State aid to Subsidy Control

David Owens, Edward Reynolds and Matthew Waters warn that the new trade agreement between the UK and European Union is likely to lead to greater uncertainty for grant-making bodies.

The UK – EU trade agreement reached (subject to ratification) on 24 December sets out in some detail the interstate obligations for subsidy control between the parties, and gives UK bodies a rather clearer picture of the shape of subsidy control in the UK for the future. The Government has already legislated to make the Agreement part of UK law, but will have to take steps to implement this fully, and these will need to be integrated with the UK subsidy control regime promised last September to address the potential concerns around subsidies distorting trade within the UK. Subsidies affecting trade in certain goods from Northern Ireland will still be subject to EU state aid rules.

The new rules are to some degree a compromise between the WTO subsidy control approach, and that of the EU. It is generally couched in terms more familiar from the WTO SCM agreement, and this may give rise to some ambiguity around the definitions. In particular, in the definition of subsidy there is no direct mention of it having an effect on competition, merely that it “has, or could have, an effect on trade or investment between the Parties”. The inclusion of investment makes explicit the approach to ‘effect on trade’ adopted by the ECJ. It should be noted that a subsidy includes support which could have an effect on trade, which brings with it certain obligations, but a subsidy is not of itself unlawful. Instead, there are a set of principles which the parties must ensure that any subsidy respects in order to ensure that subsidies which have or could have a material effect on trade or investment:

a) subsidies 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”);
b) subsidies are proportionate and limited to what is necessary to achieve the objective;
c) subsidies are 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;
d) subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
e) subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means;
f) subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on trade or investment between the Parties.

Certain types of subsidy are prohibited:

• Unlimited state guarantees;
• Rescue and restructuring aid unless compliant with specific requirements;
• Export subsidies other than limited credit insurance;
• Subsidies contingent on use of domestic products;
• Aid to airlines for operation of routes (subject to exceptions for public service obligations).

Some types of subsidy are excluded from the regime in whole or in part:

• Subsidies addressing the impact of natural disasters (such as Covid or earthquake etc.);
• Subsidies to final consumers;
• Services of public economic interest (broadly equivalent to the EU services of General Economic interest) subject to conditions;
• De minimis aid below 325,000 Special Drawing Rights equivalent currently to about £348,562 over three fiscal years;
• Audio-visual services.

Certain types of Subsidy are regarded as potentially consistent with the Principles:

• Multinational projects where the benefits spread widely;
• Energy and environmental aid where aimed at delivering a secure affordable and sustainable energy system and a well functioning and competitive energy market or increasing levels of environmental protection. This in effect identifies a suitable objective in accordance with the Principles. There are also specific provisions relating to this in the context of energy supply co-operation.

There are rules on transparency, which are likely to require domestic legislation to require sub-national bodies to submit information to a central government database within 6 months of the granting of a subsidy (which will include those which only may affect trade or investment). This will need to include the legal basis. Some public interest subsidies below 15M SDR are exempt from this. There will also be requirements to provide information to allow a potential challenger to determine whether or not to make a challenge. However, this latter obligation is subject to exclusions for good reason including commercial sensitivity and confidentiality which may render the right for challengers limited in practice.

There is an obligation on the parties to establish an independent body “with an appropriate role”. It is unclear what this is intended to be, although it may well be the CMA with powers to make initial determinations of the compatibility of any subsidy, and potentially to issue block exemptions. Equally, it may only be an advisory body.

The EU/UK Agreement also requires the parties to ensure courts and tribunals have the ability to judicially review decisions to award subsidies, and acts or decisions of the Independent body. They must have powers to impose remedies based on such review including prohibition or requiring action by the granting authority the award of damages, and the recovery of subsidy if and to the extent they are available under the respective laws of the party on the date of entry into force of the Agreement. The European Union (future relationship) Act 2020 passed on 30 December, makes the agreement law from 1 January 2020 in this country which implies that there should be no limitation from prior UK law on these rights and remedies. This may effectively defeat in this context the abolition of the Francovich principle in relation to claims for damages. Whilst there is provision of provisional implementation from 1 January 2021 it is unclear how this will work. 

There is a separate provision for recovery, which will need to be established in UK law. However, there is a very tight time limit in which to bring a claim of 1 month from the date on which the details of a subsidy are published on the national database. This is extended only by a request for further information as indicated above for a period of one month from when the granting authority certifies that it has provided the information. The claimant must be able to show their economic interests might be affected.

There are specific and more detailed provisions relating to agriculture, fisheries and fish products, and also energy and environmental subsidies.

One of the issues which it is to be hoped will be resolved quickly is the uncertainty and risk that the model creates for a UK system. In the absence of a set of block exemptions, where there is a risk of aid affecting trade or investment and subsidy will have to be tested against the Principles set out above. While it is probably safe to assume that aid that would have been within a block exemption under EU law is likely to remain safe under the new system, it would be helpful if the Government adopted a similar legislative approach. The “Technical Guidance” issued by the Government does not provide much if any help beyond indicating that local authorities will need to consider the range of different treaties and agreements that the government has entered into, including the WTO subsidy control mechanism. There is an annex to assist in applying the principles to any given subsidy but it merely invites the grantor to set out how it considers the subsidy is compliant with the principles. The political declaration on subsidy policy indicates support at some undefined level for infrastructure, regional aid and Research and development but understandably the detail is left to the parties – and in particular the UK to adopt an approach. This may include the proportionality of any subsidy, and how grant making bodies such as LEPs are supposed to evaluate the comparative benefits of the a subsidy as against the negative effects of it on the market. George Peretz QC has suggested that in effect the independent authority will need to provide a form of advance clearance, but the arrangements have yet to be made to implement this part of the agreement.

As things stand one of the key effects of the agreement in this field is greater uncertainty and potentially greater costs of legal and economic advice on the subject. The Government appears at least at this stage to be leaving it to individual grant-making bodies to arrive at their own conclusions, although there is a source of further information at the Department of Business Energy and Industrial Strategy. Given previous behaviour, this is likely to be information rather than advice, and bodies will need to take their own advice.

David Owens and Matthew Waters are partners at Bevan Brittan. Edward Reynolds is an associate at Beven Brittan.