Further response to BEIS consultation on subsidy control

We publish here a further response to the BEIS consultation on a new U.K. subsidy control regime, prepared by a distinguished group of experts in the field (Professor Andrea Biondi, Anneli Howard QC, Dr Totis Kotsonis, Professor Stephanie Rickard, Dr Luca Rubini, Dr Oana Stefan, and Kelly Stricklin-Coutinho).

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Joint Working Party of the UK Bars and Law Societies on Competition Law responds to the BEIS Consultation on the new UK subsidy control regime

The Joint Working Party of the UK Bars and Law Societies on Competition Law responded to the BEIS consultation on the new UK subsidy control regime. A copy of its response is here.

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How the United Kingdom can create a better Subsidy Control system: by Jonathan Branton and Alexander Rose, DWF Law LLP

At a time when the UK is faced by the worst economic slump for 300 years[1]  it needs strong and clear Subsidy Control rules.  A lot of time and energy was expended disassociating from the sphere of EU State aid and much was achieved in negotiating the subsidies chapter of the EU-UK Trade & Cooperation Agreement (“TCA”).  Now the UK needs to deliver a strong and clear system to maximise returns from public funding, coordinate investment towards national priorities and protect the competitive landscape from the harm that can arise from the award of excessive and poorly targeted subsidies. In this article, we advocate for some pragmatic changes that can be quickly implemented by the UK Government.  If enacted, we are optimistic that these can facilitate the economic recovery through which the UK economy is re-built.

An opportunity to create a better system

The UK is currently running a consultation on whether to improve the interim Subsidy Control regime that was brought into force at 11pm 31 December 2020[2].  The UK’s interim regime was quickly created after the TCA was agreed on Christmas Eve.

Whereas the EU State aid rules were deemed too bureaucratic and rigid, the interim regime is vague and in places dis-proportionate.  This is because for most subsidies awarded there are no guarantees of legitimacy, and the new regime places a requirement on to every public body to consider all the UK’s international commitments relating to subsidies when awarding public funding.  So for example when a District Council awards a grant to a local business it is currently instructed by government guidance to create an audit trail that details how it has considered the effects of the EU-UK TCA and whether there is an “appreciable risk” of creating a dispute under the WTO’s Agreement on Subsidies and Countervailing Measures and all the other Free Trade Agreements that the UK is party to, such as those entered into with the Ukraine and Japan.  In practice, this creates significant confusion for the Public Sector at a time when we most want them to act quickly and to be able to provide legal certainty.  Furthermore, for the vast majority of the subsidies that are awarded there should be little to no controversy or risk arising anyway.

It is also noteworthy that the new rules don’t incentivise funding towards particular outcomes.  The Government states that levelling up, economic protection and R&D are important, yet the new regime has done away with any sort of preferential treatment for these sorts of investment over others.  Now there is no notional difference in the ability to subsidise investment in a new factory in Surrey or Sunderland.  Likewise there is no higher level of intervention for R&D, nor specific preferential treatment for climate change.  Whilst none of these activities are prohibited under the new regime, they are not incentivised.  Can this be right if levelling up, the climate emergency and innovation are designated government and national priorities? 

The new Subsidy Control rules do have their benefits.  The UK did well to negotiate sufficient space in the TCA for the UK to create its own system, and this provided an opportunity to address the main problem with the old regime, which was that the EU State aid rules were far too slow at providing approvals for the largest awards.  The new Subsidy Control rules enable projects to be assessed against six Common Principles set out at Article 3.4 of the TCA.  This creates new flexibilities for such projects, which can benefit Global Britain as it builds new economic sectors.  Unfortunatley, there is little to no guidance on how to apply these Common Principles, nor no assurance that they are definitely met, even for lower risk subsidies for comparatively small amounts.

As a result, the interim Subsidy Control regime seems not yet fully formed, and currently missing an opportunity to do things better.  As a Local Government lawyer told Politico[3]the new regime is probably a bit more flexible but the lack of clarity arguably negates any benefits of that“.

What should the new regime achieve?

We agree with the Government’s consultation document that: “The UK needs a subsidy control system which minimises distortions to the normal operation of a dynamic and thriving market economy, and which facilitates strategic interventions to deliver Government priorities such as levelling up and achieving net zero“.

Furthermore, we agree with the design priorities for a new regime that were circulated to the press during the 2019 election campaign, these being that the UK’s new system of Subsidy Control should seek to be:

  • clear;
  • consistent;
  • provide the ability to make awards at speed; and
  • permissive.

In our view, when it comes to the interim rules, the absence of clear guidance on the application of the Common Principles and lack of legal certainty that the tests are met undermines the first three priorities.  The new regime can be more permissive and that is a good thing considering the range of different situations that can be encountered and the number of grey areas that can arise within them.  For example, the new regime does not contain the same prohibition on support to steel manufacturing, in the manner the EU regime had done previously.  This is inherently sensible as even though this remains a sensitive sector there may be reasons why it is strategically important for the nation to be able to support such activity.  This will depend on the circumstances and a case by case approach.  However we believe flexibility need not always be at the cost of certainty, especially for lower risk situations.  Therefore in advocating further developments to the UK regime we’ve sought to focus on these points.

Clearer and more consistent rules

We believe that four broad improvements need to be made to the new Subsidy Control rules.

These are that there should be:

  • detailed guidance so there is a consistent understanding of when a subsidy is not present;
  • safe harbours that provide legal certainty for smaller, lower risk subsidies;
  • detailed guidance of how to apply the Common Principles nd therefore when they may be deemed satisfied; and
  • an independent authority which can help guide public bodies when particularly novel or exceptional circumstances arise.
  1. Clear guidance on when a subsidy is not present

Where a measure is not considered a subsidy then it is unlikely to be subject to any of the international commitments.  Therefore, the Government should support the Public Sector by providing detailed guidance that can be used to determine whether a measure is within scope. Not only will this lead to a more consistent application of the law, but it will also result in Public Sector bodies designing interventions to minimise administration. 

  • Safe Harbours for lower risk subsidies

For smaller scale, more regularly awarded subsidies, the Government should set out in statute a list of “safe harbours” or “category exemptions” which can be presumed to be compliant.  This would provide legal certainty for the many routine and small Public Sector interventions that clearly pose no significant issues.

The advantage of this approach is that it would apply lighter touch rules for lower risk subsidies.

In terms of the legal mechanism, we would anticipate that the Government would publish conditions which are deemed in advance to satisfy each of the six Common Principles.  By placing the new safe harbours on a statutory footing, measures which properly satisfy the relevant conditions would be protected from recovery under Article 3.11.5 of the EU-UK TCA.  We would anticipate that the safe harbours would incentivise funding towards particular outcomes, including levelling up, economic protection and R&D.  

Importantly, such safe harbours do not prevent interventions proceeding under the Common Principles, just as they do today.  They simply provide a route by which the Public Sector can minimise administration for lower risk, more regularly encountered awards. We anticipate this would be a popular change with both the Public Sector and organisations seeking public funding (as they can design their applications to meet the requirements for a majority of situations).

  • Detailed guidance of how to apply the Common Principles

Much of the confusion about the new regime comes from the lack of meaningful guidance on how to apply the Common Principles.  Public bodies are unsure as to whether they need expensive expert studies and this has a chilling effect on new projects.  This may be easily rectified by the publication of detailed guidance explaining how to establish whether the level of funding is proportionate, limited to what is necessary and appropriate.  Working through each of the six Common Principles at this time is difficult, but detailed guidance will assist Public Sector bodies to take a clear and consistent approach, thereby speeding up the award process.

  • Independent Authority

As set out at Article 3.9 of the EU-UK TCA, the UK should have an independent authority which oversees the Subsidy Control rules.  Our view is to make the most of the opportunities available under a new system of Subsidy Control that this should not replicate the European Commission role.  Instead it should:

  • act as an “Amicus Curiae” for public bodies, with the ability to intervene in challenge cases of note;
  • provide guidance to public bodies in novel or exceptional circumstances[4];
  • publish templates to make the award process simpler; and
  • works with public bodies and expert practitioners to identify new safe harbours for consideration by the Government.

Our view is that the independent body should ideally be located outside of London, recognising the importance of levelling up, and to seek a greater understanding of the balance of issues and challenges facing different parts of the country, while recognising that typically it is those parts of the country that have traditionally been less affluent that most need positive subsidy intervention.

Conclusion

A vague Subsidy Control regime is not an ideal basis for economic recovery[5].  Instead the UK should put in place strong statutory Subsidy Control rules that help ensure taxpayers’ money is spent wisely and are a means to ensure the State’s finite resources are allocated productively and as effectively as possible in line with government prioirities, in order to maximise economic growth. We have set out some pragmatic steps to create what we think would facilitate a better system of Subsidy Control.

Jonathan Branton and Alexander Rose, DWF Law LLP


[1] https://www.ft.com/content/96e19afd-88b3-4e8d-bc3e-a72bd1f60d3c

[2] https://www.gov.uk/government/consultations/subsidy-control-designing-a-new-approach-for-the-uk

[3] Brexit Britain’s newfound freedom from EU State aid rules may end up countering the government’s aim to boost economically deprived parts of the country.

[4] There should be no presumption of guidance being available and nor should not be a general “free advice” bureau.

[5] https://uksala.org/the-future-of-state-aid-law-in-the-uk-should-the-uk-adopt-strong-or-weak-rules/

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UKSALA second webinar on the BEIS subsidy control consultation: recording now online

For anyone who missed the second of the two UKSALA webinars on the BEIS consultation paper on a new UK subsidy control regime (focusing on the independent body and enforcement), a recording is now available here. (I should record that the video is the property of Slaughter and May, and we are grateful to them for permission to link to it.)

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UKSALA first webinar on the BEIS subsidy control consultation: recording now online

For anyone who missed the first of the two UKSALA webinars on the BEIS consultation paper on a new UK subsidy control regime, a recording is now available here.

Details of the second event, on Monday 22 March at 5pm, are here.

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The Power to Get it Wrong by Dr Stephen Daly (King’s College London)

The assumption underlying competition (and antitrust) rules is that competition is good. As interventions by the State may create distortions to competition, then they are to be governed. Thus, State aid rules regulate the assistance that governments may provide to economic actors.

But the rules do not and should not seek to eliminate all market distortions created by government. We do not live in a state of nature where barter is the norm and markets are truly free. Governments provide rules, infrastructure, goods and services for instance that influence the goods and services that are provided on the market. Taxes are raised to pay for government action and choices must be made in respect of both the tax base and rate. The result is that government action will necessarily have a distortionary effect on the market.

The task of the State aid rules as a result cannot be to prevent or eliminate all distortions of the market by governments but to draw a line between those interventions that are legitimate and those that are not. Where that line should be drawn is a contested issue, particularly today in the context of tax administration. The tax authorities of Belgium, Gibraltar, Ireland, Luxembourg and the Netherlands are alleged to have given unduly favourable tax rulings to multinationals in departure from the underlying tax rules and that this constituted State aid. The amounts at stake in the tax ruling cases are staggering. Apple may for instance owe up to €13 billion to Ireland.

Much of the discussion on the cases to date has focused upon whether the Commission has properly interpreted and applied the relevant tax rules. This however is the wrong starting point. A misapplication of the relevant tax rules alone should not be sufficient to give rise to State aid concerns, contrary to the Commission’s stated position.

Were this the case, serious practical consequences would follow. First, the Commission would have significant power to oversee tax administration. It would seem that a taxpayer simply paying less tax than due, where the difference is anything other than de minimis, could give rise to State aid concerns. One would also expect that taxpayers in the future, looking for assurance as to the consequences of tax arrangements or transactions, would first ask the relevant tax authority (or authorities) and then lobby the authority (or authorities) to get State aid clearance from the Commission. In effect, the Commission would become a quasi-tax authority itself – a supranational tax authority!


At the same time however, it cannot be doubted that there should be oversight of the actions of tax authorities when it comes to their dealings with taxpayers. There must be some external limit on tax authorities’ powers to hand sweetheart deals to favoured actors.

In order to bridge the gap, I suggest in an article just published in the April issue of the Law Quarterly Review (“The Power to Get it Wrong”) that, both as a matter of national and EU law, tax authorities can misapply the law within the limits imposed by public law. This shifts the focus away from figuring out correct transfer pricing and other complex tax calculations to matters that we are ultimately concerned with, such as whether a tax authority has deliberately colluded with a multinational in order to give it a tax break, or has had the wool pulled over its eyes, or has failed to follow its own processes to ensure parity of treatment between taxpayers and so on. Only once unlawfulness has been demonstrated do we then have to consider whether less tax has been paid than is due.

This does not mean that the Commission’s current investigations are without merit. Indeed, applying this approach to the Apple case generates reasons for thinking that the Revenue Commissioners breached Irish administrative law.

The article was accepted for publication long before it became clear what the UK’s post Brexit relationship with the EU would be in respect of the State aid rules and was essentially “at the printers” when the Trade and Cooperation Agreement (TCA) was finally reached late in December 2020. The level-playing field provisions of the TCA in any event mirror the State aid provisions of the Treaty on the Functioning of the European Union in all material respects for tax purposes.

The proposition in my article that the focus should be on the lawfulness of the tax authorities’ actions should equally apply then to actions of HMRC with regards the level-playing field provisions. In order to determine, under the new regime, whether HMRC has provided a “subsidy” through for instance tax rulings, settlements or guidance, it is suggested that the “independent authority” (LPF Article 3.9) or court (LPF Article 3.10) that has to decide that question should ask itself whether HMRC’s decision could successfully be challenged on standard public law grounds (for example error of law or irrationality) as the basis for determining whether a “specific advantage” arises. That test could be incorporated either: 1) as part of the “normal tax regime”, thereby meaning no “advantage” arises unless HMRC has acted unlawfully, or 2) into the principles that justify discrimination between comparable taxpayers, meaning a reduction in tax ordinarily borne is not “specific” if HMRC’s dealings with the relevant taxpayer could not be successfully challenged on public law grounds. An obvious practical advantage of this approach is that whatever court gets the task of reviewing decisions under Article LPF.3.10 will already be familiar with public law principles.

The full citation for the article is Stephen Daly, “The Power to Get it Wrong” (2021) 137(2) Law Quarterly Review 280 and it is available on Westlaw. Email: stephen.daly@kcl.ac.uk

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UKSALA discussions on the future of UK subsidy control

The Government’s consultation paper “Subsidy control: Designing a new approach for the UK” sets out its ambition for a new subsidy control regime that addresses the specific needs of the UK economy whilst also meeting the UK’s international commitments (including, but not only, under the terms of the TCA). The consultation raises challenging questions on how the new regime should be designed in order to meet those objectives, and how the interests of granting bodies, beneficiaries and other interested parties can be addressed and balanced. UKSALA members have a wide range of perspectives on the issues raised that we would like to capture and share as part of UKSALA’s contribution to this debate. Please join us by registering here for a lively discussion on some of the key points raised by the discussion at two webinars, to be hosted by Pinsent Masons and Slaughter and May.

Webinar 1: All change? The future substantive rules on subsidy control Wednesday 17 March 2021 17:00 – 18:15

This session will discuss the scope and limits on the concept of “subsidy” as used in the TCA, theextension of subsidies rules to the UK internal market, the role of the joint declaration on subsidiesand the scope for formal exemptions and safe harbours from the regime.

Chair: The Honourable Mrs Justice Bacon

Speakers:

Dr. Totis Kotsonis, Pinsent Masons LLP

Nicole Robins, Oxera

Alexander Rose, DWF Law LLP

James Webber, Shearman & Sterling LLP

Webinar 2: Complaints, Challenges and Opinions: the role of the Independent Body and the courts

Monday 22 March 2021 17:00 – 18:15

This session will focus on how the procedural aspects of the new regime could best be calibrated inorder to meet the obligations in the TCA. In particular it will discuss the role of the proposedindependent body and the courts, from the point of view of the aid giver, the aid recipient, andcomplainants.

Chair:Christopher Vajda QC, Monckton Chambers, Former Judge CJEU

Speakers:Emily Neill, Blackstone Chambers

George Peretz QC, Monckton Chambers

Aidan Robertson QC, Brick Court Chambers

Isabel Taylor, Slaughter and May

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UK Government launches consultation on new Subsidy Control rules

By Jonathan Branton and Alexander Rose, Partners, DWF Law LLP

  
 
 The UK Government has launched a public consultation to consider and inform the further development of its ambitious new Subsidy Control regime.  

The consultation is open from 3 February until the end of March 2021 and seeks the views of stakeholders from across the United Kingdom in order to create a new framework of rules to ensure subsidies most effectively support UK priorities now the UK has left the European Union, and now that the previous EU State aid regime is for the most part no longer applicable. 
 Introduction

The Department for Business, Energy and Industrial Strategy (DBEIS) has launched the Subsidy Control consultation which seeks views from across the United Kingdom to shape the design of the UK’s domestic Subsidy Control regime.  

The UK removed the direct effect of EU State aid law at 11pm 31 December 2020[1].  The interim Subsidy Control regime was set up at short notice and is a “bare bones” regime.  This involves public bodies making assessments of the compliance of subsidies they award against five criteria, these being the UK commitments set out within:Part Two, Title XI, Chapter 3 of the EU – UK Trade & Cooperation Agreement  (“TCA”); Article 10 of the Northern Ireland Protocol; the Withdrawal Agreement; WTO rules[2]; and  other non-EU trade deals[3].

The TCA contains the primary elements of the new Subsidy Control regime.  This covers such issues as to what sort of public interventions qualify as a subsidy, and how these should be evaluated by awarding authorities in order to be considered lawful.  Awards of subsidy may be challenged through judicial review in the national court if, in particular, they fail to show due consideration of six Common Principles for subsidy compliance agreed within the TCA.  

The TCA does not provide for a regulator to replace the role previously performed by the European Commission in the EU State aid regime, in terms of adjudicating what subsidies may be deemed in compliance, and conveying exemptions to subsidies examined by it, either individually following notifications of proposed awards, or by reference to specific categories of limited interventions that may be deemed automatically exempted (ie. the previous so-called “block exemptions” or “safe harbours” under which the vast majority of awards of State aid under the previous regime were granted).

The new regime is more permissive and seeks to be less bureaucratic than the EU State aid regime, however for many public bodies the interim Subsidy Control regime has created greater administration and increased uncertainty.  This should not need to be the case however, indeed with some relatively straight forward adjustments, it is felt by many that the new regime could work better than the previous regime. 

The new consultation affords an opportunity for all stakeholders to input into the further development of a new improved system.  It will therefore no doubt be welcomed across the UK, both by public bodies administering funding and businesses seeking awards. 

The Subsidy Control Consultation

The consultation features 43 questions on a wide range of subjects including the responsibilities of an independent authority which will oversee the new system of Subsidy Control and which kinds of subsidy should be considered at high-risk of causing harmful distortion to the UK internal market.  

The consultation is split into three chapters.  The first is an introduction which makes the case for Subsidy Control rules.  In doing so, the consultation notes that it is advantageous to have rules which prevent subsidies which are wasteful or have a negative impact upon the economy. Likewise, well targeted subisides can help achieve positive outcomes such as helping drive greater investment in R&D or contributing to achieving the UK’s net zero objectives.  That the UK is committed to a Subsidy Control regime is in any event assured, not least by the TCA, but it is helpful to be mindful of the founding principles of why this matters.

The second chapter focusses on the objectives of the new regime. The Government lists these as: • Facilitating interventions to deliver on the UK’s strategic interests • Maintaining a competitive and dynamic market economy • Protecting the UK internal market • Acting as a responsible trade partner  These are all important and emphasise how an effective Subsidy Control regime can not only help to stimulate and maintain an effective and dynamic economy, but also to pursue specific policy objectives such as “levelling up” and assisting disadvantaged regions.  

The third chapter focusses upon the detail of the new regime and contains most of the questions.  The chapter is prefaced by a statement that the “the UK has the freedom to design a domestic subsidy control regime that works for the specific needs of the UK economy while meeting our international commitments.”  Therefore although there are significant opportunities, the new regime will need to take account of the existing commitments. The consultation proposes an additional potential Common Principle by which compliance might be judged alongside the other six set out in the TCA.  This is that “Public authorities should seek to minimise any harmful or distortive effects on competition within the UK internal market that may arise from a subsidy“.  There is little explanation as to how such a rule would apply and what kind of measure it would catch.  For example, would it make awarding a subsidy in Berwick upon Tweed (ie. a location near a border between one of the four countries within the UK) more difficult than in Brighton?  

Conclusion


The launch of the consultation is to be welcomed as it gives all stakeholders within the United Kingdom the opportunity to help shape a better, more efficient Subsidy Control regime.  It is in everybody’s interest to have a faster, clearer system which directs public funding to economic priorities.  Although the Government is naturally eager to distance itself from the EU system, it may be better to take ideas from that system which have worked well (for example safe harbours to incentivise investment into disadvantaged areas and generous intervention rates for R&D) and to make new, better rules for elements which have been problematic and perhaps overly rigid (eg. the undertaking in difficulty test).  This is a new era and the UK needs to make the most of the opportunities available.  

Subsidy Control Consultation questions  

Question 1: What type of subsidies are beneficial to the UK economy?  
Question 2: What type of subsidies are potentially most harmful and distortive?  

Question 3: Do you agree with the Government’s objectives for a future subsidy control regime? Are there any other objectives that the Government should consider?  

Question 4: We invite respondents’ thoughts on further sources of evidence that would help to strengthen our analysis of policy impacts. In particular:  • Additional datasets (other than the European Commission’s Transparency Award Module) on local or regional subsidy awards (e.g. by value, sector or category)  • Research and evaluation projects that have been conducted on the impacts of different types of subsidy awards on domestic competition and trade (e.g. by value, sector or category)  
Question 5: We invite respondents’ views on whether our proposed subsidy control regime, including the way it functions, may have any potential impact on people who share a protected characteristic (age, disability, gender re-assignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex (gender) or sexual orientation), in different ways from people who don’t share them. Please provide any evidence that may be useful to assist with our analysis of policy impacts.  
Question 6: Do you agree with the four key characteristics used to describe a support measure that would be considered a subsidy? If not, why?  
Question 7: Should there be a designated list of bodies that are subject to the new subsidy control regime. If so, how could that list be constructed to ensure that it covers all financial assistance originating from public resources? 
Question 8: Do you think agricultural subsidies in scope of the AoA and fisheries subsidies should be subject to the proposed domestic arrangements? If so, what obligations should apply?  
Question 9: Do you think audio-visual subsidies should be subject to the domestic regime? Please provide a rationale for your answer.  
Question 10: Do you agree with the inclusion of an additional principle focused on protecting the UK internal market by minimising the distortive effects on competition? Question 11: Do you think there should be any additional principles?  
Question 12: What level of guidance or information would be helpful for public authorities to assist with their compliance with the principles?  
Question 13: Should the threshold for the exemption for small amounts of financial assistance to a single recipient replicate the threshold in the UK-EU Trade and Cooperation Agreement at 325,000 Special Drawing Rights over a three-year period? If not, what lower threshold would you suggest and why?  
Question 14: If you consider the small amounts of financial assistance threshold should replicate the UK-EU Trade and Cooperation Agreement, should it be fixed at an amount of pound sterling (GBP)? 
Question 15: Do you agree that subsidies under the proposed small amounts of financial assistance threshold be exempt from all obligations under the domestic regime, except for the WTO prohibitions? If not, why?  Question 16: Should relief for exceptional occurrences be exempted from obligations regarding principles, prohibitions and conditions in the subsidy control regime?  
Question 17: Should subsidies granted temporarily to address a national or global economic emergency be exempted from the rules on prohibited subsidies and any additional rules set out below?  Question 18: Should the threshold for the exemptions for Services of Public Economic Interest replicate the relevant thresholds in the UK-EU Trade and Cooperation Agreement at 750,000 Special Drawing Rights over a three-year period, and for transparency obligations at 15 million Special Drawing Rights per task? If not, what lower threshold would you suggest and why? 
Question 19: If you consider the SPEI thresholds should replicate the UK-EU Trade and Cooperation Agreement, should they be fixed at an amount of pound sterling (GBP)?  
Question 20: Do you agree with the Government’s approach to prohibitions and conditions? Should any types of subsidy be added to either category? If so, why?  
Question 21: Would more detailed definitions of any of the terms set out in this section, including the definition of “ailing or insolvent enterprises” be useful to ensure a consistent and proportionate? approach to compliance? If so, what should these be? 
Question 22: Should the Government consider any additional ways to protect the UK internal market, over and above the inclusion of a specific principle to minimise negative impacts? If so, what?  
Question 23: Would an additional process for subsidies considered at high-risk of causing harmful distortion to the UK internal market add value to the proposedprinciples? If so, how should it be designed and what criteria should be used to determine if the subsidy is at high-risk of causing distortion? Question 24: Should public authorities be obliged to make competition impact reviews public? If not, why?  
Question 25: Should public authorities be permitted to override competition impact review e.g. in the case of emergencies? If so, why? 
Question 26: Should there be additional measures to prevent subsidies that encourage uneconomic migration of jobs between the four nations?  Question 27: Could additional measures help ensure that lower risk subsidies are able to proceed with maximum legal certainty and minimum bureaucracy? What should be included within the definition of ‘low-risk’ subsidies?  Question 28: What guidance or information would be helpful for public authorities to assist on lower risk subsidies?  
Question 29: Should the specific rules on energy and environment subsidies apply only in so far as they are necessary to comply with trade agreements? Or should they apply under the domestic regime more generally?  
Question 30: Which sectors or
particular categories of subsidy (such as for disadvantaged areas, R&D, transport, skills etc) would benefit from tailored provisions or specific guidance on subsidy control? If so, why, and what should the nature, extent and form of the provisions be?  
Question 31: Do you agree with the proposed rules on transparency? If not, why? 
Question 32: Do you agree that the thresholds for the obligation on public authorities to submit information on the transparency database should replicate the thresholds set for small amounts of financial assistance given to a single enterprise over a three-year period and for transparency for SPEI?  
Question 33: If not, should the threshold be lowered to £175,000 over a three-year period to cover all reporting obligations for Free Trade Agreements, enabling all of the UK’s international subsidy transparency obligations to be met through one database? 
Question 34: Should there be a minimum threshold of £50,000 below which no subsidies have to be reported?  
Question 35: Do you agree that the obligation should be to upload information within six months of the commitment to award a subsidy? 
Question 36: What should the functions of the independent body be? Should it be responsible for any of the following: • information and enquiries;• review and evaluations;• subsidy development advice;• post-award review; and/or,• enforcement. 
Question 37: Should any review of a subsidy by the independent body consider all the principles, and the interaction between them, or only some principles, and if so which ones?  
Question 38: What role, if any, should the independent body play in advising public authorities and reviewing subsidies before they have been awarded?  
Question 39: If the independent body is responsible for post-award review, what types of complaints should it be able to receive and from whom?  
Question 40: Which, if any, enforcement powers should the independent be given? In what circumstances could the body deploy them? What would be the routes of appeal and the interaction with judicial enforcement?  
Question 41: How should the independent body be established in order to best guarantee its independence and impartiality when exercising its operational functions?  
Question 42: In addition to the application of time limits, are there any other considerations for implementation of the recovery power?  Question 43: Should a specialist judicial forum such as the Competition Appeals Tribunal hear challenges to subsidy schemes and awards? If not, why?    
 Jonathan Branton 
Alexander Rose  

[1] State Aid (Revocations and Amendments) (EU Exit) Regulations 2020

[2] Including the Agreement on Subsidies and Countervailing Measures, the Agreement on Trade Related Investment Measures, the General Agreement on Trade in Services and the Agreement on Agriculture. 

[3] The guidance refers to Canada, Japan, Israel, Jordan, Kosovo, Morocco, Palestine, Tunisia, Ukraine and Georgia

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Taking advantage of the opportunity presented by the UK’s new subsidy control regime – by James Webber (partner, Shearman & Sterling)

The Trade and Cooperation Agreement (TCA) represents a deregulation of subsidy control in Great Britain on a massive scale.  Under a new reformed regime, the UK can:

  • simplify and speed up approvals for productivity-enhancing projects, helping to attract globally mobile inward investment;
  • improve research and development collaboration, enhancing the UK’s competitiveness; and
  • enable regional fiscal policy to support regional investment and the Government’s levelling up agenda.

However, achieving this outcome requires that everyone in the system – especially public funding bodies, and BEIS – break from the old EU State aid framework. This will involve difficult cultural change.  Yet, if we merely aspire to shadow the EU State aid rules the UK would be giving up the advantages of a new regime – won at the cost of increased trade friction with the EU – and prioritising the interests of the EU over itself.   Whatever your views on the terms of that bargain, it has now been struck.  It would be wrong and unfair not to use the new freedoms to the fullest extent possible to help our country grow and become more productive.

The State aid rules operate to protect a single market Great Britain is no longer a part of.  The Government now needs to set the new direction.  BEIS should issue additional guidance within the next month explaining how to apply the principles behind the subsidy control framework in the TCA.  This can and should come ahead of the planned full consultation on the new UK regime.

This short paper explains: (1) why the TCA regime is so radically different; (2) what the UK has agreed with the EU for its new subsidy policy; (3) the guidance which BEIS should now publish – ahead of its pending consultation on the new regime – to smooth the path.  This would ameliorate any uncertainty created by the significant and sudden change in approach arising from Brexit.  Section (4) briefly discusses the intersection of the ideas in this paper and the Northern Ireland Protocol.

  1. What is new?

The TCA subsidy control regime takes great care to allow for a new approach.  It avoids EU State aid terminology. This is not a peevish change. It reflects the fact that the UK and EU have agreed an approach to subsidies that is fundamentally new, and different from the EU approach – both procedurally and substantively.  There are four key changes.

First, subsidies caught by the TCA are not prohibited[1] and there is no suspensory effect, which means that any subsidy measure has immediate effect and is not suspended pending its approval.  So there is no uncertainty associated with whether domestic measures constituting the grant of a subsidy are lawful.  Unlike under the EU regime, there no basis to enjoin such a measure pending the approval of the EU Commission.[2] 

Second, the measure must actually affect trade or investment between the UK and the EU.   There must be some reasonable likelihood of actual competitive advantage for UK traders over EU ones (or vice versa).  That’s a very large change.

Effect on trade or investment will be interpreted by an independent arbitral panel.  An arbitral panel in relation to Dominican Republic-Central America Free Trade Agreement – in one of the few cases where such issues have been considered – found that “affecting” included “the notions of influencing or making a material impression upon that which is affected”[3] and that the measure must be “likely to confer a competitive advantage on a [firm] engaged in trade between the parties.”[4]  The panel specifically dismissed the argument that affecting trade meant any instance of underenforcement of the rules relating to unfair dismissal and unpaid wages , necessarily affects trade once it is shown that the employers save costs that they would have otherwise have incurred.[5]  This is the opposite of the usual reasoning in EU law – where an “effect on trade exists as soon as a financial support from State resources strengthens the position of an undertaking compared with other undertakings in a market subject to trade”.[6]  This reasoning is the route by which the Commission and ECJ usually asserts effects on trade in State aid without having to show any evidence that such effects are plausible.  

There are many instances in which there is a strong argument a UK subsidy would not confer such a competitive advantage over the EU in trade.  The UK position on each of these points should be assertive and maximise the flexibility offered by the TCA:

  • Smaller subsidies: A subsidy needs to be large to confer a genuine competitive advantage.  Otherwise the effect would be too small or diffuse to be discernible.  Subsidies sufficient to create an effect would almost always need to be substantially larger than the de-minimis threshold of SDR325,000 (about €380,000) over three years specified in Article 3.2.4 of the TCA – which should be considered merely a safe harbour or floor – rather than the starting point for effects.
  • Domestic supply chain: a subsidy to firms higher up the domestic supply chain not engaged in trade with the EU is very unlikely to affect EU trade, since that firm is not engaged in trade between the parties.  For example in the Guatamala CAFTA-DR case  noted above the US challenged any failure to enforce labour laws as liable to distort trade and competition.  But the panel drew the line much higher. In fact, the mere fact that a firm benefitting from underenforcement of labour rules was engaged in trade or in a traded sector was insufficient to engage “affecting trade” provisions of the trade agreement;[7]
  • Non-tradeable goods or services: This may include large elements of real estate, local heat or power generation, labour, training or domestic transport services.  Again, any indirect effects would almost certainly be too small and diffuse to be caught.
  • No EU investment counterfactual: where an investment or research subsidy did not involve competition with an alternative in the EU, for example because the alternative was in the US or China etc., this is unlikely to be caught.
  • Matching subsidy: where a UK subsidy serves to neutralise the effect of an EU subsidy, no competitive advantage is granted to a UK subsidy recipient; rather, a disadvantage is mitigated. This doesn’t mean each company hasn’t received an ‘advantage’ in subsidy terms. It means that the two advantages cancel each other out thus generating no net effect on trade and investment between the EU and UK.
  • No EU competitor to affect: where a subsidy is given to a firm (or for a product or service), other than perhaps to secure a mobile investment, when it has no EU competitors against whom an advantage can be obtained (e.g. specialist manufacturers or tech companies), this is also very unlikely to be caught.

Third, domestic enforcement is to be done through the courts – not publicly through notification in advance. This is a large shift, even if the UK’s domestic regime reintroduces a degree of ex ante supervision (for example through a voluntary notification regime). An enforcement claim implies that a claimant company has suffered a significant enough harm to make litigation worthwhile.[8] This means that enforcement effort will be focused on those subsidies that are most likely to be distortive. Both sides to the litigation will appear before an impartial judge.  The outcome will depend on the quality of the argument and evidence they can each muster.   The granting authorities and beneficiaries of any subsidy do not have to consider the reaction of a political or administrative decision-maker whose interpretation of the rules and standard of evidence is effectively final for the vast majority of projects. This should lead to far fewer but higher quality decisions.

Fourth, compatibility with the TCA in the UK is measured against ‘principles’. These are assessed by the granting body itself not by an equivalent of the European Commission,[9] subject to the supervision (in the UK’s case) of the domestic courts. This means that the principles will not necessarily be implemented the same way by public authorities within the UK and between the UK and EU’s granting authorities.  This is not a problem – i.e. it is a feature not a bug.

  • The ‘principles’ the UK has agreed to apply and what they mean in practice

In the TCA, the UK has agreed to apply certain high level ‘principles’ in setting its new subsidisation policy.  These principles, set out in the table in section 3 of this paper, are sensible and loosely-drafted propositions.  They answer the basic questions that arise for the UK in considering its approach.  The central questions for the granting of subsidies should be the same as any other economic policy decision: how does this subsidy expand growth and productivity? How will it help the UK compete for investment? How does it protect the UK’s Union while doing so? Do the costs of a particular scheme outweigh the benefits for the country as a whole?  While it is also necessary to consider how any proposed subsidy ensures compliance with the UK’s international treaty obligations, this is a second order issue that can and should absorb only a small amount of resource and effort.  This hierarchy should not be controversial.  The EU State aid regime is also almost entirely inward looking and spends very little (if any) time considering the EU’s international law obligations.

The principles satisfy these objectives and are all features of good subsidy policy. There is no one way to comply with them. 

A good example of how different approaches may still satisfy the relevant principle is the principle that subsidies must be proportionate and limited to what is necessary to achieve the objective.  Any UK granting authority will need to choose for itself how to evidence this in designing a scheme.  There are a large number of options and techniques.  These include:

  • A subsidy competition. This is how subsidies for renewable energy projects are often determined. The bidder with the lowest (i.e. most proportionate) subsidy will be the winner of the competition. 
  • Impose an overage provision – which allows clawback of larger than expected development profits. This may be particularly relevant in real estate regeneration ‘gap’ projects, whereby the development profit is not expected to recoup the entire investment required.  The aid can then be tailored to exactly the amount that turned out to be necessary.
  • The authority could ask for evidence demonstrating the difference between the net present value of the project with and without the subsidy – and compare that against a counterfactual or investment hurdle rate.
  • Expert evidence that the subsidy is the minimum necessary.   

These techniques are not new and have all been used in State aid practice.  But there is a fundamental difference in how a UK granting authority can decide to use them.

It is for the granting public authority to decide for itself the approach to adopt.  There is no longer a need to consider the terms of the EU’s General Block Exemption Regulation (GBER) or the relevant Commission guidelines.  Subject to any challenge in the UK domestic courts, the UK authority just takes a view of what makes most sense in order to demonstrate that the aid is proportionate – which itself is likely overlap anyway with good economic policy-making and the National Audit Office’s “value for money” assessment.

There is no aid ceiling overlay to any test for proportionality.  For EU State aid, the minimum aid necessary is benchmarked against an aid intensity ceiling. This means that regardless of how much aid is offered or needed, the EU rules put a hard cap on the amount that can be paid in area x for project y.  This ceiling concept is hard wired into the rules and used very extensively. Some ceilings vary according to the regional aid map, which shows the aid that can be paid in each region of the EU. But they also vary with the size of the beneficiary company, the type of research that is being carried out, the type of costs the aid is used to support capital, training, other operational costs and many other factors.  

Ceilings are designed to ensure that wealthier parts of the EU are not able to outspend the poorer parts and that – very roughly – aid is pointed at the right places with modest impacts on the single market.  That’s a reasonable policy design choice within a 27 member state single market.  But it is not a good approach for the UK.  Aid ceilings are administratively burdensome. Their use triggers mostly wasted work to calculate eligible costs, gross grant equivalents, scaling down etc. and consideration of which project or beneficiary qualifies for a particular ceiling – and they are anyway only a proxy for the real question of whether the distortive effects of the subsidy outweigh the benefits.

Further, ceilings are entirely superfluous for spending centrally controlled by the Government – since the UK Government can consider the effects on the union when deciding whether to spend the money in the first place. For spending by regional, local or devolved administrations, some mechanism will be needed to avoid subsidy races damaging the union – this needs to be considered as part of the consultation on the new UK regime.  In my view, this is likely to involve adding to UK internal market legislation a set of subsidy measures that are especially damaging to the UK union – such as a subsidy to move jobs from one area to another.[10]  Subsidies of this type – or otherwise large or contentious – may then be considered ex ante by an appropriate authority such as the Office for the Internal Market. This ex ante review could be a mix of compulsory – for subsidies that are especially likely to be damaging to the union and voluntary – if beneficiaries want the certainty of prior approval – in a similar way to how the CMA merger control regime works.  

Not just aid ceilings, but all familiar distinctions used in the Commission guidance and GBER have now gone in Great Britain.  There is no difference between large and small companies.  There are no development areas, no undertakings in difficulty[11], no need to consider single investment project, or the distinction between fundamental research and development research.

All of these changes remove very large amounts of wasted effort, complexity and expense from the subsidy control system.  It is still however a sudden and large departure from prior practice – in an environment before a full UK regime has been introduced.  So guidance from Government can play a crucial role to help with immediate uncertainties and to feed into the regime proposed in its consultation.  

  • What should the new BEIS Guidance now say?

The Government issued guidance on 31 December 2021,[12] summarising the UK’s international law obligations and the definition of subsidy.  However, this does not provide meaningful guidance on how to apply the TCA principles discussed above.[13]  The danger in leaving this gap is that decision-makers default to applying the old EU rules.  The UK would then lose the benefit of the policy flexibility under the TCA.

This note sets out some guidance that BEIS could issue, which is based on building out Annex 2 to the BEIS guidance issued on 31 December.  

Draft Guidance for Applying the Principles[14]

The principles below overlap to a limited extent with the GBER and European Commission guidance and common assessment principles. Some concepts from that guidance and practice may still be useful in applying these principles but the great majority of the distinctions and concepts in the GBER and Commission guidance are no longer relevant and should be discarded. For instance, there are no aid ceilings, no eligible costs, no SME or large company distinctions, no regional aid map, no single investment project issues, no distinctions between different types of research and development spend or training, no EU standards against which environmental protection subsidies are measured, and no exclusions for or concept of undertakings in difficulty[15].

It not necessary for public authorities to comply with GBER or any other EU State aid rules – except where in cases affected by the Northern Ireland Protocol.  If this is potentially an issue for a particular project, it should be discussed with BEIS as early as possible.

The table below discusses some ways in which public authorities may approach compliance with the principles. This is illustrative and not intended to be exhaustive.

PrinciplesRoutes to satisfy the principle
The subsidy pursues 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”).Identify an objective. What is the problem public money is being spent on to alleviate?   Incorporate the objective into your grant offer letter or scheme design and rationale.
The subsidy is proportionate and limited to what is necessary to achieve the objective.Choose a method to demonstrate the aid is limited to the minimum necessary relative to the objective. Public authorities are best placed to decide what is reasonable for their scheme or measure. Options include but are not limited to:   Non-discriminatory subsidy competition; Overage or claw back provisions (for example of development profit in real estate development subsidies)Review of beneficiary internal documents comparing the gap with a plausible counterfactual Expert report or assessment of the subsidy amount required to create the desired incentive effect.  
The subsidy is 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 the subsidy being provided.For a scheme this would typically be incorporated into the exercise to define a proportionate way to achieve the scheme’s objective.   If further work were considered desirable, consider what evidential basis there is for choosing a subsidy as a way to ameliorate the identified problem?  This may include legislative impact assessments, internal or expert consultant reports, study of prior policy outcome or similar work.  It need not be exhaustive and clearly not more extensive than was the case under the EU State aid rules.   Incentive effect for an individual aid would typically require the subsidy application to be made before the project started. For larger sums, authorities may consider it appropriate to seek disclosure of beneficiary internal documents.  
The subsidy should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.In many cases this will be verified by the prior steps or assessment of effects.  Subsidy schemes that merely provide corporate welfare for existing activities rather than generate additional activity are unlikely to constitute value for money and are likely to be distortive.   This principle could be satisfied by:   A subsidy competition.  Since this will return zero (or negative) subsidy if the activity would be carried out anyway.    Likewise, internal modelling of the NPV of an investment will show whether the subsidised investment required the subsidy. This is especially so if the public subsidy is much smaller than the investment made by the private company and if there is a mechanism for the public authority to participate in any unexpected upsides.   For public service obligations, use of competitive tendering would establish this (and indeed most of) the principles are satisfied.  
The subsidy is an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means.This should be incorporated into the same reasoning used for defining an objective and the evidential basis for choosing subsidy as a policy response.
The subsidy’s positive contributions to achieving the objective outweigh any negative effects, in particular the material effect on trade or investment between the Parties.While new, this does not require substantial assessment except for the largest subsidies in the most trade sensitive sectors.  For instance, the EU anticipates complying with the TCA obligations using its existing State aid rules, yet these require no systematic or empirical assessment of effect on trade and competition.    The following are likely to generate significant adverse effects:   The aid takes place in a market in structural absolute decline provided such goods or services are traded in a material way with the EU or with other competitors in the UK;The aid causes the beneficiary to close down the same or similar activity elsewhere in the UK or in the EU; orThe aid causes, against an evidenced counterfactual, an investment project to move from elsewhere in the UK or the EU.   The following are unlikely to generate adverse effects:   Subsidy to firms not involved in direct trade with the EU; Subsidy that changes investment behaviour from outside the UK or the EU;Subsidy to firms that do not have competitors elsewhere in the UK or the EU;Subsidy that matches or neutralises the effect of subsidy in another trading partner (including the EU); Subsidy below £5m per beneficiary per year; and Subsidy granted via open non-discriminatory competition.   The following considerations may be relevant to assessing effect on trade and investment of other subsidies. It is not necessary to assess all these factors or to do so in great depth. For example, the EU State aid rules do not assess these issues systematically.   The granting authority should be aiming to roughly estimate the extent of any effects – which may then be balanced against the objective the subsidy is intended to pursue.   Subsidy scale: Proportion of variable or capital cost that a subsidy represents for the beneficiary firm. The lower the proportion covered by the subsidy, the lower the likelihood of effects on that firm’s competitiveness. Size of the market: the larger the market, the larger a subsidy needs to be in order to have a plausible effect.Market share of the beneficiary: beneficiaries with higher market share are more likely to trade across the UK or across border with the EU.Payment cadence: The longer the payments persist the greater the likelihood of effects. Extent of EU trade in the good or service produced by the beneficiary firm. The greater the extent of trade the higher the likelihood of effects. Barriers to entry: subsidies can either lower or raise barriers to entry. Giving incumbent firms protection from entry or exit is more likely to cause adverse effects on trade and investment than subsidies to new entrants to assist in overcoming barriers.   Any adverse effects must then be weighed against the positive effects of achieving the objective.  It will often be possible to remedy negative effects by altering the design of the subsidy.  This would also be consistent with good economic policy design and value for money practice.    
Where relevant, record consideration against Article 3.5 [Prohibited subsidies and subsidies subject to conditions], including consideration of whether that subsidy has or could have a material effect on trade or investment between the Parties.These types of subsidy are unusual and the provisions of Article 3.5 itself are prescriptive.   Please discuss with BEIS or your advisers if unsure how to comply with these provisions for a given measure or scheme.  
  • Interaction with the Northern Ireland Protocol

The Withdrawal Agreement (specifically Article 10 of the Northern Ireland Protocol) applies the entire EU State aid rulebook to UK subsidies which may affect trade in goods between Northern Ireland and Ireland.  The extent of what affects trade means is obviously important to a new UK regime based on the TCA.

The Commission published a paper on 18 January 2021[16] suggesting that “affect trade” in this context should be interpreted to catch any aid to company that “trades with” Northern Ireland.  For example, a bank in London that has a corporate client in Northern Ireland; or Nissan in Sunderland that sells cars in Northern Ireland etc.

This is notwithstanding the fact that companies in Great Britain are outside the single market and customs union. The Commission’s approach is antagonistic and unworkable.  While the Commission’s views are not legally determinative and no more relevant than the UK Government’s, asserting their position in such a way may cause confusion and uncertainty for UK public authorities and companies.  It’s important therefore to briefly note how the BEIS guidance should provide comfort to UK undertakings and public authorities.

First, BEIS existing guidance of 31 December 2020 correctly stated that the Protocol provisions primarily apply to aid to companies trading in goods located in Northern Ireland.

Second, BEIS again correctly, noted that “subsidies granted in Great Britain are only in scope of Article 10 where there is a clear benefit from and a genuine, direct link between the subsidy and companies in Northern Ireland.”  This view is based on a unilateral declaration made by the EU about the its interpretation of Article 10 – given as part of the settlement of the dispute about provisions of the UK’s Internal Market Bill.

The declaration goes to the EU’s international law obligations under the Withdrawal Agreement and is not itself a question of EU law. The declaration starts by saying “When applying Art. 107 TFEU to situations referred to in Art. 10(1) of the Protocol, the European Commission will have due regard to Northern Ireland’s integral place in the United Kingdom’s internal market.”

Its purpose is to modify or reinterpret the usual approach to effects under EU law for the specific circumstances of Northern Ireland. That modification was then expanded upon to say that the link to Northern Ireland must be genuine, direct and evidenced by reference to real foreseeable effects. This is a substantially higher threshold than affecting trade between Member States in the State aid case law of the ECJ.  Such a higher threshold is also logically consistent with GB firms (unlike NI firms) being outside the customs union and single market.  

The Commission’s suggestion that the declaration changes nothing and that the usual approach in EU law applies as if GB (rather than NI) were still a Member State is highly unlikely to be correct. It is also disingenuous and should not as a matter of principle be permitted to undermine the development of an independent subsidy control regime by the UK as foreseen by the TCA.

BEIS should add to the existing guidance therefore a reminder that, since the end of the transition period, the Commission’s view on the extent of Article 10 of the Northern Ireland Protocol is speculative and untested. Public authorities are encouraged not to place reliance on it.  

JAMES WEBBER


[1]              Except export subsidies which are anyway prohibited by the WTO Agreement on Subsidies and Countervailing Measures.

[2][2] It is possible that some subsidies in Great Britain have such a strong direct connection to goods trade between Northern Ireland and Ireland that it is reasonably foreseeable the subsidy would affect that trade – and would therefore be caught by the suspension obligations in the EU State aid rules via Article 10 of the Northern Ireland Protocol.  These cases should be unusual.  The Northern Ireland Protocol is discussed in section 4 below.

[3]              In the Matter of Guatemala – Issues Relating to the Obligations Under Article 16.2.1(a) of the CAFTA-DR FINAL REPORT OF THE PANEL June 14, 2017, para 164.  This case was one of the few instances in which “level playing field” provisions in a trade agreement have been considered.

[4]              Ibid.,para 190.

[5]              Ibid, para 478-79

[6] See Commission Notice to Stakeholders re Withdrawal of the United Kingdom and EU rules on State in the field of State aid, page 6 available at: https://ec.europa.eu/info/sites/info/files/notice-stakeholders-brexit-state-aid_en.pdf

[7]              In the Matter of Guatemala – Issues Relating to the Obligations Under Article 16.2.1(a) of the CAFTA-DR FINAL REPORT OF THE PANEL June 14, 2017, para 168. 

[8]              The approach of the UK courts to standing in these cases has yet to be tested, although the terms of the TCA track highly restrictive EU standing rules, it is possible that UK courts would be more generous.

[9]              Title XI 3.4.

[10] A similar concept is used in EU State aid assessment usually referred to as “manifest negative effects”

[11] Although there is a different concept of “ailing or insolvent economic actor” in Article 3.5(3) whereby aid is prohibited in the absence of a credible restructuring plan.

[12]             Available at https://www.gov.uk/government/publications/complying-with-the-uks-international-obligations-on-subsidy-control-guidance-for-public-authorities/technical-guidance-on-the-uks-international-subsidy-control-commitments-from-1-january-2021.

[13]             Step 3 in the BEIS guidance is only high level on the point.

[14]             Ie. those principles contained in Title XI Chapter 3 Article 3.4 of the TCA.

[15]             Although there is a concept of “ailing or insolvent economic actor” in Article 3.5(3) whereby aid is prohibited in the absence of a credible restructuring plan.

[16] https://ec.europa.eu/info/sites/info/files/notice-stakeholders-brexit-state-aid_en.pdf

Posted in Brexit issues, EU/UK Trade and Cooperation Agreement, Legislation, New UK subsidy control regime | 1 Comment

EU Commission issues “Notice to Stakeholders” on Brexit and State aid

On 18 January, the Commission issued a Notice to Stakeholders setting out its view of the current legal position in relation to Brexit and State aid. (The Notice is not, I think, to be found anywhere on the DG Comp part of the Commission’s website: it is in the “Relations with the UK” section.)

The Notice covers the position under the “run-off” provisions of the Withdrawal Agreement in relation aids to granted by the UK, and procedures started by the Commission, before 1 January 2021. It also explains that the withdrawal of the UK has effects on various provisions of EU State aid law (eg guidance referring to cooperation between Member States will no longer apply in relation to the UK).

More interestingly – and more controversially – it addresses the application and effect of Article 10 of the Ireland/Northern Ireland Protocol (see blogs on this site, passim). It confirms the Commission’s support for the view that point that Article 10 does not just apply to State aid measures that relate to the production of or trade in goods: rather, it applies to “any public support for any economic activity … as long as it can be established that the public support is liable to affect the relevant trade” between NI and the EU. To hammer that point home, the example is given on page 7 of “Incentives to the financial services industry that would allow manufacturers or electricity companies engaged in trade between Northern Ireland and the Union to access cheaper credit, thus gaining an advantage
over their trading partners
.”

Further, the Notice states in terms that the concept of effect of trade in the Protocol “has to be read in light of the same notion in Article 107(1) of the Treaty on the Functioning of the European Union” (a proposition that has been questioned, although it seems clear enough given Article 4(3) of the Withdrawal Agreement).

The Notice then turns to the effect of the December 2020 declaration on Article 10 by the EU side of the Joint Committee on the Protocol, which offered a justification for the UK government to withdraw its proposal to breach the Withdrawal Agreement by amending the direct effect of that Article in UK law. As I commented at the time, it was unclear that the declaration’s qualification of the concept of “effect on trade” (that is could not be “hypothetical” or “presumed”) under Article 10 the declaration had any effect in practice (no court, regulator, or complainant is ever going to accept that their reasoning is based on hypothetical effects, so ruling out the possibility of hypothetical effects meant nothing) . It is apparent from the Notice that the Commission does not think that it had any practical effect either, since it notes that “This qualification is fully in line with the case law of the Union Courts” and goes on to state that “The declaration therefore clarifies, but does not alter, the notion of ‘effect on trade’ as interpreted by the Union Courts“. And it goes on to state that “The case law thus creates a presumption that an effect on trade exists as soon as a financial support from State resources strengthens the position of an undertaking compared with other undertakings in a market subject to trade” – the point that lies at the heart of many Commission findings of potential effect on trade in cases where the economic analysis leading to that conclusion is less than obvious.

For those not capable of taking a hint, the Commission then spells out what it thnks that that means, directly addressing the question of “reach back” (the issue of the application of Article 10 to aid granted to undertakings in Great Britain: “In particular, aid granted by the United Kingdom to undertakings that are not located in Northern Ireland may also fall under Article 10 of the IE/NI Protocol if the potential of an effect on the relevant trade between Northern Ireland and the Union can be demonstrated. This might notably be the case if the undertaking operates in, or trades with, Northern Ireland, as the aid might reduce the possibilities of Union competitors to be active in that market” (emphasis added). In other words, any aid to a GB undertaking which merely “trades with” Northern Ireland could fall within Article 10: a point again hammered home with an example on page 7 “Aid to a manufacturer in difficulty if its goods are available for sale in Northern Ireland” (emphasis added). And, in a final hammer blow, the Commission directly addresses the neuralgic question of tax measures, observing that Article 10 (and its powers to quash measures, including Acts of Parliament, and order recovery of aid) could apply to “A tax scheme granting a direct or indirect benefit to any firm trading with Northern Ireland” (emphasis added).

Finally, the Commission aims at the claim that the UK Government can freely compensate NI businesses that suffer as a result of the effective customs barrier now in place between Northern Ireland and Great Britain, noting the provisions of Article 5(6): “As a result, the United Kingdom will be able to waive tariff debt or reimburse traders as foreseen in Article 5(6) of the IE/NI Protocol, but only in accordance with the EU State aid rules. To that end, reimbursements of more than 200 000 EUR over
three years (i.e. above the de minimis threshold) would be subject to notification to
the European Commission, unless an exemption applies
.”

The views of the Commission are not of course binding. But it is likely that Article 10 and 12 of the Protocol require a UK court at least to consider its views on questions of law within its purview, not least given the Commission’s powers and functions under those Articles. And the terms of the Notice, and in particular the choice of examples, should give pause for thought to any UK granting authority or beneficiary considering any major aid measure.

GEORGE PERETZ QC

Posted in Brexit issues, Uncategorized | Comments Off on EU Commission issues “Notice to Stakeholders” on Brexit and State aid