The Department for Business, Energy and Industrial Strategy has been consulting on how subsidies granted by UK public bodies will be regulated in the future. The consultation closed at the end of March and the Government is currently analysing the feedback.

What has happened to State aid law?

The previous law on State aid that applied while the UK was a member of the European Union was repealed at 11pm on 31 December 2020 by the State Aid (Revocations and Amendments) (EU Exit) Regulations 2020 and so no longer binds UK public bodies. That is subject to the caveat that EU State aid law continues to govern aid that could affect the trade in goods and electricity between Northern Ireland and the EU, under the Northern Ireland Protocol to the UK's Withdrawal Agreement with the EU.

With that exception, subsidies given to undertakings by UK public authorities no longer have to be notified to and approved by the European Commission.

However, this does not mean the granting of public subsidy to private enterprise is now unregulated in the UK. A set of rules similar to EU State aid law are included in the Trade and Cooperation Agreement between the EU and UK (the "TCA"). Giving financial assistance to "economic actors" from public resources is generally prohibited if it is selective, confers an economic advantage and has or could have an effect on trade or investment between the UK and EU.

How does the TCA differ from State aid law?

Most of the TCA rules are very similar to the equivalent State aid law, with three prominent exceptions.

Firstly, there is a significantly higher de minimis threshold – allowing most businesses to receive approximately £340,000 of subsidy over any three year period rather than £175,000.

Secondly, there is the potential for the "effect on trade" part of the test to be approached entirely differently from the equivalent test under State aid law. Those familiar with State aid law will know that this part of the test for whether support constitutes State aid has become a bit of a dead letter – the EU courts have adopted the position that effectively any grant of state resources is capable of having an effect on intra-EU trade. There is scope for this point to be reopened in terms of how it applies to the TCA rules, and it may be that a broader category of "purely internal" subsidy will be permitted.

Thirdly, and perhaps the most immediately significant of all the changes, there is a new transparency requirement. Within 6 months of granting a subsidy, the granting authority must publish the details of the subsidy including its legal basis, policy objective and purpose. Any interested party seeking to challenge a subsidy must then notify the authority of its intentions within one month of that publication. The authority must then provide information within 28 days that will allow the interested party to assess whether the subsidy was granted consistently with the principles set out in the TCA (receipt of which then starts a further one month period to commence court proceedings). Authorities will need to put procedures in place to comply with this requirement, including ensuring those responsible for handling FOI requests recognise this type of request going forward so they can be channelled into a separate process.

The domestic legal situation now

The TCA obliges the UK to ensure the prohibition on subsidies is complied with in domestic law. For the time being the UK Government has done that through section 29 of the European Union (Future Relationship) Act 2020 ("EUFRA") – which provides that domestic law has effect "with such modifications as are required" to implement the terms of the TCA.

That means the TCA is, essentially, directly effective in UK law. A grant of financial support that does not comply with the rules set out in the TCA would be an unlawful act by the granting body. How exactly that will be enforced by courts will need to be ironed out in time.

The regulation of subsidy control was expressly reserved to the UK Parliament by the United Kingdom Internal Market Act 2020. The devolved legislatures are therefore not able to put in place their own subsidy control regimes (having previously had to comply with EU law on State aid before that obligation was removed as a result of Brexit). That reservation does not prohibit the Scottish Government and other devolved authorities from granting subsidies where they have the power to do so. However, they must act consistently with the TCA.

As noted above, a grant of financial aid by any UK public body which affects trade between Northern Ireland and the EU in goods or electricity, remains subject to EU State aid law. Precisely how broadly or narrowly that test will be applied will similarly need to be clarified by the courts – though, notably, the final decision on interpreting the Northern Ireland Protocol lies with the EU courts.

Accordingly, any grant of financial support by any public body anywhere in the UK that might affect NI-EU trade is potentially subject to legal challenge under EU State aid law.

See our recent webinar on subsidy control for more on these issues (the session was part of our local authority webinar program but will be generally relevant to anyone interested in the issue).

The proposals for what happens next

The UK Government's consultation set out proposals for a domestic UK subsidy control law, to replace the direct application of the TCA under EUFRA. This seeks to put in place domestic rules which comply with the UK's obligations under the TCA, WTO rules and other free trade agreements signed between the UK and other countries.

The objectives set out by the UK Government are:

  • Facilitating interventions to deliver on the UK’s strategic interests;
  • Maintaining a competitive and dynamic market economy;
  • Protecting the UK internal market; and
  • Acting as a responsible trade partner

The consultation sought, among other things, views on whether these are the right objectives, what type of subsidies are potentially beneficial, which are potentially the most harmful and distortive, and the right balance between them.

The definition of subsidy set out in the consultation paper is, in essence, the same test as set out by EU State aid law and by the TCA. But the consultation sought views on whether subsidies that are subject to different rules (such as agriculture and fisheries) or are exempt from the TCA (such as the audio-visual sector) should be covered by the domestic subsidy regime.

The consultation also asked whether there should be additional principles controlling public subsidies – on top of those in the TCA – and whether the de minimis threshold should be lower under the domestic regime than the one provided by the TCA.

The consultation proposed to exempt temporary emergency aid (for example, aid granted in response to the COVID-19 crisis) from the rules entirely.

Rather than subsidies being subject to a general notification and standstill regime, as existed under EU State aid law, the Government's stated intention is that enforcement of the new UK regime will (like the current direct application of the TCA rules) be based on judicial review within tight time limits, before the ordinary courts, the Competition Appeal Tribunal or another body. Powers may also be given to an independent oversight body (which may or may not be the Competition and Markets Authority) to take enforcement action in respect of illegal subsidies – though without, crucially, requiring any advance approval of proposed subsidies.

Taken as a whole the consultation suggests a desire on the part of the UK Government to transition UK public bodies away from the old State aid approach, which could certainly be somewhat Byzantine, and towards a more principles-based approach that allows public bodies to provide low-risk financial support in pursuit of the UK's economic interests while still prohibiting distortive interventions, and prevents the UK's nations, regions, towns and cities from competing with each other over who can offer the biggest taxpayer-funded incentives for businesses.

While replacing a complex rules-based regime based with a looser principles-based regime can certainly provide greater flexibility, the downside is likely to be a reduction in certainty for public authorities, as well as for recipients and their lenders (who will continue to carry the primary risk of having to repay subsidy if the authority gets it wrong). In particular, replacing an enforcement system based on ex ante approvals with one based on ex post litigation means the system will be less bureaucratic, but the parties will have to carry more risk of subsidies being reversed if a court disagrees with their assessment of the rules.

The Government's response to its consultation may provide more clarity on how the new system will balance these tensions, but until then (and possibly well into the future) authorities, recipients and their lenders will need to tread carefully when granting or relying on public subsidies.