Why do the new TCA rules on subsidy control matter to businesses?

There are a number of reasons why it is important for businesses to understand the new rules on subsidy control that will apply in the UK (and correspondingly to the EU).4 Beneficiaries of aid measures in the UK will want to ascertain whether such aid qualifies as a subsidy and, if so, ensure that it complies with applicable substantive and procedural rules to avoid potential adverse consequences such as the recovery of the aid. Further, the same applies indirectly to investors which provide funding in connection with projects that qualify as a subsidy. Finally, businesses that compete with beneficiaries of aid will be interested in knowing under which conditions and through which remedies they may challenge such aid where it amounts to a subsidy.

2. When does aid amount to a subsidy under the TCA?

The TCA does not simply adopt the definition and terminology of State aid as it exists under EU law.

The concept of a subsidy is defined very broadly as financial assistance arising from the resources of one the parties to the TCA (i.e. the UK or the EU) which confers a specific economic advantage on an economic actor and which has, or could have, an effect on trade or investment between the UK and the EU. 

Although many of the constituent elements of the notion of subsidy are broadly similar to those that characterize State aid, the TCA refrains from using EU State aid law terminology. By way of example, it refers to a “specific” advantage instead of the EU term “selective” advantage and to “economic actors” instead of the established EU concept of “undertakings”. Although these concepts appear to be equivalent, by using different or new terminology, the TCA creates at least the potential that the concept of State aid under EU rules and the concept of a subsidy under the TCA could be subject to divergent interpretations. To what extent such divergence will materialize is difficult to assess at this stage, especially pending clarification on how the UK intends to apply the provisions in practice.5 

In addition, certain types of measures are excluded from the scope of subsidy control. While some of those exclusions are similar to exclusions known under EU State aid law (e.g. de minimis aid), the TCA also excludes a limited number of entire sectors, in particular the audiovisual sector as the EU systematically excludes that sector from trade agreements. In addition, recovery of an unlawful subsidy will not be required when that subsidy is based on an act of the UK Parliament.6

3. When is a subsidy prohibited under the TCA?

The TCA creates an obligation for the UK to implement two main sets of rules in its domestic subsidy control system to ensure the legality of subsidies. 

First, the UK is required to put in place an “effective system of subsidy control” ensuring that the granting of subsidies complies with six general principles set out in the TCA. These general principles reflect rules applied by the European Commission when assessing the compatibility of State aid with the EU Internal Market. For example, according to one of the principles, subsidies must 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. Moreover, according to another principle, subsidies should not normally compensate for costs which the beneficiary would have funded in the absence of any subsidy. These two principles broadly resemble the principle under EU State aid law that, in order to be compatible, State aid must have an incentive effect.

Second, in addition to the six general principles, the TCA identifies a number of categories of subsidies that are per se prohibited (such as unlimited State guarantees), or subject to conditions. Importantly, the requirements regarding prohibitions or conditions do not apply to all subsidies, but only to those that have or could have a “material” effect on trade or investment between the UK and the EU. The implication is that, below this materiality threshold, the UK will retain more flexibility in the assessment of the legality of subsidies. Which types of cases fall below this threshold will likely be contentious, but it might be argued that the threshold would not be met for example in relation to subsidies for regional or local services or certain goods involving very little cross-border EU-UK trade and investment.

4. Will granting subsidies require prior notification in the UK under the TCA?

The EU State aid law enforcement regime is based on ex ante control. State aid may only be implemented after it has been notified to, and cleared by, the European Commission – although a majority of State aid measures and schemes are exempt from the notification obligation as they meet the conditions of EU block exemptions. However, the TCA does not impose any obligation on the UK to set up an ex ante control mechanism. The UK is therefore able to introduce an ex post control mechanism, whereby compliance with the rules on subsidy control is reviewed only after the subsidy has been granted. It remains, however, to be seen whether the UK will indeed make use of this possibility or whether it will opt, for example for reasons of legal certainty, for a system of optional or mandatory prior notification and clearance.

The TCA also provides for certain transparency obligations, which require the EU and the UK to make available certain information on subsidies within six months from the date of their granting. For the UK specifically, the TCA also requires that interested parties be able to request information which has to be provided within 28 days of the request by the granting authority or the independent authority. That information relates to the application of the principles on the legality of the subsidy and is supposed to enable the interested parties to make an informed decision as to whether to challenge the aid before a court

5. Who will enforce the new rules on subsidies in the UK under the TCA?

The TCA requires that the UK entrusts an independent authority and courts with the domestic enforcement of the rules on subsidies set out by the agreement.

First, the TCA creates an obligation for the UK to establish or maintain an operationally independent authority or body with an “appropriate role” in its domestic subsidy control regime. It is quite likely that the UK competition and consumer authority (i.e. the Competition and Markets Authority) will exercise this role. It is, however, unclear which tasks precisely an “appropriate role” encompasses. Such a role may involve reviewing whether subsidies that have been granted in a particular case comply with the UK law implementing the principles on the legality of the subsidies set out in the TCA. The importance of this role might, however, depend on whether the UK opts for an ex ante control system or an ex post control system and to what extent the authority will be able to initiate ex officio investigations and/or investigate complaints. An “appropriate role” may also involve providing guidance as to the circumstances under which specific types of subsidies (e.g. in particular sectors) comply with the UK law implementing the principles of legality set out in the TCA.7

Second, the TCA requires the UK to ensure that courts have jurisdiction to review subsidy decisions taken by a granting authority or, where relevant, the independent authority for compliance with the UK law implementing the principles of legality set out in the TCA. Moreover, the TCA provides that the courts shall have jurisdiction to review any other relevant decisions of the independent authority and any relevant failure to act, as well as to impose effective remedies including suspension, prohibition, requirement of action by the granting authority, the award of damages, and the recovery of the subsidy from its beneficiary.

6. Which remedies will be available under the TCA?

The TCA contains provisions governing two main types of remedies, namely remedies for individuals, companies and other organisations on the one hand, and remedies for the parties to the TCA (the UK and the EU) on the other hand.

As regards remedies for individuals, companies and other organisations, the primary remedy provided for by the TCA is review by the courts which, as noted above, will have the power to grant recovery of the subsidy and award damages. The TCA requires in this regard that the UK courts have jurisdiction to hear claims from interested parties where an interested party has standing to bring a claim in respect of a subsidy under UK law. Interested parties might be facilitated in such court proceedings by the transparency obligations set out in the TCA, noted in response to question 4 above.

As regards remedies for the Treaty parties (the UK and the EU), the TCA provides for various mechanisms intended to resolve disputes between the UK and the EU, in particular information and consultation mechanisms, unilateral but proportionate remedial measures (i.e. retaliatory action) as well as arbitration. Moreover, the UK and the EU may intervene in each other’s domestic court proceedings with the permission of the relevant court.

7. How does the TCA relate to the State aid provisions of the Protocol on Ireland/Northern Ireland?

The Protocol on Ireland/Northern Ireland, which entered into force on 1 January 2021, provides that EU State aid rules shall continue to apply to the UK “in respect of measures which affect that trade between Northern Ireland and the Union which is subject to this Protocol.”8  In addition to measures relating specifically to Northern Ireland, this provision could potentially also apply to UK-wide measures that affect trade between Northern Ireland and the Union. The TCA does not amend or clarify this aspect of the Protocol. Accordingly, two legal regimes coexist in the UK: one regime where the new rules on subsidy control apply (under the TCA), and a parallel regime where EU State aid rules continue to apply (under the Protocol on Ireland/Northern Ireland).

8. What are the next steps in the process of establishing the new UK subsidy control regime?

On 3 February 2021, the UK government launched a public consultation seeking views from businesses and public authorities on how the new UK subsidy control regime should be best designed. The consultation will run until 31 March 2021. The consultation document, setting out 43 questions as well as initial proposals of the government, is available here.

Subject to the outcome of this consultation, the UK government plans to bring forward primary legislation to establish the new UK subsidy control regime. The questions on which input is sought from stakeholders as part of the consultation relate to a number of areas, including the following:

  • to what extent the UK should apply its own additional principles on subsidy control, beyond those required by the TCA;
  • how best to ensure transparency across the regime;
  • the possible roles and responsibilities of the independent authority that will oversee the new regime;
  • how this independent authority could have some role in supporting enforcement of the principles, alongside normal judicial review standards; and
  • how the regime could seek to introduce exemptions consistent with the UK’s international obligations, in particular in relation to subsidies of low value and subsidies granted to support natural disaster relief or in response to global economic emergencies

The consultation document does not propose the creation of an ex ante notification regime as it exists in the EU. However, it considers a number of options which could reduce the legal uncertainty in individual cases. In particular, the consultation document suggests that the independent authority could have a limited role in providing advice to public authorities on the design and impact of subsidies before they are awarded. Obtaining such advice could be mandatory where public authorities award high-value or “high risk” subsidies (e.g. subsidies that could create significant distortions). The government is also seeking views more generally on what role the independent authority could have before a subsidy is awarded. Further, the consultation document explores the option of establishing a voluntary or statutory standstill period which would have to expire before “highest risk” subsidies can be disbursed, to allow legal challenges or requests for information to be received.

If you have any questions regarding the future UK subsidy regime, the public consultation or other issues related to State aid, please contact our lawyers below.

[1] Trade and Cooperation Agreement between the European Union and the European Atomic Energy Community, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part, OJ L 444, 31.12.2020, p. 14–1462. The text of the TCA is available here.

[2] While the UK withdrew from the EU on 31 January 2020, it remained bound by EU State aid rules throughout a transitional period, which ended on 31 December 2020. 

[3] The UK is subject to commitments under the WTO Agreement on Subsidies and Countervailing Measures (ASCM), trade agreements, including the UK-Japan Comprehensive Economic Partnership and the Protocol on Ireland/Northern Ireland that is part of the UK-EU Withdrawal Agreement (see question 7 below). 

[4] The TCA’s provisions on subsidy control generally apply to both the UK and the EU. However, since the EU already has an established system of State aid control, this article focuses on the impact of the TCA on subsidy control in the UK.    

[5] On 31 December 2020, the UK published guidance on its website on the new subsidy control regime (the guidance is available here). According to the guidance, the UK government “will consider whether to bring forward secondary legislation in early 2021 to give legal certainty regarding compliance with the UK’s commitments in relation to the granting of subsidy. It will also consider, as part of its forthcoming consultation on the UK’s approach to subsidy control, whether further primary legislation is necessary.” As noted in response to question 8 below, a public consultation was launched on 3 February 2021.  

[6] This exception does not apply to acts adopted by the devolved parliaments and assemblies in the UK (e.g. the national Parliament in Scotland).

[7] By way of comparison, the European Commission has issued a very large amount of guidance documents explaining how it assesses the compatibility of State aid with the EU Internal Market. 

[8] Withdrawal Agreement, Protocol on Ireland/Northern Ireland, Article 10.

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