From State Aid to Subsidy Control

The new subsidy control regime – State aid by another name or something new?

The new subsidy control rules contained in the UK/EU Trade and Cooperation Agreement (TCA) have taken us from “State aid” to “subsidies”, from “undertakings” to “economic operators”, and from “selective” to “specific”. But what’s in a name? In this article, we explore some of the key changes brought in by the new subsidy control rules, how the UK’s domestic regime – to be laid out in the newly announced Subsidy Control Bill – might continue to develop and what this all means for public authorities, beneficiaries and potential challengers.

As from 1 January 2021, the EU State aid rules have ceased to apply in the United Kingdom, save for one important exception contained in the Northern Ireland Protocol. While the familiar EU State aid rules have now gone, both public authorities and beneficiaries must now grapple with the subsidy control provisions in Chapter 3 of Title XI of the 11th-hour TCA and how these sit alongside the UK’s other international subsidy obligations, including under the World Trade Organisation’s Agreement on Subsidies and Countervailing Measures and other Free Trade Agreements. 

At the end of March the Department for Business, Energy & Industrial Strategy (BEIS) closed a two-month consultation on the design of the UK’s new domestic subsidy control regime, which it is required to implement under the TCA. Then in May, the Queen’s Speech announced the introduction of a Subsidy Control Bill to implement such a domestic regime in the new parliamentary session. However, section 29(1) of the EU (Future Relationship) Act 2020 has already incorporated the subsidy provisions of the TCA into domestic law with effect from 1 January. UK authorities are therefore already subject to the new rules which impose some limits on their ability to lawfully grant subsidies. The TCA also includes various dispute settlement mechanisms that apply to unlawful grants, including private enforcement in domestic courts, as well as the possibility of remedial measures by the EU or UK (such as trade tariffs). So, the new rules are already here, and while we await the implementation of a more developed domestic regime pursuant to the Subsidy Control Bill, public authorities, beneficiaries and potential complainants face some challenges in navigating them.  

BEIS has published technical guidance to give some practical direction to public authorities. But many questions remain over how to ensure compliance, particularly in the first year post-Transition Period while the procedural elements of the new regime are ironed out, and the scope of the substantive provisions is still to be tested. 

The new regime: Plus ça change, plus c'est la même chose

One of the key changes from a procedural perspective is the removal of the need to obtain pre-approval from a designated public authority before granting a subsidy. The new process allows public authorities to self-assess their compliance with the rules, which could lead to faster implementation of subsidies. The counter-balance to this new-found autonomy is quite wide-ranging transparency requirements. But this shift of responsibility from the European Commission to UK public authorities is a significant one and imposes a considerable compliance burden. Of course, it is also important to bear in mind the interplay with the Northern Ireland Protocol, which provides for the continued application of the EU State aid rules – in particular the requirement to obtain ex ante approval from the European Commission – in respect of UK measures that affect trade between Northern Ireland and the EU (although this is limited to areas covered by the Protocol i.e. trade in goods and wholesale electricity markets).

Room for interpretation?

The TCA subsidy provisions conspicuously avoid the EU State aid terminology: the TCA applies to “subsidies” granted to “economic actors” in a “specific” way while the EU regime refers to “State aid” granted to “undertakings” in a “selective” manner. On the one hand, while the concepts look and feel familiar, the difference in terminology is potentially helpful as the deliberate choice to move away from the EU lexicon – which has been the subject of considerable EU and domestic case law –  might suggest there is scope to argue for different interpretations under the new rules. On the other, this could come at the cost of decreased certainty which only increases the compliance risk for public authorities and beneficiaries. There is also a risk that this uncertainty leads to public authorities defaulting to the well-known and familiar State aid concepts, thereby adopting what is potentially a more restrictive set of principles than those required under the TCA when self-assessing the legality of a measure.

Another good example of there being some room for interpretation relates to the “effect on trade” requirement, which is also one of the component parts to establish aid under the EU regime. Under the TCA, a measure must have an actual or potential effect on trade or investment between the UK and the EU in order to constitute a subsidy. This is of course different to the requirement that aid “affects trade between Member States” under the EU rules, which has been interpreted broadly by the EU courts to the point that almost any measure is presumed to satisfy this criterion. Given the different language in the TCA, coupled with the fact that this now has a different context (trade between the UK and the EU as opposed to trade between EU Member States), there may be scope for the “effect on trade or investment” requirement to become a higher bar, meaning fewer measures will fall within the definition of a subsidy in the first place. We note in its recent consultation, BEIS suggested a lighter touch approach with respect to “lower risk” subsidies, which could include measures unlikely to have a “material” impact on trade. Of course, the interpretation of this limb of the test for a subsidy is not yet clear, which means public authorities may need to take a more cautious approach (i.e. interpreting this requirement broadly) until there is more guidance on its application.

On the topic of “effect on trade”, it is also worth noting that there is a more specific test for subsidies to air carriers, which refers to measures that have an “effect on competition between air carriers between the UK and EU” – this appears to be a bit of an outlier in the new regime. 

Approach to emergency measures

The TCA rules expressly include general exemptions for emergency subsidies. For example:

  • subsidies granted to compensate the damage caused by natural disasters or other exceptional non-economic occurrences” are largely exempt from the rules (although remain subject to the transparency requirements); and 
  • subsidies granted temporarily to address a national or global economic emergency” – to the extent they are targeted and proportionate – are also exempt from certain provisions including remedial measures. 

In its technical guidance, BEIS explains that these provisions are relevant for Covid-19 related subsidies and that from 1 January 2021, measures that compensate for costs incurred due to Covid-19 and more general measures to support industry in the wake of the pandemic will fall in scope of these exemptions. 

Prohibited subsidies 

The UK must still respect certain rules in relation to a defined list of “prohibited/conditional subsidies”. For example, rescue and restructuring subsidies are generally prohibited unless they are based on a “credible restructuring plan” and “contribute to an objective of public interest by avoiding social hardship or preventing a severe market failure”. Unlimited State guarantees – either in amount or duration – are another example of prohibited measures. 

New information rights – a boost for potential challengers?

In a significant departure from the EU regime, under the TCA, public authorities are subject to a potentially wide-reaching information obligation which enables a third party to receive information that allows it to “assess” the authority’s approach prior to issuing a claim. While this right is subject to certain limitations (e.g. confidentiality), this could impose an onerous burden on public authorities, as it may require the disclosure of business cases, economist reports etc. It may also increase the risk of challenge.

However, while the TCA provides for this information right (and also requires authorities to publish details of subsidies on a centralised transparency database within six months of the grant, although the timeframe is longer for tax measures), it also reduces the window during which recovery is available as a potential remedy. Under the TCA, recovery is currently only available where a challenge is brought within one month of publication of the transparency notice (although this is extended by another month where the party engages or uses his/her information right under the TCA).  

Private enforcement

A third-party challenge under the TCA subsidies rules would be brought by way of judicial review in the Administrative Court. It is difficult to predict how the UK courts would handle these claims but it is likely that, in line with public law challenges under judicial review, they will afford a wide margin of appreciation to judgement calls taken by public authorities, particularly in respect of the conditions to establish a permitted subsidy. BEIS’ consultation confirmed that the use of judicial review proceedings would meet the terms of the TCA, although it also invites opinions on whether a specialist judicial forum such as the Competition Appeal Tribunal may be the more appropriate forum.

The court / tribunal must have powers to grant remedies including: quashing or setting aside the subsidy in question; issuing a declaration that a subsidy is unlawful; damages; injunctions; and recovery orders (provided a subsidy is challenged within the strict time limits outlined above). An important caveat is that no recovery can be required where the subsidy is granted on the basis of an Act of Parliament, which could be relevant for many tax schemes for example. 

Of course, a third party would need to show they have “standing” in order to bring a judicial review claim, but it is not yet clear what that would require in the context of a claim for breach of the TCA, other than demonstrating their interest might be affected by the grant of a subsidy, which may be interpreted broadly.

What does this mean for public authorities, beneficiaries and potential challengers?

We are in a period of flux as BEIS develops proposals for the new subsidy control system for the UK – to be introduced via the Subsidy Control Bill – which will reflect the TCA subsidy rules in domestic law. Until the more detailed regime is implemented, there are some important challenges facing public authorities and beneficiaries, although the new rules appear to be relatively “challenger-friendly”, so long as you are quick off the mark to comply with the applicable limitation periods. 

We list below some of those challenges, and how they might be addressed in the new regime under the Subsidy Control Bill:

  • The TCA requires the UK to establish an operationally independent authority or body with an “appropriate role”. The BEIS consultation left open the question of which body should carry out this work and what role it should play, but did suggest that the new regulator’s functions and powers might include: providing guidance and (non-binding) advice to public and private bodies; scrutinising and reporting on the operation and effectiveness of the system as a whole; post-award subsidy reviews; and enforcement. We consider that the ability to approach the regulator for (non-binding) guidance on the compliance of a measure would be welcomed by most, if not all authorities, as it would provide some level of comfort/certainty in their self-assessment. 
  • The new information right (which kicks in pre-action, where an “interested party” is contemplating applying for review of a subsidy) is a significant development and may lead to an increase in the number of challenges. Public authorities will need to ensure they keep robust audit trails including records of awards granted, their decision-making and external reports. It is worth bearing in mind that this information right does not appear to be limited to potential challengers; beneficiaries may also be able to invoke this right in order to get comfort around the legality of any subsidy. 
  • At this early stage, there is considerable uncertainty about the exact scope of the new rules. This is exacerbated by the inability to obtain ex ante approval, which puts the responsibility of compliance with the public authorities who will be new to this role. It is however important to remember that the concepts are still very similar to those in the EU State aid rules, and it is highly likely that a measure that fell within an EU block exemption would be likely to satisfy the criteria for permitted subsidies under the TCA. So public authorities can also take some comfort from the EU rules and precedent. BEIS’ consultation did not refer to “block exemptions” (familiar terminology under the EU regime) but did seek views on sector/subsidy specific provisions in areas such as R&D and transport. We can see multiple benefits in introducing a type of safe harbour system: reducing the compliance burden on public authorities; giving additional comfort to beneficiaries and discouraging broad information requests from potential challengers (and associated time and cost savings).