Beyond Brexit: Preparing for changes to the treatment of UK State aid

The deadline for the UK government to make a request to extend the Brexit transition period under the Withdrawal Agreement has now passed. While it may technically be possible for an alternative form of extension to be negotiated later in the year, this would present significant legal and practical challenges, and would involve agreement on a continuing UK contribution to the EU budget. It is therefore prudent for businesses to assume that the transition period will end on 31 December 2020 (Completion Day). 

The interface between the EU and UK competition law regimes may therefore present businesses with significant challenges in the coming months. This update outlines the transitional arrangements for 'live' State aid notifications at the end of the year. It also examines the extent to which the EU State aid rules will continue to be relevant to, and in, the United Kingdom in the future.

EU State aid rules

The European Union operates a system of State aid (subsidy) control which applies when financial support is given to an economic entity by an EU Member State, leading to a selective advantage which is liable to distort competition. The rules apply to the extent that there is an effect on trade between Member States. State aid can take many forms, for example direct grants, tax advantages (such as exemptions or deferrals) and State guarantees. Any aid not falling within existing EU exemptions or pre-approved schemes must be notified to, and approved, by the European Commission (Commission). If the Commission finds that unlawful State aid has been granted, it may order that the aid be recovered from the recipient. This order can only be suspended by an application to the Court of Justice of the European Union (CJEU). However, EU national courts also have an important role to play, particularly for complainants, as they are able to rule on the illegality of aid and require its repayment.

The transition period, and beyond

During the transition period, the EU State aid rules will continue to apply to financial support granted by the United Kingdom; the Commission will therefore receive and assess notifications as before. The Commission will continue to investigate 'live' cases initiated (i.e. given a case number) before 31 December 2020 and will remain entitled to initiate new investigations into UK aid measures granted before 31 December 2020. This latter provision will apply until 31 December 2024 and the Commission will continue to review cases after the end of this four year period if an investigation is already underway. This means that the CJEU will remain the ultimate arbiter of UK aid granted before 31 December 2020 for some years to come.

In addition, the Northern Ireland Protocol (annexed to the Withdrawal Agreement) states that the EU State aid rules will continue to apply to UK aid measures which have an effect on trade between Northern Ireland and the European Union until at least 31 December 2024 (Art. 10). The precise scope of Art. 10 is currently unclear, but new UK-wide measures such as VAT rules or significant UK-wide support for businesses affected by the Covid-19 crisis (which affect trade between the European Union and Northern Ireland) may be caught if this provision is not superseded by a new arrangement at the end of the year. 

The future relationship

State aid control is a crucial aspect of the current negotiations on the future EU-UK trade relationship and the two sides are currently a long way apart on this issue. The  United Kingdom is insisting on a 'separate and independent' subsidy policy, whereas the European Union is seeking 'dynamic alignment' via the level playing field commitments. While there appears to have been some recent movement on the EU side, it  is not yet clear where the final landing zone will be, if any. The details of the United Kingdom's proposed new subsidy control regime have not yet been published, but the  government has made it clear that it does not intend to accept any commitments that would limit its sovereignty over the UK regulatory framework. It has also stated that it would not accept a continuing role for the CJEU. Any compromise would therefore be likely to require an alternative, binding adjudication or arbitration mechanism for alleged breaches. Some commentators suggest one solution would be for the United Kingdom to retain a domestic regime that is ‘as effective’ as the EU rules, including reciprocal commitments on transparency. While this may be too rigid an outcome for some members of the UK government, it is difficult to see how any trade agreement can be reached without some form of 'shared' vision in this area.

In any event, it is likely that the UK government will adopt new State aid legislation before the end of 2020. Draft legislation put forward in the form of a Statutory Instrument by the previous UK government  in 2019 envisaged that the Competition and Markets Authority would act as a domestic regulator for a new parallel UK State aid regime. However, the current government has indicated that its proposals do not necessarily require an enforcement body, paving the way for political decision-making in this area.

Recipients (and potential recipients) of State aid should monitor the progress of trade negotiations in this area towards the end of the year, as it is currently very difficult to predict the outcome of the negotiations.

No Deal?

If there is no trade agreement with the European Union in place at the end of the transition period, the United Kingdom will remain subject to existing WTO rules on foreign subsidies in relation to trade in goods. This is a distinct, and much more limited, legal regime to that of the European Union, with no prior notification requirements or direct mechanism for the recovery of aid. Rather, the negative effects of subsidies granted by other WTO Members may be addressed or challenged in WTO dispute settlement proceedings.

In addition, the Commission has recently published a white paper which seeks to address the distortive effects of foreign subsidies on the EU single market. The recommendations would, if implemented, significantly expand the existing system of subsidy control to cover financial support granted by non-EU countries (including the United Kingdom) to businesses operating in the European Union.

Commentary

Whatever the outcome of the United Kingdom's negotiations with the European Union, State aid recipients, as well as potential complainants, will need to be aware of the continuing role of the Commission in monitoring UK subsidies after the end of the transition period.

This note provides outline guidance only. For detailed advice on the issues raised, please contact either David Harrison or Julian Ellison.