In her speech at the Mansion House on 2 March 2018 on the Government’s position on Brexit negotiations, Theresa May said that “… we may choose to commit some areas of our regulations like state aid and competition to remaining in step with the EU's”.

Quite what this means in terms either of concrete proposals from the UK in negotiations with the EU, or of the shape of provisions on state aid ultimately agreed in any trade agreement between the UK and the EU, remains to be seen.

State aid regime

What then is the range of likely options for post-Brexit UK rules on state aid?

If no deal is reached or if an agreement has no provisions on state aid, the World Trade Organisation’s rules will apply (as has been much vaunted). The principal differences between the WTO Agreement on Subsidies and Countervailing Measures (“ASCM”) and the EU rules are:

• The ASCM’s provisions on subsidies apply only to goods (not services);
• Unlike the position with the EU rules, the WTO regime involves no prior approval for the introduction of a subsidy or the recovery of unlawful subsidies (but rather provides a mechanism for the removal of the measure or the introduction of instruments in response);
• Under EU law, state aid is unlawful unless it falls within a prescribed exemption or is approved by the European Commission before the aid is granted. The WTO rules allow subsidies (other than prohibited subsidies) unless, on a challenge, it is shown that the measure concerned has adverse effects; and
• The enforcement of the WTO rules is in the hands of the governments of its members. A private entity adversely affected by a subsidy granted by one WTO member would need to persuade the government of another to take action (whereas under the EU regime complaint can be made to the European Commission or through proceedings brought in domestic courts).

However, adopting the WTO regime would not provide for any internal regulation of subsidies in the UK.

The House of Lords’ European Union Internal Market Sub-Committee’s Brexit competition enquiry report (published on 2 February 2018) concluded that “[t]he EU has, in almost every case, insisted that trade agreements with third countries include some form of controls on State aid, and it is highly likely that any deep and comprehensive UK-EU Free Trade Agreement (FTA) will include State aid provisions”.

Such provisions may extend the WTO rules for subsidy control. Examples of this are extending the list of subsidies which are prohibited under the ASCM (EU-South Korea FTA) or, with less impact, extending the parties’ reporting obligations under the ASCM (EU-Canada Comprehensive Economic and Trade Agreement).

Other options are closer to the EU regime rather than based on the WTO system. By way of example, the language of the general principles on state aid in the EU-Ukraine Association Agreement reflects the EU regime. It also provides for the relevant jurisprudence of the European Court of Justice and the guidance and framework of the European Commission to be used as sources for interpreting the state aid rules in the Association Agreement.

The European Council’s draft guidelines published on 7 March 2018 on the EU’s negotiating position state that its aim is to prevent any unfair competitive advantage that the UK could enjoy through undercutting of current levels of protections, including in relation to state aid, which will require, among other things, “a combination of substantive rules aligned with EU and international standards”. The UK’s negotiators will no doubt be under pressure from the EU to adopt a more robust state aid rules which are close to the EU regime.

Enforcement mechanisms

Whilst the prospect is that the post-Brexit UK rules may reflect (to a greater or lesser degree) the EU regime, the institutional framework for the enforcement of them in the UK will change fundamentally. How are any post-Brexit UK state aid rules to be enforced?

Unlike in competition law matters where domestic authorities have had a role in enforcement, state aid has been the exclusive remit of the European Commission. Whilst not strictly necessary (as enforcement could be way of court action by an aggrieved party), a UK regulator would perhaps be the best way of achieving proper enforcement of domestic rules. Either a UK state aid authority would need to be established or the role of an existing entity (most likely, the Competition and Markets Authority) extended to include responsibility for the enforcement of any UK state aid rules.

The devolved administrations in Scotland and Wales have demanded co-operation in the development of a UK state aid framework.

As with so many areas of Brexit, there is a long legal and political road to be travelled before the shape of the post-Brexit state aid landscape in the UK comes clearly into view.

For more information please contact Stephen Cole on 01604 233233 or click here to email Stephen.