The new UK subsidy control regime

Posted on 05 Feb 2021 by Brick Court

The UK government’s Department for Business, Energy and Industrial Strategy (“DBEIS”) announced yesterday a consultation on new legislation to establish a domestic subsidy control regime.[i] The proposals are outlined in a consultation document “Subsidy control Designing a new approach for the UK”.[ii] The closing date for responses to the consultation document is 31^st March 2021.

Since the beginning of this year, subsidy control has been a matter for UK law as a consequence of the end of the implementation period for the UK’s withdrawal from the EU. Subject to various transitional provisions[iii], the EU State aid rules applicable under Articles 107-109 of the Treaty on the Functioning of the European Union (“TFEU”) have now ceased to apply to Great Britain[iv], although they remain in force so far as trade in goods and wholesale electricity between Northern Ireland and Ireland are concerned.[v] That does not mean that there is no applicable subsidy control law in GB. There is what should turn out to be interim law in place, but it is somewhat uncertain in its scope and application.

The current position is that the UK is required, as a consequence of the UK’s Trade and Cooperation Agreement (“TCA”) entered into with the EU on 24^th December 2020 and given effect from 11pm on 31^st December 2020[vi] by the European Union (Future Relationship) Act 2020 (“the Future Relationship Act”), to have a domestic subsidy control regime. This is required by Part Two (“Trade, Transport, Fisheries and Other Arrangements”), Title XI (“Level playing field for open and fair competition and sustainable development”), Chapter 3 (“Subsidy control”) of the TCA (“the TCA Subsidy Control Chapter”).

Section 29 of the Future Relationship Act currently gives effect in UK domestic law to the provisions of the TCA Subsidy Control Chapter (some of the key provisions of which are outlined in more detail below) until such time as the UK enacts a specific domestic subsidy control system. Any subsidy as defined in the TCA Subsidy Control Chapter must comply with the requirements set out in that Chapter. Unlike the EU system, there is no mechanism for seeking advance approval for a proposed subsidy, no directly applicable case law on the interpretation of those requirements, but a decision to grant a subsidy may be challenged within a month by way of a claim for judicial review in the Administrative Court.[vii] This is an uncertain environment in which to operate both for the granters and beneficiaries of subsidies.

The legislation to be adopted following the consultation announced by DBEIS yesterday will enact a specific domestic subsidy control system through a new Act of Parliament, which will then replace the TCA Subsidy Control Chapter in domestic law pursuant to section 29(2) of the Future Relationship Act. It will have prospective rather than retrospective effect, so the current interim regime will continue in force for some time.

Key points of the proposed new regime that emerge from DBEIS’s consultation document are that its purpose is to protect the UK’s internal market (in contrast to the EU regime which is to protect the EU internal market). The aim is therefore to prevent inefficient and costly subsidy races between different nations or regions in the UK. Subject to that, the minimum substantive requirements of the new regime will be dictated by the terms of the TCA Subsidy Control Chapter as well as other international agreements to which the UK is party, but there are policy decisions as to the extent to which the UK should impose stricter standards. For example, the TCA Subsidy Control Chapter exempts the audio-visual industry from its requirements: should the UK apply subsidy control in that sector as well?

As to enforcement, the TCA Subsidy Control Chapter requires an independent oversight body at national level, but that leaves open questions as to what should be its precise functions, oversight and composition (whether it should be the Competition and Markets Authority or some other body is one question among many). In particular, to what extent – if any – should it have a role in advance approval of subsidies and what enforcement powers should it have? The question of review of decisions is also an open one: should this be before the Competition Appeal Tribunal, the Administrative Court or elsewhere?

It should be apparent from even this very brief summary that DBEIS’s consultation document is wide ranging, running to some 43 questions, and so many important decisions about the shape of the new subsidy regime remain open for consideration.

The TCA Subsidy Control Chapter – outline of some key provisions

The TCA Subsidy Control Chapter is self-standing. It is not a continuation of the EU State aid rules, this being a key goal of the UK government in negotiating the TCA. While it does cover quite a lot of the same ground, there are important substantive differences between the concepts of State aid under Articles 107-109 TFEU and subsidy under the TCA. Furthermore, the procedural regime applicable to subsidies under the Future Relationship Act is quite different to that which applied under the EU State aid rules.

Substantive provisions

The TCA Subsidy Control Chapter places obligations on the “Parties” to the TCA, which are the UK and the EU, to operate a subsidy control regime in compliance with its provisions.

In broad terms, while some features of this new regime may be similar to the EU State aid regime, other features are quite different.

Starting with the definition of subsidy this is defined by Article 3.1.1b) of the TCA Subsidy Control Chapter as

“financial assistance which:

“(i) arises from the resources of the Parties, including:

(A) a direct or contingent transfer of funds such as direct grants, loans or loan guarantees;

(B) the forgoing of revenue that is otherwise due; or

(ii) confers an economic advantage on one or more economic actors;

(iii) is specific insofar as it benefits, as a matter of law or fact, certain economic actors over others in relation to the production of certain goods or services; and

(iv) has, or could have, an effect on trade or investment between the Parties.”

The aspect which is substantively similar to the EU State aid regime is that the definition refers to a subsidy conferring “an economic advantage on one or more economic actors”. The term “economic actor” is defined by Article 3.1.1a) as “an entity or group of entities constituting a single economic entity, regardless of its legal status, that is engaged in economic activity by offering goods or services on a market”. It is thus equivalent to the term “undertaking” in EU law. However, the change of terminology is revealing as it demonstrates the Parties’ intention not to ground the TCA Subsidy Control Chapter in existing concepts of EU State aid law. So far as the applicable principles of interpretation are concerned, the TCA’s common provisions state in Article COMPROV.13 headed “Public international law“:

“1. The provisions of this Agreement and any supplementing agreement shall be interpreted in good faith in accordance with their ordinary meaning in their context and in light of the object and purpose of the agreement in accordance with customary rules of interpretation of public international law, including those codified in the Vienna Convention on the Law of Treaties, done at Vienna on 23 May 1969.

2. For greater certainty, neither this Agreement nor any supplementing agreement establishes an obligation to interpret their provisions in accordance with the domestic law of either Party.

3. For greater certainty, an interpretation of this Agreement or any supplementing agreement given by the courts of either Party shall not be binding on the courts of the other Party.”

This very different approach to interpretation is important in considering whether the definition of subsidy is broadly equivalent to what is currently within the scope of the concept of State aid under the EU regime. The deliberate use of language which does not replicate the EU State aid rules and the fact that interpretation is governed by public international law suggests that this definition of subsidy falls to be interpreted as a self-standing provision of the TCA without regard to the EU definition.

There are two further areas of obvious substantive dissimilarity with the EU State aid rules which merit noting. These are (i) the criteria for compatibility of a subsidy with the TCA Subsidy Control Chapter and, perhaps less obviously, (ii) the requirement of “effect on trade or investment”.

Under Article 3.4 of the TCA Subsidy Control Chapter, the UK is required to:

“have in place and maintain an effective system of subsidy control that ensures that the granting of a subsidy respects the following principles:

“a) subsidies pursue 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”);

b) subsidies are proportionate and limited to what is necessary to achieve the objective;

c) subsidies are 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 subsidies being provided;

d) subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;

e) subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means;

f) subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on trade or investment between the Parties.”

A subsidy is therefore complaint with the TCA Subsidy Control Chapter if it meets the objective in Article 3.4a) and complies with the requirements of Article 3.4b)-f). These provisions replace the highly prescriptive requirements of EU State aid regime, as given effect through a variety of secondary legislation and guidelines, most notably the State aid General Block Exemption.[viii]

The second area of substantive dissimilarity concerns the requirement in the definition of subsidy that it “has, or could have, an effect on trade or investment between the Parties”. The requirement of effect of trade between Member States in Article 107(1) TFEU has almost been read out of existence in EU law.[ix] While this may serve a jurisdictional purpose within the EU in view of the objective of creation of an internal market set out in Article 3(3) of the Treaty on European Union, there is no obvious read across to the TCA which has no such objective and which is, in any event, to be interpreted in accordance with public international law.[x]

Procedure and remedies

The procedural consequences of financial assistance being categorised as a subsidy under the TCA Subsidy Control Chapter are significantly different to those that applied to EU State aid.

As to compatibility, under the EU State aid rules unless aid was permitted under a relevant block exemption, it could not be granted before notification to and clearance by the European Commission. This requirement was enforceable in the courts through the direct effect of the last sentence of Article 108(3) TFEU.

That is no longer the case. There is no requirement for advance approval before the grant of a subsidy. However, a decision to award a subsidy is open to challenge in the Administrative Court by way of a claim for judicial review.

Article 3.10 of the TCA Subsidy Control Chapter is headed “Courts and tribunals”. Article 3.10.1 provides that:

“Each Party shall ensure, in accordance with its general and constitutional laws and procedures, that its courts or tribunals are competent to:

a) review subsidy decisions taken by a granting authority or, where relevant, the independent authority or body for compliance with that Party’s law implementing Article 3.4 [Principles];

b) review any other relevant decisions of the independent authority or body and any relevant failure to act;

c) impose remedies that are effective in relation to points a) or b), including suspension, prohibition or requirement of action by the granting authority, the award of damages, and recovery of subsidy from its beneficiary if and to the extent they are available under the respective laws on the date of entry into force of this Agreement;

d) hear claims from interested parties in respect of subsidies that are subject to this Chapter; where an interested party has standing to bring a claim in respect of a subsidy under that Party’s law.”

Article 3.11.1 also requires “an effective mechanism of recovery in respect of subsidies”.

DBEIS’s “Technical guidance on the UK’s international subsidy control commitments” states at §3.4 that:

“The TCA also includes provisions on the role of domestic courts in reviewing domestic subsidy decisions by way of judicial review. The UK government will consider legislating in due course to give clarity on the role of the courts in subsidy cases (including as regards recovery of subsidies) but public authorities should be mindful of the possibility that some complainants may already seek to challenge subsidy awards by reference to the principles and their effect in domestic law by virtue of provisions in the European Union (Future Relationship) Act 2020. The UK and EU have also agreed that, in certain circumstances, domestic courts should have the power to order the recovery of subsidies that have been improperly granted under domestic law (e.g. a subsidy that was in scope of, but did not comply with the principles). Recovery could follow from a successful judicial review of the decision to grant the subsidy, provided that the judicial review was commenced within the time periods specified in the TCA.” The time limits for such a claim for judicial review in the Administrative Court are set out in Article 3.11.3 and essentially require proceedings to be commenced within a month of in

[i] https://www.gov.uk/government/news/business-secretary-sets-out-new-subsidies-system-that-works-for-the-uk

[ii] https://www.gov.uk/government/consultations/subsidy-control-designing-a-new-approach-for-the-uk

[iii] Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, OJ 2020 L29/7 (“Withdrawal Agreement”), Articles 92 and 93.

[iv] See regulation 3(b)(i) of the State Aid (Revocations and Amendments) (EU Exit) Regulations 2020, SI 2020 No 1470, made under the European Union (Withdrawal) Act 2018.

[v] Withdrawal Agreement, Protocol on Ireland/Northern Ireland, Article 10 and Annex 5, given effect in UK law under section 7A European Union (Withdrawal) Act 2018.

[vi] This is “IP completion day” as defined in Schedule 1 to the Interpretation Act 1978 by reference to section 39(1) to (5) of the European Union (Withdrawal Agreement) Act 2020. IP stands for Implementation Period, which was the period for implementation of the Withdrawal Agreement after the UK ceased membership of the EU at 11pm on 31^st January 2020.

[vii] DBEIS issued “Technical guidance on the UK’s international subsidy control commitments” on 31^st December 2020 referring to the role of judicial review at §3.4. https://www.gov.uk/government/publications/complying-with-the-uks-international-obligations-on-subsidy-control-guidance-for-public-authorities

[viii] Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, OJ 2014 L187/1, as amended.

[ix] Bacon European Union Law of State aid (3^rd ed, 2017) states at ¶2.145 that “the threshold for proof of an effect on competition and trade is a relatively low one”.

[x] So far as underlying objective is concerned, the preamble to the TCA refers to the Parties: “RECOGNISING the need for an ambitious, wide-ranging and balanced economic partnership to be underpinned by a level playing field for open and fair competition and sustainable development, through effective and robust frameworks for subsidies and competition and a commitment to uphold their respective high levels of protection in the areas of labour and social standards, environment, the fight against climate change, and taxation”. (Emphasis added)

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The new UK subsidy control regime