State of play: new subsidy control regime

Introduction
Out with the old
WTO obligations
In with the new: requirements under the TCA
What happens now?

Introduction

EU state aid law ceased to apply to the United Kingdom on the expiry of the Brexit transition period on 31 December 2020 – save for limited exceptions as set out in the EU-UK Withdrawal Agreement 2018.(1)

In its place, the UK government proposes to establish a domestic subsidy control regime. On 3 February 2021 the government launched a public consultation on this proposed regime. The consultation closes on 31 March 2021.

In the meantime, the grant of state financial support in Great Britain remains in limbo – the EU system has not been carried over into domestic law as 'retained' law. Further, as explored below, while the United Kingdom is bound by its international obligations under the World Trade Organisation (WTO) rules and the UK-EU Trade and Cooperation Agreement (TCA), these have no direct effect in the national courts and, to date, there are no UK implementing provisions for these obligations.

This article explores the current state of play and what will happen next.

Out with the old

The potential application of EU state aid rules to the United Kingdom was a contentious topic in the EU-UK trade negotiations in 2020, with these rules forming part of the 'level playing field' commitments that attracted much UK media interest.

While negotiations were ongoing, the UK government announced that it would replace EU state aid laws and "follow WTO subsidy rules after the end of the transition period" and "confirmed that the UK will adhere to any international agreements on subsidies".(2)

Neither of these statements provided much certainty or comfort. The United Kingdom was already bound by WTO subsidy rules while it was an EU member state (for the United Kingdom was a WTO member, despite being represented by the European Union).

The conclusion of the TCA and the launch of the consultation on the subsidy regime provide some greater detail as to how financial assistance granted by UK public bodies may be regulated.

The European Commission now retains its jurisdiction over UK state financial support only in relation to cases initiated before 31 December 2020 and has a four-year window to investigate the grant of state aid in the United Kingdom before that date. In relation to Northern Ireland, pursuant to the Ireland-Northern Ireland Protocol, the EU state aid rules continue to apply to goods insofar as there is an effect on trade between Northern Ireland and the European Union.

WTO obligations

As a WTO member, the United Kingdom is bound by the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement).

The SCM Agreement defines 'subsidy' for the purposes of international trade law and sets out a state-to-state mechanism for disputing the grant of subsidies that have adverse effects on trade between WTO members.

The SCM Agreement expressly prohibits two types of subsidy:

• those contingent on export performance; and
• those contingent on the use of domestic over imported goods.

However, unlike the EU state aid rules, the WTO rules contain no general prohibition on the grant of subsidies and there is no requirement to obtain authorisation prior to the grant of a subsidy. Moreover, the SCM applies only to goods.

Instead, the United Kingdom is obliged by its WTO obligations to notify WTO members every two years of subsidies that it has granted.

In with the new: requirements under the TCA

Under the level playing field provisions of the TCA, the United Kingdom is committed to establishing its own subsidy control regime, together with an independent body that has "an appropriate role in its subsidy control regime".(3) The identity and functions of this public body are subject to the public consultation on the UK subsidy control regime.

The United Kingdom and the European Union have also agreed a definition of 'subsidy' and a set of subsidy control principles which must be implemented via each of the parties' subsidy control regimes. These principles are intended to ensure that subsidies are not granted where they "have or could have a material effect on trade and investment" between the United Kingdom and the European Union.(4)

The government consultation seeks views on whether any additional principles should be adopted within the UK subsidy control regime.(5)

The TCA also contains a list of eight categories of subsidy which are either prohibited or subject to specific conditions, including:

• unlimited state guarantees;
• rescue and restructuring;
• large cross-border or international cooperation projects;
• energy and environment; and
• subsidies to air carriers for the operation of routes.(6)

The UK government proposes to include these prohibitions and conditions within its domestic subsidy control regime.

Moreover, the TCA facilitates third-party challenges of the grant of subsidies, where it imposes public reporting requirements on both the United Kingdom and the European Union of the grant of subsidies, so as to permit interested parties to challenge the compliance of the subsidy with these principles.(7)

What happens now?

While the United Kingdom has not yet enacted its own domestic subsidy control regime, it is nonetheless bound, as a matter of international law, by the TCA(8) (and continues to be bound by the WTO rules).

The United Kingdom has stated that it will not apply the new regime retrospectively (ie, subsidies granted after 1 January 2021 but before the regime enters into force will not fall within the ambit of the regime).

The government consultation on the subsidy control regime runs until 31 March 2021 and it is anticipated that primary legislation will be passed in order to give effect to the regime following the government's consideration of the consultation responses.

In the meantime, the government has issued guidance to public bodies on how they should self-assess compliance with the United Kingdom's obligations under the WTO, the TCA and other free trade agreements.

For further information on this topic please contact Bernardine Adkins or Sean Giles at Gowling WLG's London office by telephone (+44 207 379 0000) or email (bernardine.adkins@gowlingwlg.com or sean.giles@gowlingwlg.com). Alternatively, contact Claire Bradwell at Gowling WLG's Birmingham office by telephone (+44 207 379 0000) or email (claire.bradwell@gowlingwlg.com). The Gowling WLG website can be accessed at www.gowlingwlg.com.

Endnotes

(1) Further information is available here.

(2) See Title XI, Article 3.9 of the TCA.

(3) See Title XI, Article 3.4 of the TCA.

(4) See Paragraphs 59-61 of the consultation, available here.

(5) See Title XI, Article 3.5 of the TCA.

(6) See Title XI, Article 3.7 of the TCA.

(7) On this point, some commentators have argued that the subsidy control provisions of the TCA may be given effect in UK law by virtue of Section 29 of the European Union (Future Relationship) Act 2020. This provides for a 'sweep up' provision which – in effect – states that where necessary to comply with the TCA, domestic law will be taken as modified to implement the TCA where the TCA is not otherwise implemented. It is unclear how this is possible since no prior domestic law existed in relation to subsidy control. Irrespective of the merits of this interpretation, the provisions of the TCA are arguably too broad to be implemented in any meaningful way under this provision.

(8) See Paragraph 45 of the consultation paper.