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UK Internal Market Bill: Government moves to take back control, but also sends clear message to devolved administrations

10 September 2020
The UK Government has published the United Kingdom Internal Market Bill ("UKIM Bill") with the aim of repatriating many of the powers previously held by the European Union and ensuring the UK has a single, functioning market once the Brexit "Transition Period", as agreed between the UK and the EU, has come to an end as of 31 December 2020.  

The UKIM Bill is likely to face a difficult passage through Parliament, in particular when considered by the House of Lords, given the controversial positions on the Northern Ireland Protocol and because it may be seen to change the balance of power between Westminster (UK Government) and the Devolved Administrations (Scotland, Wales and Northern Ireland).  

The logic underpinning the UK Internal Market is that a business based in Abergavenny should be able to compete on similar terms to a business based in Walsall.  This has for the most part always been assumed, within one overall sovereign state, namely the UK.  However in a post-Brexit world and in particular following provisions negotiated in the EU/UK Withdrawal Agreement, which sets particular requirements for trade between the rest of the UK and Northern Ireland (in the event of no future trade deal to supplant these requirements), this has been called into question.  

The UK Government has therefore moved to set out in place clear rules to ensure the integrity of a single, all UK market to avoid barriers being put in place.  For example, the UKIM bill sets out in UK law the principle of mutual recognition, which ensures that a product certified as safe in one part of the UK is recognised as such when transported to another part of the UK. 

For over 45 years, the UK had such market protections through EU law.  It currently still enjoys such protections under the Transition Period.  Once the UK leaves the EU, these protections as have been designed to apply between different EU Member States will be lost.  The UK Government has tabled legislation intended to replace those powers, insofar as they apply to the UK, and instead seeks to set the same as between the different component parts of the UK.  

Under the UKIM Bill some of these powers, for example those arising in respect of consumer protection, food standards and animal welfare, will be expressely reserved to the UK Government (away from the Devolved Administrations).  Other powers, such as those relating to air quality, energy efficiency of buildings and elements of employment law will be held by the Devolved Administrations in future.   

The UKIM Bill also sets out plans to create a new independent Office for the Internal Market ("OIM") to monitor trade within the UK, which will sit within the Competition and Markets Authority ("CMA") and provide independent, technical advice to parliament and the devolved administrations on regulations that may damage the UK’s internal market.  At this time, the OIM is understood to be based in London and Edinburgh.   The reporting and monitoring role undertaken by the OIM will be non-binding and carried out independently from Ministers and Devolved Administrations, to ensure impartiality and transparency

The UKIM Bill has already proved highly controversial before it was even published.  In this section we consider some of sections which have created the most criticism. 

Northern Ireland Protocol

In October 2019 Boris Johnson agreed the Northern Ireland Protocol, including Article 10 which legally obliges the UK to maintain EU State aid law in respect of "measures which affect that trade between Northern Ireland and the Union".  

This provision was noted as being significant at the time, given it applies, potentially in perpetuity, to goods and other sectors covered under the Northern Ireland Protocol unless superseded by a new agreement under Article 13(8) of the Protocol.  In practical terms, the EU is only likely to agree to supersede this provision if the UK puts forward its own meaningful State aid regime.   

As noted by Mathew Holehouse in his article, "Brexit deal's State aid rules may have long reach".  In particular since the 1980 Philip Morris case, under EU law the effect upon trade test is regarded to be satisfied in respect of all but the smallest subsidies.  Therefore subsidies to businesses located outside Northern Ireland may well affect trade between the EU and Northern Ireland. 

Whether Boris Johnson did not comprehend the impact of Article 10 of the Protocol at the time or has changed his mind since, it appears that now the UK Government has decided to take action to try to ensure that Article 10 of the Protocol does not bind the UK.  With this aim, UKIM includes provisions allowing the Secretary of State to unilaterally remove or modify Article 10 of the Protocol.  

However there is a significant problem with this approach.  As correctly identified by the Northern Ireland secretary, Brandon Lewis, in Parliament on 8 September 2020, such a unilateral amendment would “break international law". We therefore would be very surprised if such provisions were to make the statute book.  If they did then our expectation is that they would be subject to successful challenge. 

Despite the Government's announcement about replacing State aid law with WTO rules (discussed in more detail below), we note that Article 44 of the UKIM Bill pragmatically keeps the door open to the UK Government notifying aid to the European Commission under the EU State aid law regime (in so far as the aid may affect Northern Ireland). 

Devolution

Part 6 of the UKIM Bill gives the Secretary of State the ability to award public funding for a range of activities including economic development, infrastructure, culture, sport, education and training.  Although ostensibly the repatriation of the European Commission's powers to award European Structural and Investment Funds, this is controversial because it is seen as a "power grab" against the Devolved Administrations.  

Indeed, Scotland's First Minister Nicola Sturgeon has said she will "fight tooth and nail against this shameless bid to reverse the devolution of power” and is pointing to the UKIM Bill as a reason for Scotland to have its independence.  

The Government argues that new powers are being awarded to each of the Devolved Administrations and that this power is necessary to establish a new UK Shared Prosperity Fund

State aid law

Part 6 of the UKIM bill makes State aid law a reserved matter.  It does so by removing competences from Scotland, Wales and Northern Ireland and awarding these to the UK Government. 

This could have been the first step in preparing a UK State aid regime.  However, soon after publishing the UKIM Bill, the UK Government announced that it plans to apply WTO rules on subsidies if it leaves on a no deal basis, although arguably this is not surprising since all WTO members are bound to apply at least the minimum WTO rules on subsidies as a matter of course.  

In reality the WTO rules set merely a baseline of types of subsidy which should not be granted, which all WTO members, including the EU, the UK and the US, should all be bound by.  This leaves all WTO members free to set their own domestic subsidy regimes, as the EU has always done.  

The press release goes on to states the UK shall "adhere to any international obligations on subsidies agreed under future free trade agreements") and consult on a new regime next year.  Given that the UK's application of EU rules ends as of 31 December 2020, this runs a risk of leaving a period of vacuum in the absence of some further interim set of arrangements. 

However we recommend taking these plans with a pinch of salt given that the UK has called for the WTO rules on industrial subsidies to be updated and there are strong reasons why a Government which is looking to stabilise the economy after spending large sums would want rules which act to avoid excessive and unnecessary subsidies.  

Conclusions

The core sections of the UKIM Bill are consider necessary to protect a functioning single market within the the UK once it leaves the EU's own single market.  However there are other parts which it would appear can be dropped during the Parliamentary process if a deal can be brokered with the EU.   Therefore, we agree with the Pat Leahy of the Irish Times that the UK remains eager to do a deal and the UKIM Bill and State aid announcement form part of a high stakes approach to ramp up the pressure on the EU. 

DWF has exceptional expertise in public funding matters.  Our team as experience of working within Central, Regional and Local Government on high profile grant, loans, equity investments and other forms of State support and intervention.  Please get in touch if we can be of assistance to you.

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