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UK Subsidy Control: how will public funding change now the UK has taken back control of State aid regulation?

30 December 2020
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 2021, 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.

DWF Law LLP has a considerable depth of expertise in public funding, including EU State aid law, grant funding programmes and public procurement compliance. We are able to draw upon a team of leading experts who have extensive experience in this area, including working within the UK Government on high profile funding matters, defending projects from recovery and working within the European Commission on the design of exemptions. 

Further Reading