One of the most contentious points of negotiation between the UK and EU for a trade deal between was the UK’s regulation of state aid, or governmental subsidies for companies. This was always a bit puzzling as, while it was in the EU, the UK was one of the least generous donors of state aid, typically providing less than half the EU average when adjusted for GDP.
This was less an impact of the regulatory control over state aid - France and Germany provided much greater state support to their industry within the same legal and regulatory framework - but a political decision as to whether, and to what extent, government should intervene in the market.
The disagreements were of course settled on Christmas Eve, when the UK-EU Trade and Cooperation Agreement (TCA) containing a framework regulating government subsidies was agreed.
Government consultation on designing a new approach for subsidy control
The UK government has repealed the EU rules on state aid and is now looking to formulate its own legal framework for controlling state subsidies. Consequently, the Department for Business has published a consultation paper on subsidy control.
What is the purpose of the consultation?
The government is looking to establish a new subsidy control regime that reflects the UK’s strategic interests, with the aim of delivering a regime that:
- facilitates strategic interventions to support government priorities, including supporting the economy’s recovery from COVID-19;
- takes account of the economic needs of the UK’s individual nations and strengthens the economic bonds of the Union;
- protects the UK’s competitive and dynamic market economy; and
- ensures that subsidies in the UK are given in line with our international commitments including those in the UK-EU Trade and Cooperation Agreement (TCA).
Change in terminology
So where are we starting from? The first difference is a terminological one, with “state aid” now referred to as “subsidy”. The definition broadly follows the definition of state aid in the Treaty on the Functioning of the European Union.
Subsidies include any “specific financial assistance that comes from a state resource” if it gives an advantages to a business and could affect UK-EU trade. This definition (along with much of the other law relating to subsidy control) will be familiar to anyone who has dealt with the old EU regime. For instance, it will include, fiscal measures as well as subsidies strictu senso.
Although the wording of the UK’s subsidy laws has not changed substantially, there is potential for their application to be significantly different. Subsidies can be permitted where justified by a specific public policy objective, and these objectives can now diverge significantly.
Use of funding
The consultation is concerned with more than just the TCA obligations however. Devolution has given different authorities significant sums that they can spend with limited restrictions. This can allow funds to be more targeted to where they are needed, but also risks regions competing with each other to attract investment from canny companies that will play them off against each other.
For this reason, the government is proposing that public authorities will be able to design and award subsidies that serve public policy objectives, as long as they “minimise any harmful or distortive effects on competition within the UK internal market".
What are the risks of subsidies?
The risks associated with subsidies are just as real on a domestic level as they are at an international one. The commitments in the TCA are exclusively concerned with ‘material effects’ on trade, or investment flowing between the EU and the UK. However, the consultation is asking whether we should bolster the TCA’s restrictions for the UK internal market to ensure companies are not being unfairly subsidised, and the market not unduly distorted.
How will the new subsidy control regime support the economy’s recovery?
The foreword to the consultation paper emphasises the need for government spending and subsidy control as being key in enabling the country to ‘Build Back Better’.
For this reason, the consultation paper is looking for responses to help determine the best shape and form of those subsidies. This will have an impact on key sectors in particular energy and education, through the R&D framework.
In addition, the consultation paper considers whether certain types of subsidies will be exempt from any new subsidy control regime. The government intends to exclude subsidies that “are required for the purpose of defence or safe-guarding national security" from subsidy control.
The consultation paper invites responses as to whether fisheries and farmers should be exempt from the new subsidy control regime, as well as the audio-visual sector.
The consultation paper proposes a minimum threshold, similar to the “de minimis” threshold under the EU regime, but at a significantly higher value.
Where subsidies fall within the scope of the new regime, and are above the set minimum values, public authorities will have to make a series of disclosures in relation to the subsidies awarded. These include:
- details of the subsidy instrument (how it is being delivered);
- the amount, the date granted;
- the granting authority; and
- the purpose of the subsidy.
The Department for Business, Energy & Industrial Strategy (BEIS) has also indicated that "where a subsidy is provided under the terms of a scheme, rather than as a one-off subsidy, public authorities will need to provide information about the categories of beneficiary, the terms and conditions of eligibility for subsidy and the basis for the calculation of the subsidy (including any relevant conditions relating to subsidy ratios or amounts)."
BEIS recognises that this is a lot of bureaucratic effort, and some industries, or smaller subsidies would become unviable because of it. BEIS is considering reducing the administrative burden for 'low-risk' or ‘low value’ subsidies. This is another element that is being consulted on.
Establishing an operationally independent authority
The TCA requires the UK to establish an operationally independent authority that keeps an eye on how subsidies are applied, as well as giving courts powers to review subsidies independently, and to review the decisions of the authority. Unlike the EU Commission’s role in both setting policy objectives, and ensuring compliance, the consultation proposes that this is an independent policing authority only and the does not set pre-approved policy objectives.
This role would seem to naturally sit with the Competition and Markets Authority (CMA). The CMA has significant in-house expertise and, under the UK Internal Market Act 2020, the CMA is responsible for monitoring the effectiveness of the internal market, and appears to already be recruiting state aid advisers. Whoever is responsible for this role, it is important that public authorities and businesses are clear on:
- the authority’s role and responsibilities;
- what kind of guidance it will issue; and
- and whether it will be able to give binding approval to a subsidy.
This last point is particularly significant where businesses are waiting for legal certainty before committing to a project.
This is linked to the key topic of judicial enforcement and remedies for non-compliance.
When will the new subsidy control regime take effect?
BEIS have confirmed that any changes to the subsidy control regime would only take effect when new legislation providing for them comes into force. They’ve also confirmed that it will not apply retrospectively to subsidies awarded in the interim.
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