81: Post-brexit: are subsidies the new state aid?

Aaron Nelson Legal Director

Prior to Brexit, EU State aid rules applied in the UK as a consequence of UK’s EU membership. After Brexit, they applied during the ‘transition period’ under the EU / UK Withdrawal Agreement.

Regular readers will recall that, under the European Union (Withdrawal) Act 2018 (EUWA), all EU law in force at the end of the transition period is ‘transposed into’ UK domestic law, to prevent significant lacunas in the UK statue book. However, to prevent this happening in respect of EU state aid law, the UK Government passed the State Aid (Revocation and Amendments) (EU Exit) Regulations 2020, which at Regulation 3, provide that the rights, powers, liabilities, obligations, remedies and procedures relating to State aid (which would otherwise continue by virtue of section 4(1) of the EUWA) cease to be recognised and available in domestic law. (Note these Regulations do not affect the application of EU State aid law under Article 10 and Annex 5 of the Protocol on Ireland / Northern Ireland in the EU Withdrawal Agreement which have effect in domestic law under section 7A of the EUWA).

So, from 1 January 2021 (end of transition), the UK (although, in practice, Great Britain) has a new subsidy regime. In summary, this comprises:

the World Trade Organisation’s (WTO) subsidy rules, primarily the Agreement on Subsidies and Countervailing Measures (ASCM) (trade in industrial goods) and the Agreement on Agriculture (AoA) (trade in food and other agricultural products); and
the subsidy-related commitments in specific Free Trade Agreements (FTAs) with other countries.

TCA: First among equals?

The most important of these FTAs – given existing trade flows and economic ties – is the agreement reached between the UK and EU, known as the Trade and Cooperation Agreement (TCA) (which we reviewed here).

This contains a chapter on subsidies (Title XI, ‘Level playing field’, Chapter 3) which, in outline, provides that the EU and the UK will each have in place their own independent system of subsidy control, which the aim of ensuring that the granting of subsidies does not have detrimental effects on trade between the parties. (Again, note that this chapter has limited application to Northern Ireland: EU state aid rules continue to apply there under the Northern Ireland Protocol in the Withdrawal Agreement.)

The TCA does so by recreating a number of elements very familiar to practitioners from the EU state aid regime, albeit these have been renamed, e.g. ‘undertaking’ becomes ‘economic actor’:

the definition of a ‘subsidy’ (Article 3.1) and the six ‘key principles’ with which subsidy grants must comply (Article 3.4) are clearly based on the State aid regime;
the TCA contains specific exceptions (see Articles 3.2 and 3.3), which are akin to some of the previous ‘block exemptions’, eg subsidies below 325,000 Special Drawing Rights (c.£350,000) over any period of three fiscal years (similar to de minimis), subsidies to disadvantaged areas (like regional aid), subsidies to economic actors assigned with particular tasks in the public interest, including public service obligations (like Subsidies of Public economic interest (SPEIs); and
the UK and EU have separately agreed a ‘Joint Declaration on Subsidy Control Policies‘ which, while not binding, ‘represents their shared understanding of the appropriate subsidy policies … for the development of disadvantaged areas … to airports, for road infrastructure projects and to ports (in certain circumstances) … for research and development’.

BEIS Guidance: Search the world over

The Department for Business Enterprise and Investment (BEIS) has published Technical Guidance on the UK’s new subsidy regime. Given the absence of case law, this is the main resource/point of reference for analysis at this stage. It includes a five-step approach for determining whether a given measure is a subsidy and, if it is, whether it is within the scope of the WTO rules or an FTA, including the TCA. It also gives guidance on what public authorities should do when awarding a subsidy.

In outline, BEIS steps are:

Step 1 – Determine whether a measure is a subsidy and what international obligations are relevant: BEIS suggests an initial “triage” of whether the measure is a subsidy which, if passed, leads to more detailed consideration of the particular WTO / FTA rules.
Step 2 – Evaluate whether the measure is a prohibited subsidy (i.e. specifically prohibited under the WTO / FTA rules) or subject to conditions
Step 3 – If the subsidy is in scope of the UK – EU TCA, additionally assess the subsidy against the TCA principles: we discuss these further below.
Step 4 – Assess the likelihood of triggering a dispute under the WTO ASCM rules and other FTAs: Of course, the likelihood is linked to whether the measure is a subsidy (Step 1) and is prohibited or subject to conditions (Step 2) so you may largely have answered this one already.
Step 5 – Record the award of the subsidy: There is a form in the Annex to the Guidance which public authorities are encouraged to use.

The approach taken by the BEIS guidance is logical from a certain point of view, but it has been criticised for not giving sufficient prominence to the subsidy provisions of the TCA which, by s.29 EUFRA, apply in domestic law. Instead, it considers the UK’s subsidy obligations under international treaties / FTAs as a whole, and while it specifically mentions the new TCA with the EU, it doesn’t expressly give the TCA any greater status, or attribute to it any greater importance, than any other FTA.

This gives the erroneous impression that the main constraint on subsidy measures in UK law is the WTO provisions relevant to subsidies to which the UK is party (and downplaying the TCA requirements). But, in fact, the WTO provisions apply only to trade in goods while (as noted above) the TCA subsidy provisions ‘recreate’ much of EU state aid law and so apply more widely and impose a higher degree of constraint than exists under the WTO rules (or other FTAs). In short, if a public authority complies with the TCA requirements as applied by s.29, it will comply with the WTO requirements; but the converse not necessarily the case.

It may be that, politically, the UK government did not wish to acknowledge candidly that it has, by the TCA and s.29, immediately given effect to subsidy constraints that are closely analogous to EU state aid law in a number of significant respects. We’ll look more at this domestic application next time.