There has been considerable political debate surrounding the possible increase in state funding and intervention that may result from Brexit. However, Brexit is unlikely to represent a windfall of government funding. This guide looks at what the post-Brexit state aid regime may look like and what this means for business.
Some political debate on state aid post-Brexit has suggested that the UK will be able to provide more state aid to industry once it leaves the EU. This is not altogether correct and the UK will still be subject to international rules supressing unwarranted state support.
This guide looks at what the post-Brexit state aid regime may look like, and what this means for business.
Please note also that if the UK does agree a comprehensive free trade agreement with the EU (often referred to as 'Canada Plus'), it is very likely to contain rules on state aid to maintain alignment with the EU state aid rules and to inhibit competitive divergence between the EU and UK. The EU has acknowledged this, with its negotiating guidelines stating that the agreement on the future EU-UK relationship should "prevent [any] unfair competitive advantage that the UK could enjoy through undercutting levels of protection with respect to […] state aid."
What is state aid?
Different state aid regimes have different definitions of state aid. Broadly, state aid is where a public authority grants a financial or pecuniary advantage to a specific business or industry. Examples of state aid include grants, loans, tax credits or allowing an enterprise to use state assets for free or below market price.
Illegal state aid is state aid that unfairly distorts competition and/or trade. The applicable rules that determine when state aid leads to unfair competition vary depending on the trade agreements to which the relevant state is a party.
What are the current rules?
There are currently two separate sets of rules that apply to state aid granted by the UK, namely the:
- EU state aid rules, as set out in the EU treaties and interpreted by the EU courts; and
- World Trade Organisation (WTO) rules, as set out in the Agreement on Subsidies and Countervailing Measures (the "SCM Agreement"), which applies to all WTO members.
A brief overview of the two systems is provided below.
EU state aid rules
The EU state aid rules apply to EU Member States and the European Free Trade Association (EFTA) countries that are party to the European Economic Area Agreement. The European Commission (the "Commission") is the body responsible for enforcing the EU regime. In Norway, Iceland and Liechtenstein, the EFTA Surveillance Authority and EFTA Court are responsible for enforcing the EU's State aid rules in line with EFTA's own interpretative guidelines.
The Commission has a broad definition of state aid, namely: "an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities". EU law has a general prohibition on state aid, only permitting state aid where certain positive conditions are met. Therefore, where state aid may distort competition and the state intervention is likely to affect trade between EU Member States then the Member State proposing the aid must notify the Commission whereby they can give permission for the grant of the state aid where the positive conditions are met.
It is illegal for an EU Member State to award any state aid until the Commission has approved the proposed state aid. However, there are some limited exceptions where notification is not required. Specifically:
- the amount of aid is de minimis (i.e. worth less than €200,000 per enterprise over any three-year period (or €100,000 in the road transport sector));
- the state aid benefits from automatic approval under the General Block Exemption Regulation (which includes (among other things) state aid that benefits SMEs, environmental protection, or research, development and innovation); or
- the aid is granted under a scheme that has already been approved by the Commission.
The Commission has two months under the relevant EU regulation to make a decision, however decisions often take longer, and the UK government advises authorities to allow for 6-9 months for approval in cases that must be notified. At the end of that two month period, the Commission may undertake a further investigation, which may take up to 18 months.
Notifiable state aid will generally be cleared by the Commission where it is designed to address a genuine market failure, provided that the aid is:
- proportionate - i.e. the minimum necessary to remedy the failure;
- incentivising a change in behaviour in the recipient(s) of the aid;
- appropriate - i.e. the best method to respond to the market failure; and
- sufficiently beneficial to outweigh any negative (or potentially negative) effect on competition.
Where aid is granted illegally i.e. without Commission clearance and where it does not fall under an available exemption, and the Commission, on investigation, considers that exemption is not warranted, the recipient of the aid must pay it back, with interest.
The WTO rules are significantly less stringent than the EU state aid rules in a number of ways. Firstly, under the WTO rules, there is no general prohibition on state aid.
Secondly, the SCM Agreement applies only to 'subsidies' that affect international trade (i.e. the WTO rules are not enforced domestically, so WTO rules could not be enforced by one company against another in the event that a subsidy unfairly distorts competition. The SCM Agreement defines subsidies as including (inter alia) grants, loans, guarantees and tax credits.
Thirdly, the SCM Agreement provides for retrospective enforcement, and there is no requirement on WTO members to obtain prior approval in order to provide state aid. The WTO also lacks an equivalent enforcement body like the Commission. Instead, the WTO rules are triggered only if a WTO member files a complaint against the member providing the state aid.
The SCM Agreement divides subsidies into those that are prohibited outright, and those that are 'actionable'. For prohibited subsidies, the WTO has a fast-track dispute settlement mechanism to address a complaining member's grievances. For 'actionable' subsidies, the complaining WTO member must show that the subsidy has caused 'adverse effects', such as injury to that country's domestic industry. This reflects the fact that state aid is generally permitted under the WTO rules.
If this can be demonstrated, then the complaining WTO member may be able to impose 'countervailing measures', such as a retaliatory tariff towards the WTO member that has caused adverse effects to negate the impact of the subsidy. However, the complaining member and the member providing the subsidy must first go through a settlement procedure to resolve the dispute.
What actions should business take now?
The application of the EU's state aid rules to the UK will depend on the future trading relationship agreed as part of the Brexit negotiations. However, the European Union (Withdrawal) Act 2018 (the "Withdrawal Act") transposes the current EU rules into UK law, such that they will continue to apply in the UK after exit day (defined as 11pm on 29 March 2019).
It may be significant that the draft withdrawal agreement proposed by the EU currently states that during the transition period (due to expire on 31 December 2020), the EU "shall be competent to initiate new administrative procedures concerning compliance with [EU] law". The Treaty on the Functioning of the European Union (TFEU) currently states prohibits state aid "insofar as it affects trade between Member States." It has been suggested this will be amended to "affect trade between the UK and the EU", but we consider it more likely that this will be replaced with "affect trade within the United Kingdom" in the same way that analogous provisions are replicated in the Competition Act 1998. Should the former approach be adopted, the wording of the withdrawal treaty suggests the Commission would retain the ability to investigate state aid granted (or proposed) by the UK during the transition period.
Moreover, the government's latest Brexit white paper (the so-called Chequers deal) commits to "a common rulebook on state aid, enforced by the CMA [Competition and Markets Authority]". Alluding to the prospect that the UK will increase state aid in certain sectors, the white paper goes on to say "this is without prejudice to the UK's intention to develop new tailored arrangements in relation to payments to farmers and other land managers for environmental benefits, and the UK's future public procurement policy."
At the time of writing, it is not clear whether the UK's proposed 'common rulebook' will be accepted by the EU. Nonetheless, the Withdrawal Act will transpose EU state aid rules into UK even in a no-deal scenario.
The application of the WTO rules will be unaffected by Brexit. Consequently, Brexit is not a carte blanche for the UK to significantly increase state aid, since this would likely provoke a complaint from another WTO member.
The UK government has produced a guidance note on state aid in the event of a no-deal Brexit. This guidance confirms that the no-deal regime will require public authorities to notify the CMA when it intends to offer state aid and that all existing approvals will continue to be valid.
The government advises all businesses that:
- they will still be able to receive state aid from UK public authorities in accordance with the UK state aid rules;
- any complaints from business regarding state aid should be made to the CMA;
- businesses should consult further guidance to be published by the CMA in early 2019.
The guidance also says that any state aid notifications "not yet approved by the Commission should be submitted to the [CMA]." Therefore, Brexit may lead to a delay in the approval process for new state aid.
Accordingly, businesses should be aware of where the state funding currently comes from, and from where they intends to receive such funding in future. If a business intends to receive funding from any proposed new UK state aid measures, then businesses should be aware that the pre-notification approval process is changing - it is not yet clear whether the CMA will be any quicker or slower at approving state aid than the Commission.
Notably, the Department for Business, Energy and Industrial Strategy has stated that should the UK attempt to subsidise industries with a global surplus (like steel), or "highly competitive sectors like the automotive sector, would be challenged" at the WTO. This may make it unlikely that the UK government will substantially increase subsidies to the automotive sector.
There is currently no guidance from the government as to the basis on which state aid will be granted after Brexit, but it is assumed the CMA will use the decisional practice of the Commission as a guide, to ensure a degree of continuity. Further, in light of the high workloads at the CMA, we anticipate guidance will be released separately with respect to specific de minimis thresholds and exemptions to ease the administrative burden. In any event, businesses should be aware that it is possible to notify illegal state aid after becoming aware that it is prohibited.
Further, the government has not released any information as to the procedure for the retrieval of unlawful state aid, or whether companies will continue to be able to obtain injunctive relief where they are affected by the implementation of unlawful aid.