State of play: the UK's new subsidy control regime

10 February 2021

EU State aid law ceased to apply to the UK upon the expiry of the Brexit transition period on 31 December 2020 - save for limited exceptions as set out in the EU-UK Withdrawal Agreement of 2018.[1]

In its place, the UK Government proposes to establish a domestic subsidy control regime. On 3 February 2021, the Government launched a public consultation on this proposed regime. The consultation closes on 31 March 2021.

In the meantime, the grant of state financial support in Great Britain remains in a state of limbo - the 'old' EU system has not been carried over into domestic law as 'retained' law. Further, as we explore below, while the UK is bound by its international obligations under the World Trade Organization ("WTO") rules and the UK-EU Trade and Cooperation Agreement (the "TCA"), these do not have direct effect in a national court nor are there yet UK implementing provisions for these obligations.

In this Insight, we briefly explore the state of play and look at what happens next.



Out with the old

The potential application of EU State aid rules to the UK was a contentious topic in the EU-UK trade negotiations in 2020, with these rules forming part of the 'level playing field' commitments that attracted much UK media interest.

While negotiations were ongoing, the UK Government announced that it would replace EU State aid laws and "follow WTO subsidy rules after the end of the transition period" and "confirmed that the UK will adhere to any international agreements on subsidies".[2]

Neither of these statements provided much certainty or comfort. The UK was already bound by WTO subsidy rules while it was an EU Member State (for the UK was a WTO member - albeit the EU represented the UK at the WTO).

The conclusion of the TCA and the launch of the consultation on the subsidy regime provide some greater detail as to how financial assistance granted by UK public bodies may be regulated.

The European Commission now only retains its jurisdiction over UK State financial support in relation to cases initiated before 31 December 2020 and it also has a four year window to investigate the grant of State aid in the UK before that date. In relation to Northern Ireland, pursuant to the Ireland/Northern Ireland Protocol, the EU State aid rules continue to apply to goods insofar as there is an effect on trade between Northern Ireland and the EU.

The UK's WTO obligations

As a WTO member, the UK is bound by the WTO Agreement on Subsidies and Countervailing Measures (the "SCM Agreement").

The SCM Agreement defines 'subsidy' for the purposes of international trade law and sets out a state to state mechanism for disputing the grant of subsidies that produce adverse effects on trade between WTO members.

The SCM Agreement expressly prohibits two types of subsidies - those contingent on export performance and those contingent upon the use of domestic over imported goods. However, unlike the EU State aid rules, the WTO rules do not contain any general prohibition on the grant of subsidies and there is no requirement to obtain authorisation prior to the grant of a subsidy. Moreover, the SCM only applies to goods.

Instead, the UK is obliged by its WTO obligations to notify WTO members every two years of subsidies that it has granted.

In with the new -requirements under the UK-EU Trade and Cooperation Agreement

Under the level playing field provisions of the TCA, the UK is committed to establishing its own subsidy control regime, together with an independent body that has "an appropriate role in its subsidy control regime".[3] The identity and functions of this public body are subject to the public consultation on the UK's subsidy control regime.

The UK and the EU have also agreed a definition of 'subsidy' and a set of subsidy control principles which must be implemented via each of the parties' subsidy control regimes. These principles are intended to ensure that subsidies are not granted where they "have or could have a material effect on trade and investment" between the UK and the EU.[4]

The Government's consultation is seeking views on whether any additional principles should be adopted within the UK subsidy control regime.[5]

The TCA also contains a list of eight 'categories' of subsidies which are either prohibited or subject to specific conditions. These categories include (among others) unlimited state guarantees, "rescue and restructuring", "large cross border or international cooperation projects", "energy and environment" and "subsidies to air carriers for the operation of routes".[6] The UK Government proposes to include these prohibitions and conditions within its domestic subsidy control regime.

Moreover, the TCA facilitates challenge by third parties of the grant of subsidies, where it imposes public reporting requirements on both the UK and the EU of the grant of subsidies, so as to permit 'interested parties' to challenge the compliance of the subsidy with these principles.[7]

What happens now?

While the UK has not yet enacted its own domestic subsidy control regime, the UK is nevertheless bound, as a matter of international law, by the terms of the EU-UK TCA[8] (and continues to be bound by the WTO rules).

The UK has stated that it will not apply the new regime retrospectively - i.e. subsidies granted after 1 January 2021 but before the regime enters into force will not fall within the ambit of the UK subsidy regime.[9]

The Government consultation on the subsidy control regime runs until 31 March 2021, and it is anticipated that primary legislation will be passed in order to give effect to the regime following the Government's consideration of the consultation responses.

In the meantime, the Government has issued various guidance to public bodies on how they should 'self-assess' compliance against the UK's obligations under the WTO, the UK-EU TCA as well as other free trade agreements.

Read the guidance in full.

Here to help

Gowling WLG's EU, Trade and Competition team regularly acts for Government departments, public bodies and recipients of state funding and has extensive experience advising on matters of WTO law, the EU State aid regime and judicial challenge of the grant of State aid.


Footnotes:

[1] See: https://www.gov.uk/government/news/government-sets-out-plans-for-new-approach-to-subsidy-control.
[2] See Title XI, Article 3.9 of the TCA.
[3] See Title XI, Article 3.4 of the TCA.
[4] See paragraphs 59-61 of the consultation, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/957958/subsidy-control-consultation-document.pdf.
[5] See Title XI, Article 3.5.
[6] See Title XI, Article 3.7.
[7] On this point, some commentators have argued that the subsidy control provisions of the TCA may be given effect in UK law by virtue of Section 29 of the European Union (Future Relationship) Act 2020. This provides for a 'sweep up' provision which - in effect - states that where necessary to comply with the TCA, domestic law shall be taken as modified to implement the TCA where the TCA is not otherwise implemented. It is not clear how this is possible since no prior domestic law existed in relation to subsidy control. Irrespective of the merits of this interpretation, the provisions of the TCA are in our view too broad to be implemented in any meaningful way under this provision.
[8] See paragraph 45 of the consultation paper.


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