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Revoking EU state aid rules: where next?

Jonathan Branton and Alexander Rose consider the implications of revoking EU State aid rules without a domestic subsidy regime in place, and set out a short term solution.

On 29th September 2020, the UK Government laid down a draft Statutory Instrument to revoke EU State aid rules in the UK as of the end of the post-Brexit "Transition Period" ending on 31 December 2020.  The move is controversial because, at this time, the UK has not articulated a substantive domestic subsidy regime in place of the existing EU regime to apply as of 1 January 2021. 

The State Aid (Revocations and Amendments) (EU Exit) Regulations 2020

The new Statutory Instrument, the State aid (Revocations and Amendments) (EU Exit) Regulations 2020,  removes EU State aid rules from UK law with effect from 31 December 2020.  It does so by disapplying the relevant EU Treaty articles from UK law as well as revoking all relevant Regulations, guidelines and decisions.   

However it is premature to regard this delegated legislation as being the end of any form of EU State aid law in the UK.  Beside being the subject of a potential challenge, the Statutory Instrument expressly allows for litigation in respect of subsidies awarded up until the end of the EU-UK Transition Period. This includes allowing competitors of businesses who have received an unlawful award to bring litigation under EU State aid rules many years in the future.  

Article 10 of the Northern Ireland Protocol

Furthermore, the Statutory Instrument also recognises that EU State aid law shall apply to measures caught by Article 10 of the Northern Ireland Protocol, which applies EU State aid law to measures with a potential effect on trade between the EU and Northern Ireland. 

As noted by Mathew Holehouse in his article, "Brexit deal's State aid rules might have long reach" since the 1980 Philip Morris case, the effect upon trade test in EU State aid law is regarded to be satisfied in respect of all but the smallest subsidies. Therefore subsidies to businesses located outside Northern Ireland may still be regarded to have a potential effect on trade between the EU and Northern Ireland, thereby necessitating an EU State aid assessment in many situations involving public funding.  

Article 10 of the Northern Ireland Protocol will apply, potentially in perpetuity, unless superseded by a new agreement under Article 13(8) of the Protocol. In practical terms, the EU is only likely to agree to supersede this provision if the UK puts forward its own meaningful State aid regime. While the enforceability of this aspect of the Northern Ireland Protocol remains uncertain, this at the very least creates a level of doubt over future measures with any arguable element of Irish reach. 

The UK's "no deal" Subsidy Control Regime

On 9th September 2020, the Government announced it intends to apply WTO rules to UK subsidies if no deal can be agreed with the EU. However the WTO rules have very limited impact as a domestic subsidy control regime by themselves, because they were never designed as such. 

Instead WTO rules were designed to regulate the effects of certain types of subsidies upon trade between different WTO Members. This necessarily means effects on foreign markets caused by damage to the domestic industries of other WTO members, caused by unfair competition from subsidised imports. This is why the WTO rules are primarily invoked as a trade defence measure, in much the same way as anti-dumping investigations. The WTO rules contain very basic prohibitions on subsidies based solely on export performance and subsidies contingent on use of domestic over imported goods, but otherwise they do not contain the basic provisions one would expect to be in place to coordinate and control subsidies within a country, for example rules to ensure:

  • information about large subsidies is available to the public;
  • subsidies are not awarded for activities which a business has already legally committed to deliver (sometimes called "incentive effect")
  • a certain range of subsidies to support particular activities within particular limits are expressly validated to give legal certainty (for example the role of "block exemptions" in EU law) ; and 
  • grants are only paid towards genuinely incurred costs.  

Although such provisions may seem the minimum which a prudent Government would want in place, at present these provisions will disappear from UK law on 1 January 2021.

Ultimately, the WTO rules contain provisions enabling domestic subsidies to be targeted by other countries in terms of trade defence measures when they affect foreign trade, but they do not prohibit the vast array of subsidies that go on currently under EU law on a daily basis, including those in the UK. The WTO rules are therefore very permissive and regulate very little indeed, especially on a domestic level.  

UK offers State aid concessions in EU Trade Talks

On the same day as the Statutory Instrument was laid before Parliament, the UK has reportedly submitted negotiating papers to the EU which offer some concessions on State aid regulation, albeit these compromises are apparently not yet sufficient to form the basis of a trade deal.  The new SI may be regarded by some to be part of a carefully choreographed negotiation (with a view to procuring agreement on a more in depth compromise in due course). Otherwise, the new SI will be seen as simply a basic legislative step to remove the effects of the existing EU regime going forwards, regardless of any consideration as to what follows it.

Would the UK benefit from a UK State aid regime? 

A meaningful UK State aid regime would appear to provide a solution to the gridlocked talks in Brussels. After all, the UK needs rules to coordinate subsidies across the 500+ public sector bodies in the UK capable of awarding State aid to businesses. 

UK State aid rules would guard against taxpayer funded subsidies being excessive or wasteful. They would allow a common approach to levels of subsidy and related conditions against different types of investment, anywhere in the UK. Further still, they could act as a means to coordinate funding to Government priorities such as levelling up poorer parts of the UK and investing in advanced technology. By way of example the current EU regional aid rules have the intention and effect of facilitating subsidies to certain activities in statistically poorer areas rather than others. This aligns ideally with current stated UK Government policy, and is therefore something that could be built upon in a new UK State aid regime. Similarly, the current rules offer particularly generous allowances for R&D investments and this again could be built upon.

Some of the other considerations which have been raised include:

  • given that historically most EU countries considerably out-spend the UK in terms of subsidies granted as a proportion of GDP, the UK has arguably more to win than lose by some sort of tracking with the EU going forwards, or else mobile investments might be considered more likely to go to EU regimes offering more;
  • the UK prides itself on an effective domestic competition law regime wherein cartels, abuse of dominance and potentially anti-competitive mergers are rigorously held to account, all in the name of maintaining effective competition and a level playing field in the UK. A lack of an effective domestic subsidy regime would severely undermine this; and 
  • no domestic controls would mean less immediately obvious law to breach, but it would also mean a lack of alignment or common rules as between the devolved administrations and the many other public bodies in the UK today. This could be expected to unleash intra-UK subsidy auctions with little limitation, other than when the public money runs out. This ultimately plays to the advantage of more affluent areas (the opposite of levelling up) and may be expected to increase scrutiny on the funding decisions reached by public authorities, with undoubted outcries and allegations of cronyism or worse to come when funding decisions are scrutinised.

What can be done in the time frame? 

There is now less than a hundred days until the end of the Transition Period. If the UK is to proceed with a formal consultation for the development of new UK State aid rules, then it is difficult to see how a comprehensive exercise to develop a new detailed regime can be delivered, considered and its results written into new law within that time frame. 

One option is to agree principles with the EU and then use delegated powers to build a new interim regime, which could then be the subject of a consultation in the near future. Noting that the primary political goal of Brexit is to "take back control", it seems that any new regime must above all not be governed or regulated by a body outside the UK. Furthermore if Brexit is to be a success, then the regime must allow for the UK's economic priorities to be supported. 

Various commentators have argued then that the simplest short term measure would be a virtual "cut and paste" of existing EU law (which the UK public sector is used to working with) into a UK version, without control by any EU authorities. It would be possible to simplify certain rules to create 'quick wins' thereby allowing public funding to be provided more quickly and with reduced administration. Examples of such quick wins would be amending the 'undertaking in difficulty' test so that companies signed off as viable by an independent qualified accountant could receive public support and reducing transparency requirements to the minimum information necessary for the public to know what grants have been given. 

The main benefit of starting with the current EU rules, including with oversight powers repatriated to the UK, is that such a regime is almost certain to satisfy the EU in terms of its basic stated need to see a "high standard" of subsidy control. Furthermore, it would form the basis for the UK to reach agreement with the EU that the new regime supersedes Article 10 of the Northern Ireland Protocol (which can be replaced by agreement between the parties under Article 13(8) of the Protocol). This would in turn allow the UK to be subject to one clear subsidy regime rather than having to worry about potential effects on trade with Ireland and possible complications arising from the Northern Ireland Protocol accordingly.

In terms of enforcement, such a regime would be subject to oversight by the UK courts and a UK regulator, if necessary, such as the Competition & Markets Authority, or a Government Department.  

The UK Government has already shown in respect of the UK Internal Market Bill that it intends to retain overall control of the policy at a central government level, but absent a new UK law setting subsidy limits for different activities across the UK there will be nothing to control the devolved administrations or indeed the English cities and regions entering subsidy competitions to outspend each other in a bid to attract the best investments. Furthermore, the Government will lose the ability to coordinate public funding across the country towards its key objectives, be these spurring a technology revolution, tackling climate change or levelling up economically underperforming parts of the UK. 

Conclusion

The UK benefits from having subsidy control rules because these work to coordinate funding from across the whole public sector towards key economic priorities in a consistent and objective manner. Furthermore, they are a useful means to limit the use of public funding to the minimum necessary to achieve a particular objective, and prevent runaway subsidy competitions. 

Therefore it is noteworthy that the UK has removed its current subsidy control rules without first establishing a replacement and without putting in place rules to ensure that subsidies are spent in line with basic requirements, such as not being awarded when the recipient has already legally committed to deliver such support. 

The UK has had over four years to consider a new regime. With three months to go before the end of the transition period, there is no longer time to carry out a consultation for a new ambitious UK State aid regime to take effect now, but this need not prevent this happening in due course. For the immediate time being however the UK needs something to prevent a legal black hole for subsidy regulation come 1 January 2021, whatever the outcome of negotiations with the EU, and it would seem the "win win" scenario would be to start with a broad UK version of the rules the UK already manages very well with, and thus satisfy the EU for the purposes of a trade deal now, and set a foundation for the delivery of a top level UK regime going forwards in the future at the same time.  

Jonathan Branton is a partner and Head of Public Sector and Alexander Rose is a Director at DWF. Jonathan can be contacted on 3333 203 101 or This email address is being protected from spambots. You need JavaScript enabled to view it., while Alexander can be reached on 0333 320 3142 or This email address is being protected from spambots. You need JavaScript enabled to view it..