The Cinderella-style transformation at 11pm UK time on 31 December 2020 from the European Union State aid rules to a domestic system of subsidy control brings a challenging and uncertain time to the regulation in the UK of government assistance to businesses.
Once the Trade and Cooperation Agreement (TCA) between the UK and EU is implemented (initially on a provisional basis pending the completion of ratification processes in the EU), the UK will be free to establish its own regime for controlling subsidies. But that system will have to comply with the provisions of the TCA.
What is a subsidy?
A subsidy is defined in the TCA as financial assistance which arises from the resources of either the UK or EU; confers an advantage on an economic entity engaged in offering goods or services on a market; is specific (ie benefits the recipient over others in relation to the production of certain goods or services); and has, or could have, an effect on trade or investment between the UK and EU.
Subsidies may include direct grants, loans, loan guarantees, foregoing of revenue, the provision or purchase of goods or services, and tax measures.
What subsidies are prohibited?
The TCA places restrictions on certain categories of subsidies if they have, or could have, a material effect on trade or investment between the UK and the EU including the following:
- Unlimited state guarantees - Subsidies in the form of a guarantee of debts or liabilities of the beneficiary without any limitation as to the amount of the debts and liabilities or the duration of the guarantee are prohibited.
- Rescue and restructuring subsidies – Support for restructuring an ailing or insolvent business without a credible restricting plan in place is prohibited. Particular rules apply to banks, credit institutions and insurance companies.
- Export subsidies – Subject to certain exceptions, any subsidy that is contingent upon export performance relating to goods or services is not permitted.
- Domestic content subsidies – Subsidies which are contingent on the use of domestic over imported goods or services are prohibited.
What measures are excluded from subsidy control?
Excluded from some or all of restrictions set out in the TCA are subsidies which are:
- of a social character targeted at final consumers;
- granted on a temporary basis to respond to a national or global economic emergency, but they must be targeted, proportionate and effective in order to remedy the emergency;
- under 325,000 Special Drawing Rights (approximately £343,000) over any period of three fiscal years to any one beneficiary; or
- relate to the audio-visual sector.
Particular rules relate to subsidies granted for the performance of particular tasks in the public interest, including public service obligations.
How will subsidies be regulated in the UK?
At the time of writing, the big unknown is what system of internal regulation of subsidies the UK will adopt. The lack of any details gives rise to great uncertainty. Grantors and recipients of government assistance will want to know whether any proposed project will be compliant with the new regime. It remains to be seen what effect the lack of any rules will have on planned projects.
It is possible that the new regime will be similar to the series of EU State aid block exemptions whereby any proposed assistance which satisfies detailed criteria in terms of matters such as scope, financial limits, eligible costs etc will exempted from the need to obtain specific approval.
The UK is committed in the TCA to adopting a system which ensures that the granting of a subsidy respects the following principles. Subsidies must:
- 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”);
- be proportionate and limited to what is necessary to achieve the objective;
- be 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;
- not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
- be an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means;
- have positive contributions to achieving the objective which outweigh any negative effects, in particular the negative effects on trade or investment between the UK and EU.
Under the terms of the TCA, the UK is required to:
- establish or maintain an operationally independent authority with an appropriate role in its subsidy control regime;
- ensure that the courts are competent to (a) review decisions of an authority granting a subsidy for compliance with the above principles; (b) review decisions of the independent authority; (c) impose effective remedies in relation to (a) and (b) (including awarding damages or ordering recovery of the subsidy from the beneficiary); and (d) hear claims from interested parties in respect of subsidies; and
- have in place an effective mechanism of recovery in respect of subsidies.
It will be very interesting to see the details of the subsidy control system that the UK will introduce and the policy decisions made on the back of it as to where government support will be targeted. In a non-binding Joint Declaration on Subsidy Control Policies, the UK and EU recognised that subsidies may be granted for the development of disadvantaged or deprived areas or regions, to airports, road infrastructure projects, ports and for research and development (including fundamental research, industrial research and experimental development, new production processes, relevant infrastructure, innovation clusters and digital hubs). It would be surprising if subsidies are not provided in a much wider range of sectors.
Goodbye State aid?
It is not quite as simple as that. Certainly, we will be now be living in an era of an independent, domestic subsidy control in the UK, but somewhat confusingly the EU State aid rules will continue to apply in respect of measures which affect that trade between Northern Ireland and the EU. Time will tell how these two systems will operate alongside each other and how any overlap between their application will be resolved.
For more information on any of the items raised in this article please contact Stephen Cole on 01604 233233, or click here to email Stephen.