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

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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

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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

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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