Good Law Project challenge to regulations purporting to remove State aid rules

The Good Law Project – a non-profit membership organisation that brings public interest litigation – has sent a letter before claim to the Department for Business, Energy and Industrial Strategy challenging the Government’s decision to use secondary legislation under the EU Withdrawal Act 2018 to remove EU State aid rules from retained EU law (EU law that remains in force in the UK as domestic law after 1 January 2021). Their letter can be read here.

As I wrote here, there seems to me to be considerable force in the argument that the use of SIs under the 2018 Act to abolish a whole area of EU regulation, as opposed to modifying it so as to make sense, is outside the scope of the powers granted under that Act. And it is certainly contrary to the then Government’s assurance in its White Paper proposing that Act that “the [Bill] will not aim to make major changes in policy or to establish new legal frameworks in the UK beyond those that are necessary to ensure the law continues to function properly from day one.”

As explained here, the current Government has now committed in the Trade and Cooperation Agreement to an enforceable subsidy control regime for the UK (in addition to Article 10 of the Ireland/Northern Ireland Protocol) as from 1 January 2021. As further explained here, the way that it has chosen to implement that obligation – by merely providing that the parameters for such a regime set out in the TCA are law – has left the UK subsidy control regime in an incoherent mess: a mess that may well have the effect of chilling large projects involving state subsidy, because no one can be sure how the Administrative Court will approach its role of enforcing that regime.

Given where we now are, it is to be hoped that the current Government’s response to this litigation involves commitment to a swift timetable for the introduction of primary legislation – capable of proper scrutiny by Parliament and of being the subject of amendment – to put the new regime on a satisfactory legal basis and to establish the powers and functions of the independent regulator required by the TCA. The fact that the current government should have been getting on with that legislation since the December 2019 election – in which it promised such a regime – is not an argument for not doing it now.

GEORGE PERETZ QC

Posted in Brexit issues, EU/UK Trade and Cooperation Agreement, New UK subsidy control regime | Comments Off on Good Law Project challenge to regulations purporting to remove State aid rules

New UK subsidy regime – where are we now?

Two recent blogs on this site (here and here) have described the subsidy control provisions in the Trade and Cooperation Agreement (TCA) to which the current UK government signed up on Christmas Eve. Those obligations bite on 1 January 2021: the obligation to have an independent authority playing an “appropriate role”, and the right of affected parties to apply to the court for a review of decisions granting subsidies that must be prohibited under the TCA or which fail to comply with the principles that the TCA lays down.

As matters stand, there appears to be no implementing legislation in place (though the extraordinary Henry VIII powers in the EU (Future Relationship) Act 2020 (as it will be by the time most people read this) would in theory allow the government to put in place a whole new regime by a statutory instrument made at 1059pm on 31 December, without having even been placed before Parliament (see paragraph 14 of Schedule 5 to that Act).

In default of legislation, and given the removal of EU State aid law from the UK lawbook by SI 2020/1470, all that will be in place is the provisions of section 29 of the EU (Future Relationship) Act, which (in effect) provides that the TCA is law if not otherwise implemented. That means that the subsidy control provisions in the TCA become law. But it is law that fails to give any functions or powers to the independent authority it contemplates, and no framework in which courts are supposed to adjudicate on the application of the broad principles laid down. It is a recipe for extrordinary confusion and uncertainty.

There is one day left for the government to get a more coherent position in place. As I said in my blog, the obvious short-term patch is to keep a “repatriated” version of the EU State aid rules going. Let us hope that the current Prime Minister’s boast in the debate today on the Bill that his government had removed the EU State aid regime from the UK has not put paid to that sensible option.

GEORGE PERETZ QC

Posted in EU/UK Trade and Cooperation Agreement, New UK subsidy control regime | Comments Off on New UK subsidy regime – where are we now?

The subsidy control provisions of the UK-EU trade and cooperation agreement: a framework for a new UK domestic subsidy regime – by George Peretz QC

The provisions of the (draft) UK-EU Trade and Cooperation Agreement (the “Agreement”) that govern subsidy control (Title XI, Chapter three, starting at page 184) are unprecedented in comparison with other free trade agreements.  They impose significant constraints on UK policy towards public subsidies.

What “subsidies” are caught by the Agreement?

As to scope, the definition of “subsidy” in Article 3.1 of the Agreement essentially parallels the definition of “State aid” in EU law.  Thus, it covers: public grants, loans, and guarantees; forgoing revenue otherwise due (e.g. tax waivers or debt write-offs); and the provision of goods or services or the purchase of goods and services, such as agreeing to purchase services at an overvalue or only in order to assist an operator. The provision of general infrastructure is not in terms excluded – as it is under Article 1.1(a)(1)(iii) of the WTO Agreement of Subsidies and Countervailing Measures – perhaps because it was considered that the provision of general infrastructure would not be a specific advantage, just as it is not a selective advantage under EU State aid law. 

A subsidy must also confer an advantage and be “specific” (a term derived from WTO subsidy law but which, both there and here, means much the same as “selective” in EU law). The assistance must also have actual or potential effects on trade and investment between the parties: whether that threshold is much higher than the notoriously low threshold that similar words have created in EU State aid law remains to be seen (it may be noted that Article 3 refers elsewhere to “material” effects on trade, perhaps suggesting that the omission of “material” at this point is deliberate). 

Tax measures can be subsidies.  Article 2(a) attempts to limit the application of the concept of “subsidy” to tax measures by setting out circumstances in which a general tax measure will not be considered “specific”.  These broadly mirror existing case-law of the ECJ in EU law: a tax measure will not be a subsidy unless some economic actors pay less tax than they would in comparison with a “normal” tax regime (the often-criticised “reference framework” concept in EU law); those economic actors must be treated more advantageously than those in a “comparable position” from the point of view of the objective and features of the tax regime; and favourable treatment is not a subsidy if it is justified by features such as the need to fight tax evasion, tax neutrality, the progressive or redistributive nature of a tax or its link to ability to pay (all of which mirrors current ECJ case-law on the nature and logic of the tax system).  So the subsidy provisions are more or less as likely to apply to tax measures as are EU rules on State aid (either to tax rulings, such as the Apple case (Cases T‑778/16 and T‑892/16), or to general tax measures that operate in favour of particular operators, such as the recent UK case on the tax treatment of certain controlled foreign companies).

Article 3.2 of the Agreement limits the scope of what counts as a “subsidy”.  Again, much of this mirrors EU State aid rules.  Subsidies to compensate damage caused by natural disasters or other exceptional non-economic occurrences (such as pandemics) are largely excluded from the rules on subsidies – but State aid falling in that category has to be cleared by the Commission under Article 107(2) of the Treaty on the Functioning of the EU, so, again, there is little change from the State aid position.  The exclusion of subsidies targeted at consumers also mirrors EU State aid law, as does the de minimis provision (set, at SDR 325,000, or ~EUR 380,000, over three years, at about twice as high as the EU de minimis threshold of EUR 200,000 over three years). 

There are, however, two significant departures from EU State aid law.  Subsidies to the audio-visual sector are entirely excluded,  so the rules do not apply to the funding of the BBC or to support for the film industry.  And the provisions of the agreement that prohibit subsidies or require remedial measures do not apply to subsidies granted on a temporary basis to respond to a national or global economic emergency, though such subsidies must be targeted, proportionate and effective.

Article 3.3 of the Agreement again rings bells for State aid lawyers by excluding from the rules subsidies granted to providers of services of “public economic interest” (cf “general economic interest” in EU law) if application of the rules would obstruct them in performing their tasks: Article 3.3.2 requires the avoidance of over-compensation and cross-subsidy, while Article 3.3.4 fixes a higher de minimis threshold for such subsidies.  Again, all familiar to State aid practitioners.

What rules apply to subsidies caught by the Agreement?

Articles 3.4.2 and 3.5 of the Agreement provide that certain types of subsidies must be prevented by the parties, if they are such as to have an actual or potential “material” effect on trade or investment between the parties.  They are:

  • unlimited state guarantees;
  • rescue and restructuring assistance where there is no credible restructuring plan, no provision for current owners to contribute to the plan (except for SMEs), or no social hardship or severe market failure consequent on business failure (this provision, and the first bullet above, parallel provisions in the UK/Japan FTA);
  • assistance to banks, credit institutions and insurance companies exceeding what is needed to secure an orderly exit from the market unless there is a credible restructuring plan;
  • export subsidies other than short-term credit insurance for non-marketable risks;
  • subsidies conditional on domestic content; and
  • subsidies to air carriers for the operation of routes, unless they are start-ups, where there is a public service obligation, or in special cases where the funding provides societal benefits.

Article 3.5 also creates special rules for assistance for secure and sustainable energy and for environmental sustainability, and for large cross border or international cooperation projects.

Outside those categories, the Agreement commits the parties to applying the general principles set out in Article 3.4.1 to all subsidies within the scope of the Agreement.  Those principles are familiar to any student of Commission State aid policy: assistance should pursue a specific public policy objective to meet an identified market failure or address an “equity rationale”; should be proportionate and necessary; should generate a change in economic behaviour that assists in achieving the objective; should not compensate for costs the beneficiary would have funded itself; that there is no less distortive alternative; and that positive effects outweigh negative ones.

In applying the Article 3.4.1 principles, the Joint Declaration on Subsidy Control Policies provides at page 5 useful guidance on some issues. First, it sets out a framework for clearance of subsidies to address regional disadvantage – important to any ‘levelling up’ policy. The framework itself is fairly anodyne (it requires policy to take account of the needs of the area, the size of the beneficiary and the size of the project, and to require a substantial contribution from the beneficiary), but it means that there is no doubt that the UK can develop its own system of what State aid lawyers think of as regional aid. It also makes it clear that such assistance cannot have as its main purpose or effect the poaching of activity from the other side – thereby discouraging subsidy races between the EU and UK (something that is very much in the UK interest, given the greater resources of many EU Member States). Further provisions of the Declaration deal with transport (generally summarising standard EU State aid policy and law on subsidies to airports, road infrastructure and ports) and research and development (again summarising the established EU law and policy approach). The value of these latter declarations is largely to make it clear that the UK government, committed to major investment in both transport and R&D, can do so within the framework of the Agreement – though it will be observed that it could also have done so within the framework of EU State aid rules.

Article 3.6 commits the parties to ensuring that beneficiaries only use assistance for the purpose for which it was granted (no “misuse of aid”, in EU law).

How are these rules to be enforced internally, within the UK?

The provisions do not commit the UK to replicate the ex ante mechanisms of EU State aid law (i.e. that State aid may not be implemented unless and until it is notified to and cleared by the European Commission). Note, though, that most State aid actually granted in the EU is granted under legislative block exemptions that mean it does not have to be notified.

One important commitment – especially bearing in mind concerns expressed recently over Covid-19 contracts – is a commitment to transparency in Article 3.7 of the Agreement.  All subsidies have to be published within six months with details and, if there is a letter before action from an interested party, that party has to be provided with all relevant information within 28 days (see Article 3.7.5).

But, more substantively, the UK is committed, under Articles 3.9, 3.10, and 3.11 respectively, to:

  • an independent authority or body that will play “an appropriate role” in its regime;
  • a power for courts to review compliance with the principles set out above by granting authorities and to review decisions of the independent authority, to do so on application by interested parties with standing, and to grant remedies including injunctions and orders to recover assistance granted; and
  • a power of recovery if an application is made in time (there are complex provisions as to what “in time” means) by an interested party on the ground that a measure should have been treated as a subsidy but wasn’t, or has misapplied the principles applicable to that subsidy.

In deference to the principle of Parliamentary sovereignty, recovery is not required where the subsidy is granted on the basis of an Act of the UK Parliament (Article 3.11.5),  but, importantly, that exception does not cover subsidies granted by the devolved Parliaments.

Against that background, the UK Government’s resistance to an ex ante commitment may well prove not to matter very much.  No beneficiary (or provider of loan or equity finance) is going to commit to a project if it is vulnerable to being overturned by a court.  In some cases, certainty and immunity from challenge could be achieved by simply allowing the time for challenge to lapse before proceeding with a project; however, in others that will be too slow and uncertain a device.  In practice, therefore, the UK regime is going to have to provide some mechanism for clearance by the independent authority – a clearance that will have binding effect.  Once in place, any such mechanism is likely to have to be gone through before beneficiaries and funders will agree to proceed – effectively requiring an ex ante clearance as a matter of commercial necessity rather than law.  Moreover, it is hard to see that the Government would in reality be content with a system that left the courts as the judges of whether the Article 3.4.1 principles had been correctly applied, given the need for consistent and transparent policy so as to guide granting authorities and beneficiaries in working out what types of assistance are likely to be acceptable given the broad parameters of the Article 3.4.1 principles.  In practice, therefore, the application of the Article 3.4.1 principles is likely to have to be a matter for the independent authority rather than the courts. 

All this therefore points to a regime that in substance, if not in form, ends up rather similar to the structure under the EU State aid rules: an independent authority issuing policy guidance and deciding the application of the Article 3.4.1 principles in particular cases, and whose decision is in commercial reality if not in law needed before most significant projects involving subsidies can proceed, combined with a role for the courts in dealing with cases where there is a real argument about whether the measure is a subsidy at all and where the independent body has never been approached, and in reviewing the decisions of the independent body. 

How are these rules to be enforced by the EU, if it considers the UK rules have not worked?

All the following provisions apply equally, vice versa, where the UK is unhappy with an EU subsidy.

First, the EU can appear as an intervening party in any court action in the UK concerning the subsidy rules: Article 3.10.2.

More importantly, in relation to an individual case, the EU can seek information and consultations: Article 3.12 of the Agreement.  If that does not work, it can take remedial measures if there is evidence that a UK subsidy will cause, or runs a serious risk of causing, a significant negative effect on trade an investment as between the UK and the EU.  Article 3.12.5 and .6 emphasise that that assessment must be based on facts and not speculation, and on reliable evidence.  The remedial action must be limited to what is strictly necessary and proportionate to remedy the significant effect.  If the UK considers that the EU has exceeded its rights to take remedial measures, then it can take the matter to an arbitration panel. Failure to comply with that panel’s ruling (if it is against the EU) triggers a UK right to take remedial action.

A more general UK failure to comply with the subsidy control rules (e.g. a claim that UK law does not meet the requirements imposed by Article 3) gives rise (except in relation to Articles 3.9 and 3.10) to a dispute settlement procedure under the general dispute settlement rules in Part Six, Title I.

Article 10 of the NI Protocol

Article 3 of the Agreement makes no reference whatsoever to Article 10 of the Ireland/Northern Ireland Protocol (the “Protocol”).  But Article 10 – which applies the EU State aid rules in full to the UK in relation to measures that have an actual or potential effect on trade in goods between Northern Ireland and the EU – will apply to many UK measures which have effects in Northern Ireland.  Article 10 of the Protocol will apply in parallel with the UK regime set up to implement the subsidy provisions of the Agreement.  That is well short of ideal, as there will be two separate subsidy regimes applicable to the same measures (as to which, as Lady Bracknell might have said, to have one set of subsidy rules to worry about may be necessary: to have two looks like carelessness).  The only way of avoiding that would be to carve out measures subject to Article 10 of the Protocol from the UK regime; however, given the penumbra of uncertainty as to when Article 10 will apply, that is not a satisfactory option either.

As I explained in my blog post here, the problems with the application of Article 10 of the Protocol – and in particular the “reach-back” issue, that is to say, the likelihood of its applying to general UK measures affecting Great Britain as well as Northern Ireland, as well as to GB measures with an indirect effect in Northern Ireland – were not adequately addressed by the 8 December statement by the Joint Committee.  It is also unlikely to be assisted by guidance issued by the Secretary of State under section 48 of the Internal Market Act 2020: as I pointed out in my blog post on the Joint Committee statement, the ambit of Article 10 is for the courts, and ultimately the ECJ to determine: what the Joint Committee says, and what the Secretary of State says, is in the end no more than a view.

It is regrettable that the UK Government did not seek (or if it sought did not obtain) an amendment to Article 10 to reflect its commitments under the subsidy control provisions of the Agreement.  The result is going to be, inevitably, something of a mess.

The short-term and the medium-term

Article 3 of the Protocol requires implementing legislation by the UK Government.  The Sewel Convention is not in play as subsidy control is now a reserved matter outside devolved competence: section 52 of the Internal Market Act 2020.

It is, however, inconceivable that a new regime could be up and running by 1 January 2021 – less than a week away.  As far as I am aware, there is no detailed legislation prepared, and the sudden production of detailed new legislation would both be unwise at this hyper-late stage and contrary to the spirit if not the letter of section 53 of the Internal Market Act 2020 (which requires the devolved governments to be provided with a pre-publication draft of the Government’s response to its consultation on a new UK subsidy regime).

There therefore seems to me to be no real alternative to preserving the EU State aid rules, modified only to make sense outside the EU, until a new system is up and running.  Fortunately, in best “Blue Peter” fashion, draft legislation – in the form of a “no deal” statutory instrument under the EU (Withdrawal) Act 2018 prepared under the May Government – already exists.  With a few tweaks to deflect accusations that the current Government was doing anything designed by its Conservative predecessor, it could be pressed into service, and the recently-made statutory instrument removing the State aid rules from retained EU law could simply and quietly be revoked. It would also be sensible – since there will not be time to devise new ones – to press back into service all the current EU block exemption regulations, compliance with which will provide certainty that a subsidy is lawful.

What the current Government’s plans are in that regard will presumably be made clear when the Bill implementing the Agreement is published and voted on this week.

Conclusion

This blog post is no more than an immediate reaction to the detailed provisions in the Agreement. 

What can be said, however, is that the UK has accepted a framework that fundamentally resembles the EU regime, even though in form it self-consciously avoids expressly drawing on it.  The UK will have to create a robust domestic framework for the regulation of subsidies, including an independent regulator and a set of rights to bring subsidy control issues to the courts.  The challenge will be to create a regime which makes use of the ability to move away from some of the more rigid aspects of the EU State aid regime while continuing to provide a useful check and review on the power to subsidise – a power which can often be used wisely to promote very important public policy objectives, but can also be abused for bad political or even venal reasons, and in ways that seriously damage the legitimate interests of trading partners.

GEORGE PERETZ QC BL

Monckton Chambers, London, and Law Library, Dublin

(This post originally appeared on www.eurelationslaw.com)

Posted in EU/UK Trade and Cooperation Agreement, New UK subsidy control regime | Comments Off on The subsidy control provisions of the UK-EU trade and cooperation agreement: a framework for a new UK domestic subsidy regime – by George Peretz QC

UK Subsidy Control: how will public funding change now the UK has taken back control of State aid regulation? By Jonathan Branton and Alexander Rose, DWF Law

After much fanfare the UK has agreed a new Trade and Cooperation Agreement (“TCA”) with the EU which, subject to ratification, allows for zero tariff, zero quota trade between the two blocs with effect from 1 January 2021.  One of the final points to be agreed was future State aid regulation, which is addressed under Chapter 3 (Subsidies) of Title XI (Level Playing Field) of the TCA.  Here are our first reflections on the contents of the Subsidies section of the TCA and we consider what it means for grant authorities awarding and undertakings receiving public funding from 1 January 2020, and consider how the UK can regulate subsidies more effectively, now it has “taken back control“.

The UK and EU negotiating teams agreed the terms of the TCA on Christmas Eve, with fisheries policy, rules of origin thresholds for the automotive sector and State aid regulation being the final points to be brokered.  For the UK, the discussion on subsidies centred on ensuring the freedom to create its own independent regime.  For the EU, the focus was upon ensuring the Single Market was not compromised by UK businesses being able to trade with a competitive advantage derived from receiving greater subsidies than those permitted by the existing EU regime.  Chapter 3 (Subsidy Control) of the TCA therefore appears a success for both parties.  However, with the implementation of the new UK regime yet to be clearly set out, the big question is how the UK will use its new freedom to diverge.

Overview of Title XI Chapter 3

Title XI Chapter 3 of the TCA sets out reciprocal commitments on subsidy regulation. Although the agreement pointedly doesn’t generally use the existing EU State aid texts (possibly with an eye on ensuring the ECJ would not have a role in interpreting the meaning of any provisions) we start with the premise that the text is drafted with the understanding that the current EU State aid regime generally already meets the commitments from the EU’s perspective.

From our perspective the key themes emerging from Title XI Chapter 3 at this stage are as follows:

  • what is and what isn’t a subsidy appears largely consistent with current understanding, albeit including a concept of potential effects on investment (in addition to trade), which suggests the concept of what is a subsidy will not be clearly narrower than what is a State aid;
  • the 6 stated General Principles around which the legitimacy or otherwise of subsidies must be judged are self-evidently sensible, and encapsulate what has hitherto gone into the approval of individual subsidies by the European Commission, and the drafting of block exemptions which have set out the conditions under which over 99% of subsidies have been legitimately granted without any need for regulator consultation or approval;
  • the TCA acknowledges and endorses a concept similar to the EU’s services of general economic interest with a notion of subsidies for public economic interest, including compensation for the delivery of public service obligations;
  • the UK must appoint an independent body charged with oversight of its subsidy regime, but does not dictate that this body be a regulator like the Commission responsible for giving approvals;
  • the TCA does not dictate that the UK adopts its own block exemptions or safe harbour equivalents  pursuant to the General Principles (although as explained below we believe it would be most unwise not to);
  • the TCA provides for clear transparency obligations including procedures entitling interested third parties to receive, upon request, minimum information from grant authorities on subsidies granted, including how they satisfy the General Principles;
  • the TCA sets heightened de minimis subsidy levels (ie. subsidy amounts per undertaking over three fiscal years) below which the respective procedures should not apply, , which are roughly double the current €200,000 threshold;
  • the TCA provides for temporary subsidies to respond to “a national or global economic emergency” (such as presumably the COVID-19 pandemic) to be allowed, provided they are targeted, proportionate and effective in order to remedy that emergency;
  • existing methods of challenge in the national court (eg. judicial review in the UK) may continue, in which an ultimate remedy of recovery of the subsidy (ie. repayment) must be provided for;
  • recovery is not required in cases of subsidy provided directly by act of Parliament (UK) or by the European Parliament and/or EU Council; and
  • the TCA provides for mechanisms for consultations between the UK and EU regarding subsidies of concern to either party, including procedures for arbitration of disputes and remedial action in cases where significant negative effects to the other’s trade (or a threat thereof) are clearly evidenced. 

Alignment with the Northern Ireland Protocol from the Withdrawal Agreement

The substantive issue which Title XI Chapter 3 TCA does not deal with is continued application of the notorious Article 10 of the Northern Ireland Protocol in the pre-existing Withdrawal Agreement, entered into on the UK’s formal departure from the EU in January 2020.  This provides that EU State aid law will continue to cover subsidies provided in the UK “which affect that trade between Northern Ireland and the Union” even after the end of the agreed transition period (ie. from 11 pm on 31 December 2020).

While this is apparently limited in its effects to goods and the all-Ireland single electricity market, there will no doubt be speculation as to how readily an effect on trade between Northern Ireland and the EU can be deduced.  Pending further clarification (and no doubt test cases in due course) this will lead to a concern that subsidies in the UK related to the production of goods which will readily move across borders (eg. the automotive sector) may still fall within the reach of EU State aid control.  As noted by Mathew Holehouse in his article, “Brexit deal’s State aid rules may have long reach” the notion of effect upon trade under EU State aid law has been interpreted to have a “famously low bar“, raising the spectre of two subsidy law regimes applying simultaneously within the UK in some situations, creating potentially significant administrative burdens.

Immediate concerns arising for the ongoing delivery of subsidies grants in the UK

Title XI Chapter 3 clearly provides the UK with considerable flexibility in adopting its own subsidy control system.  However there will need to be significant implementing measures undertaken quickly in order to render the UK in immediate compliance.  In the absence of relatively immediate implementing measures there is a danger of a relative legal vacuum emerging.

As things stand, the EU framework ceases to apply in the UK in less than a week from the time of writing, without a fully formed replacement regime yet in place. Grant authorities (of which there are over 550 in the UK) in the middle of delivering many ambitious funding programmes such as the Getting Building fund will ask how do they ensure the legality of proposed grants as of 1 January 2021.  This is creating considerable uncertainty for public sector bodies administrating grant programmes and businesses looking for public funding to take forward new investments.

This is consistent with our experience that the biggest immediate issue of concern arising from this “on the ground”, will be legal certainty.  The vast amount of subsidies (over 99%) currently proceed under the block exemptions, which provide assurance to grant authorities and beneficiaries that the grants may be presumed lawful and therefore should not be subject to clawback later.  Based on this we would hope that the UK Government will quickly enact provisions for some form of safe harbour or block exemption equivalent under which this majority of non-contentious awards may continue.  The last thing the UK Government will want is for its new found flexibility to result in standstill.

Need for implementing measures and suggestions for UK Government

As noted the most pressing issue for ongoing delivery of routine grants and investments is for articulation of where are the safe harbours, ie. what can be granted safe in the knowledge that it will definitely be acceptable?  Such safe harbours must of course deal with all of the General Principles in the TCA in arriving at a set of circumstances and procedures that would allow pre-defined types of subsidy and respective amounts which could be deemed expressly lawful.  We would start with a presumption that the existing EU block exemptions do this already.  There will be time to refine the details of a UK safe harbour instrument in due course later but some form of starting place is urgently needed for awards to be granted as of 1 January 2021.  For reasons simply of speed, our recommendation would be to borrow from the existing block exemptions until there has been time to hold suitable consultations in order to define and support new UK policy initiatives, for example the ‘levelling up‘ agenda . 

Based on the above and noting the need to set up a new regime by 1 January we urge the government to:

  • immediately set up a “safe harbour” system based on the current block exemptions (which are used for over 99% of all awards of State aid), which would allow almost all subsidies to be granted quickly and with the minimum of fuss from 1 January 2021 (NB. if time allows then immediately adjust some of the less user friendly elements of the existing block exemptions such as revising the rules around undertakings in difficulty);
  • set up a temporary approval system for larger awards of aid outside the block exemptions, to enable quick decisions to be made pursuant to evidence supplied on the application of the TCA’s General Principles.  Clearly the Government’s intention is for this to be a reserved matter for central government (ie. not for the devolved administrations) and possibly such larger awards will be wholly retained within central government administration;
  • appoint an independent body for oversight of the new subsidy control regime generally (noting that the powers to be awarded to the authority can be developed over time following due consultation);
  • run a consultation for new rules to come in with effect, for example, from the end of 2021.  The consultation would include how best to shape the safe harbours for optimal pursuit of UK policy objectives, plus what powers to give to the new independent supervisory body; and
  • consider whether at the four-year review of the TCA to argue that Article 13(8) of the Northern Ireland Protocol should be invoked and Article 10 removed in favour of a single subsidy control regime for the UK, to phase out what may prove to be difficult considerations of dual regimes to apply in certain cases.

The UK has a huge advantage now of starting afresh but also having been part of the EU State aid system, in order to observe the good and the bad.   Therefore it should be possible for the UK to take the best parts of the EU’s regime and design further elements of its own subsidy control regime to work much better. 

How should public bodies handle subsidies in the meantime?

Awards made before 11pm 31 December 2020 remain subject to EU State aid law, as will other awards after that under the last vestiges of the EU Structural and Investment Fund (ESIF) programmes.  Awards made after that may consider whether the EU State aid rules might arguably continue to apply by virtue of the Northern Ireland Protocol, and otherwise have regard to the TCA and all implementing measures as they come into force. 

In the absence of swift implementing measures (in particular safe harbour clarifications) we would suggest it will be important to work through the requirements of Title XI Chapter 3 TCA individually for each proposed award, to establish whether the measure falls within the definition of a subsidy and if so, whether it will be in line with the General Principles.  In interpreting the General Principles we would expect regard to be had to previous experience of the EU rules.  Some may argue that until what is not compliant is expressly clarified, there should be flexibility to award freely and the risk in so doing will accordingly not be high.  However our experience is that grant authorities and sophisticated beneficiaries alike will want to know things are being done right and that good administration is seen to be done.  Public authorities will not wish to be considered reckless and therefore will wish to balance the above considerations.  No one will want to become the new test case.  Until implementing measures are clarified therefore we would recommend that meticulous records are kept and that care is taken to ensure the prescriptive transparency rules are satisfied.  Individual authorities may develop their own protocols and checklists for approvals prior to execution of awards. 

Conclusion

The new TCA is to be welcomed, as are Boris Johnson’s emphatic statements about levelling up the UK. In order to make the most of the hard-earned opportunities created by the TCA, the UK government should develop meaningful subsidy control rules that target and coordinate public funding as efficiently as possible towards the UK’s economic priorities.  Given EU State aid law is revoked as at 11pm on 31 December 2020, the development of such rules will need to be accelerated to prevent an immediate legal vacuum stifling delivery and interventions from January 2021, when it is arguably needed most in the continued wake of the pandemic.  An interim regime, based on quick wins, would allow for a new modern regime aligned to the UK’s interests to be carefully planned over the next year, thereby helping the UK build a new economy fit for the future.

JONATHAN BRANTON

ALEXANDER ROSE

DWF Law

Posted in EU/UK Trade and Cooperation Agreement, New UK subsidy control regime | Comments Off on UK Subsidy Control: how will public funding change now the UK has taken back control of State aid regulation? By Jonathan Branton and Alexander Rose, DWF Law

State aid damages claim unsuccessful yet again – and time to bring such a claim is running out – by Aidan Robertson QC

As Falk J observed in 2019 in Credit Suisse v HMRC [2019] EWHC 1922 (Ch)[1] at [95] when rejecting a claim for damages following a full trial of the action, there is no recorded instance of damages being awarded by a court in the UK for breach of the EU State aid rules. That remains the case following the judgment handed down on 25 November 2020 in The Durham Company Ltd (t/a Max Recycle) v Durham County Council [2020] EWHC 3200 (Ch).[2]  HHJ Keyser QC, sitting as a judge of the High Court in the Competition List of the Business and Property Courts (Chancery Division) granted Durham County Council ‘reverse’ summary judgment on its defence against a claim for damages, as well as declaratory and injunctive relief.

The claimant, Max Recycle, runs a commercial waste collection and recycling business in north east England. It claimed that it was being undercut by the Council’s statutory commercial waste collection services which are provided for a ‘reasonable charge’ in discharge of its duty under section 45 Environmental Protection Act 1990. Max Recycle claimed that the Council was using its public sources of revenue to cross-subsidise those commercial waste collection services and that this alleged cross-subsidy constituted unlawful State aid as it had not been notified to the European Commission as required by the last sentence of Article 108(3) of the Treaty on the Functioning of the European Union.

The Council’s defence was that any alleged breach of the State aid rules was not, on any view, sufficiently serious under the EU Francovich principle and therefore did not give rise to a claim for damages. The Court agreed. If there were any breach, it was not an inexcusable breach for Francovich purposes and so did not give rise to a right to claim damages.

Max Recycle’s alternative claim that it did not need, as a matter of law, to plead a sufficiently serious breach based on dicta in the judgment of Morison J in Betws Anthracite Ltd v DSK Anthrazit Ibbenburen GmbH [2003] EWHC 2403 (Comm)[3], [2004] 1 CMLR 12, was also rejected: the Francovich criteria apply to any claim for damages so far as State liability is concerned.

Max Recycle’s claims for declaratory and injunctive relief were also rejected because by the time of any trial of the claim the EU State aid rules would have ceased to apply to the Council and so such relief would be devoid of purpose.

An additional limitation point about the availability of Francovich damages is worth noting (although it did not arise in this case).  Francovich damages claims are now subject to a special limitation period expiring in December 2022. This is because Francovich liability was abolished under the European Union (Withdrawal) Act 2018 with effect from 11pm on 31st December 2020 by Schedule 1, paragraph 4. Any Francovich claims relating to the period before that date are now subject to a limitation period expiring two years from that date under Schedule 8, paragraph 39(7) of that Act.

AIDAN ROBERTSON QC

Brick Court Chambers, London


[1] https://www.bailii.org/ew/cases/EWHC/Ch/2019/1922.html

[2] https://www.bailii.org/ew/cases/EWHC/Ch/2020/3200.html

[3] https://www.bailii.org/ew/cases/EWHC/Comm/2003/2403.html

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EU/UK TRADE AND COOPERATION AGREEMENT: SUBSIDIES PROVISIONS – A NEW SUBSIDY CONTROL REGIME FOR THE UK

The text of the EU/UK Trade and Cooperation Agreement has now been published.

The provisions on competition and subsidies start at page 181 of that print.

I shall blog on the content of those provisions shortly (it’s Boxing Day).
Since it is also now clear that the UK will have a legally enforceable subsidy control system in place after the end of transition, I will also over the next few days set out some thoughts for the future of UKSALA and this blog: now that Kelyn (who co-founded UKSALA with me some 6 years ago) has become Mrs Justice Bacon, I need some others to get involved.

GEORGE PERETZ QC

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State aid and subsidies post-transition: where are we now?

Competition Law Insight recently published a piece in which I tried to take stock of where we are now on the question of a possible subsidy control regime in the UK after the end of transition. You can find it here.

George Peretz QC

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Subsidy provisions in the UK/Japan Comprehensive Economic Partnership Agreement: what are they, and what do they mean for the UK/EU negotiations?

The text of the Comprehensive Economic Partnership Agreement between the UK and Japan was published on 23 October.  Somewhat disturbingly for those who believe in effective Parliamentary scrutiny of such agreements, that was the same day on which the Agreement was signed, so that it is in effect now too late for scrutiny to achieve any change in the text agreed between the two governments.  Moreover, as pointed out below, under the Trade Bill the agreement can be implemented into UK law by Ministerial regulation, and without Parliamentary debate.

For readers of this blog, the interesting chapter is chapter 12, which deals with subsidies.  There, the text is unchanged as compared to the EU/Japan Economic Partnership Agreement.  However, since the public position of the current government is that it wishes to end the application of the State aid regime to the UK as from the end of transition, subject to commitments that it makes in free trade agreements, the commitments made by the United Kingdom in this agreement assume a particular interest.

Article 12.1 is an introduction: it notes that subsidies may be granted where necessary to achieve public policy objectives but commits each party “in principle” not to grant subsidies where it finds that they have or could have a significant negative effect on trade or investment between the United Kingdom and Japan.  One can also note as an introductory matter the point that Article 12.4 provides that the chapter does not affect either party’s rights and obligations under the WTO Agreement on Subsidies and Countervailing Measures (the SCM Agreement), Article XVI of GATT or Article XV of GATS (which both deal with subsidies). 

Articles 12.2 and 12.3 deal with scope and definitions.  The concepts of “subsidy” and “specific subsidy” are taken from the WTO Agreement on Subsidies and Countervailing Measures, but are extended to cover services.  The chapter is stated in Article 12.3.1 to apply to specific subsidies (which is a concept broadly similar to that of a “selective advantage” in EU State aid law) that are related to “economic activities”, defined as the offering of goods and services in a market, excluding “education provided under the domestic educational system” of the parties. 

Article 12.3 then lays down some general exceptions (as well as some exceptions from particular parts of the chapter, which I deal with below). Article 12.3.2 excludes, save for a requirement of transparency and a requirement not to go beyond the stated objective, “subsidies granted to enterprises entrusted by the government with the provisions of services to the general public for public policy objectives”: that covers much of the territory covered by the concept of “services of general economic interest” in EU State aid law.  Article 12.3.3 excludes subsidies granted to compensate for the damage caused by natural disasters or other exceptional circumstances, which covers the ground of Article 107(2)(b) TFEU (a provision much used this year in relation to the Covid-19 pandemic).  And Article 12.3.7 excludes audio-visual services (broadcasting).

Finally, on the topic of general exceptions, Article 12.9 incorporates Article XX GATT and Article XIV GATS into the chapter: the effect of that is to allow the parties to rely, subject to the requirement of necessity, on the broad range of public policy considerations that, under those provisions, can justify what would otherwise be infringements of WTO rules (although it is hard to see how those exceptions would apply in practice to the types of damaging subsidy covered by the prohibition in Article 12.7, discussed below).

Articles 12.5 and 12.6 deal with “soft” obligations: notification and consultation.  Each party has to notify to the other (in English) every two years of details of any specific subsidy granted or maintained by that party.  That can be done by a public website (Article 12.5.2): but the agreement imposes no requirement for there to be a public website or for any other form of publication, and notification can be done by a private communication.  In relation to services, the notification provision applies only to certain services sectors listed in Article 12.5.3. 

As for consultation, either party can raise with the other any case where it considers that the other party’s subsidy has or could have a significant negative effect on its trade or investment interests.  There is then a requirement to consult and for the party at the receiving end of the complaint to provide information about the subsidy.  Article 12.6.5 finally requires the party complained about to afford “sympathetic consideration” to the other party’s concerns.  Further “any solution shall be considered feasible and acceptable by the requested party”: an oddly-drafted provision that presumably does not force the party complained about to accept whatever solution the other party comes up with, however bizarre, but rather requires the party complained about to give sympathetic and serious consideration to the feasibility and acceptability of any solution proposed.

These “soft” provisions do not apply to subsidies of below 450,000 SDRs (about £490,000): Article 12.3.4, and the consultation provision does not apply to various agricultural and fish products (Article 12.3.5).

Article 12.7 deals with “hard” obligations: prohibited subsidies.  As a threshold condition, the Article applies only to subsidies that could have a significant effect on trade or investment between the United Kingdom and Japan.  Prohibited subsidies are ones which (a) involve unlimited public guarantees or (b) involve subsidies for restructuring ailing or insolvent enterprises where there is no credible restructuring plan to which the assisted enterprise or its owners makes a substantial contribution (though the plan can be provided within a reasonable time after support is given). 

Article 12.7 does not apply to subsidies granted at below central government level: Article 12.3.8.  However, Article 12.3.8 goes on to provide that each party must take “such reasonable measures as may be available to it to ensure the observance of the provisions of this chapter by sub-central levels of government”.  In a UK context, given that clause 50 of the Internal Market Bill will make subsidy control a reserved matter to which the Sewel convention will not apply and on which Westminster can legislate freely, that would appear to require central government to legislate so as to ensure that the devolved governments observe the Article 12.7 prohibitions (as well as the other requirements of the chapter): given that legislation is “available”, it is hard to see that a failure to legislate would be “reasonable”. 

Finally, Article 12.8 is a use provision that requires the parties to ensure, generally, that subsidies are used only for the specific purpose for which they were granted.

Almost all of the chapter – apart from the obligation in Article 12.6.5 – is subject to the dispute resolution mechanism (by arbitration panel) set out in Chapter 22. 

As for domestic implementation, as with the rest of the Agreement, the Government will have power, under clause 2 of the Trade Bill going through Parliament, to implement this chapter by regulations.  On the assumption that clause 50 of the Internal Market Bill becomes law, the devolved governments will have no competence to make regulations, so that any regulations implementing it will be UK-wide and made my UK ministers.

Finally, as for implications for the EU/UK trade negotiations, those reading this blog will know that subsidies are a key area in those negotiations.  The prohibition elements of Chapter 12 go beyond what the United Kingdom was, in February 2020, prepared to offer the EU in terms of substantive commitments on subsidies (although the UK position did refer to the EU/Japan agreement as a precedent, it referred only to the consultation provisions of chapter 12).  Inevitably, since the terms of Chapter 12 became known, the UK position has shifted (it was not possible to explain why the UK was prepared to make commitments to Japan that it was not prepared to make to the EU).  Nonetheless, it is hard to see that the provisions of Chapter 12 meet EU concerns about the ability of the United Kingdom – a much larger trading partner for the EU than is Japan – to use the zero-tariff access for which it is asking (as well as benefits such as financial and data protection equivalence, road transport and so on) to distort the EU internal market by subsidising relatively freely.  The subsidies prohibited under the chapter do not include the vast majority of harmful subsidies (including hand-outs or tax-breaks to favoured but solvent businesses).  In relation to those other subsidies, all the chapter offers is notification and consultation rights: the EU will not regard those rights as adequate.  Given the scale of EU/UK trade, the EU will insist on commitments not present in the UK/Japan agreement: in particular, a wider prohibition regime, an independent subsidy regulator to deal with cases requiring a balance between distortion of competition and public policy, and third party rights to enforce the prohibition in court.  Whether the current UK government is prepared to make those commitments remains to be seen.

GEORGE PERETZ QC

24 October 2020

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Leading UK lawyers write to PM on subsidy control after transition

On 18 September, a number of leading lawyers with expertise in the area of subsidies and State aid, many of them members of UKSALA and with a wide spectrum of views on Brexit, wrote a joint letter to the Prime Minister offering to assist the UK government in developing a new UK regime to govern the granting of subsidies, building on the commitment made by the Conservatives during the 2019 election campaign.  The joint letter can be read here.

UK Domestic Subsidy Control letter 18 September 2020 (002)

As is well-known, the issue of subsidy control is a key issue to the EU/UK negotiations of a free trade agreement.  Subsidies are likely also to be a key issue in trade negotiations with other countries, and, as a member of the WTO, the UK will need to operate within the framework of the WTO Agreement on Subsidies and Countervailing Measures, as well as being involved in possible changes strengthening that agreement.    Further to the Conservatives’ statement during the election, the Government has repeatedly stated that it intends to develop a UK subsidy regime, though BEIS recently announced that it is proposing to consult next year on the possibility of further legislation.

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The future of State aid law in the UK – should the UK adopt strong or weak rules?

By Jonathan Branton and Alexander Rose, DWF Law LLP

The Financial Times reports that the UK Government is split on the design of the UK’s future State aid regime, with a faction led by Dominic Cummings arguing that the UK should adopt a “vague and non-statutory” regime.  An alternative group, said to include Chancellor of the Exchequer, Rishi Sunak, is championing strong statutory State aid rules.  The Prime Minister has yet to indicate his position, beyond the statement in his Greenwich speech on 3 February 2020, that the UK shall continue to have subsidy control rules after the transition period ends, but not those of the European Union.

The report comes at a time when it appears that progress is slowly being made with the EU on a trade deal.  Reuters reports that the EU now recognises the UK will not follow EU State aid rules once the Transition Period ends and David Frost appears to have successfully argued that the CJEU will not have oversight of any future arrangements.   However, it is recognised that a trade agreement will only be reached if the UK can put forward a subsidy regime which provides sufficient assurance to the EU that businesses will compete upon a “level playing field”.

Even putting aside the EU dimension, there are good arguments for having in place a domestic State aid regime” wrote former ERG Treasurer, David Gauke in an article published on the Conservative Home website at the weekend.  In particular, effective subsidy controls help ensure taxpayers’ money is spent wisely and are a means to ensure the State’s finite resources are allocated productively and as evenly as possible in order to maximise economic growth.  Other reasons for the UK adopting a meaningful post-Brexit State aid regime include enabling the Public Sector to avoid subsidy auctions between different parts of the UK, coordinate spending across the UK’s 650+ public bodies,  protect against cronyism (NB. it is easy to foresee the potential scandals arising from unfettered grant awards with accompanying accusations alleging undue influence etc).

Having a domestic State aid regime across the UK’s own union is also vital for consistency with the rest of the UK’s pre-existing competition regime (ie. merger control and other prohibitions of anti-competitive behaviour).  It should be recalled here that all competition laws pursue the same ultimate agenda of preservation of a level playing field in which private investment is incentivised and open competition can thrive.  Why spend vast resources preventing suspect mergers, for example, when competition can just as easily be heavily disrupted by unregulated and uneven State handouts?

Dominic Cummings argues the UK should have weak State aid rules in order to make the most the opportunities of Brexit, although even while having the same State aid laws, countries like Germany have shown that they will spend proportionally much more then the UK, which is a political choice not law.

In a “no deal” scenario, the Cummings position doesn’t appear sustainable – after all with an 80 seat majority the Government will be able to design its own State aid rules, tailored to its own economic objectives.  In practical terms, if Central Government wanted to back a novel initative such as the Advanced Research Projects Agency it could specify that this to be a legitimate (and therefore lawful) investment when setting up its regime.  If the Government appointed a regulator and subsequently did not agree with a particular decision, then Parliament would have the ability to overrule such decision, or Parliament could adopt a law exempting a particular project from usual subsidy scrutiny to begin with.  In this way, the UK could have a regulator and regime to govern the vast majority of State interventions but reserve the ability to go outside this for a few key central government initiatives when necessary.

In the context of trade negotiations, the Cummings position makes more sense.  As an act of brinksmanship, implying that the UK will seek to undercut the EU seems astute.  The EU has itself stated how much it wishes to avoid this scenario, even though history suggests it is unlikely, noting again the German example mentioned above, when for example in 2018 as a proportion of GDP it spent four times as much on State aid than the UK, while acting under the same laws).

There does come a point, however, when the UK will need to ‘play its hand’ and reveal the detail of its intended State aid/ subsidy regime.  This is necessary in order to move forward in the EU trade negotiations and to navigate Parliamentary procedure (noting that if the new regime is particularly ambitious that it would be prudent to carry out a consultation).  As Tim Nixon points out in the Times, “the priority for the government should be clear: regardless of the outcome of the EU negotiations, it needs urgently to put in place a robust, independent, rules  based domestic anti-subsidy regime to become effective at the start of next year”.  It is also necessary in order to create legal certainty (avoiding some sort of vacuum from 1 January 2021) thus allowing investments to proceed, safe in the knowledge that State support may be safely received and spent without fear. We believe that time has come and look forward to the Government unveiling details of its new UK subsidy regime.

By far the simplest option (especially given the pressing urgency) would seem to be to start with the existing regime the UK already has and which the UK has been heavily involved in developing over many years, and simply convert it to being administered by and for the UK.  This may then be adjusted once the UK has had time to consult and consider properly which areas it wishes to prioritise and what strategic aims and policy agendas it most wishes to pursue, eg. regional investment and R&D.  Starting with something like the regime it already works under might also be considered most likely to facilitate agreeing a manageable free trade deal with the EU in the time afforded.  That is not an insignificant consideration.

Indeed, appointing a properly resourced regulator and setting out clear processes (and timescales) for its decision making would appear to meet the terms for a new State aid regime that were circulated to the press during the 2019 election campaign.  This would include clearly defining what constitutes a regulated subsidy (and thus also what is not), what constitutes a permitted subsidy and ideally setting out a procedure for regulating and subjecting to further scrutiny the largest and most controversial interventions.  This could create a faster decision making process and achieve greater certainty for those considering investing in the UK.  A mechanism whereby Parliament could vote to overrule a decision by the regulator not to approve a significant investment would achieve the objective of ensuring “greater discretion over whether or not an aid is appropriate“.  Finally, we note and support the commitment to “develop these rules in full consultation with British Business” who will surely want to know terms on which they can receive Government support but also raise concerns when their competitors receive the same.

 

Jonathan Branton and Alexander Rose, DWF Law LLP

4 August 2020

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