State aid and the EU-UK trade deal: the newly plotted level playing field - updated February 2021

The Trade and Cooperation Agreement (the "TCA"), the legal document setting out the details of the trade deal agreed between the UK and EU, establishes a set of standards that must be met by both the UK and EU as regards the control of subsidies. Among these, the TCA identifies the principles that both the EU and UK must follow when determining whether subsidies are permissible or not, including a list of specific types of subsidies that must be prohibited. Further, the TCA requires both the EU and UK to provide a means for individuals and businesses alike to challenge subsidies granted in breach of the minimum standards established under the TCA.

The standards set by the TCA are generally accepted to have already been met by the EU. Accordingly, the principal purpose of the subsidy control provisions of the TCA is to lay out the foundations of the UK's future subsidy control regime.

For more discussion and analysis of the TCA generally, see our Business-friendly guide to the UK-EU Brexit trade deal.

As at the end of the Brexit transition period, EU state aid law no longer applies to state aid granted in the UK. Rather, any aid granted by a public body in the UK is now governed by the provisions of the TCA relating to subsidies, which automatically became UK law on 1 January 2021 by virtue of the European Union (Future Relationship) Act 2020.  

While UK legislation specifically addressing the UK state aid regime is expected in early 2021, the UK Government is yet to pass any such laws. Accordingly, while guidance has been issued by the UK Department for Business, Energy & Industrial Strategy on, among other issues, the applicability of the TCA rules to UK businesses, there is currently a lack of clarity regarding the implementation and enforcement of many of the TCA subsidy rules in the UK (see Question 8 for more detail).

The principles that must be followed in the UK when determining whether subsidies are permissible or not broadly reflect those employed for the same purpose under EU law. In summary, under the new UK rules, any grant of a subsidy in the UK must, in order to be lawful, (i) pursue a specific public policy objective, (ii) be proportionate and necessary, (iii) generate a change in economic behaviour that assists in achieving the objective, (iv) not compensate for costs the beneficiary could have funded itself, (v) ensure that there is no less distortive alternative, and (vi) ensure that positive effects outweigh negative ones.

In addition, the subsidies listed in the TCA as being expressly prohibited also mirror those banned under EU law.

The TCA rules governing subsidies, which now directly apply in the UK (see Question 2 for more detail), identify a number of exemptions, which again are akin to those established under EU law. For example, as is the case under EU law, aid granted to compensate for damage caused by natural disasters is out of the scope of the TCA subsidy rules.

In the same vein, the TCA also generally permits the grant of subsidies to undertakings carrying out tasks in the public interest, including public service obligations. This principle under the TCA is reminiscent of the exemption granted under EU state aid law for providers of services of general economic interest.

While there are many similarities in the exemptions granted under the TCA and EU state aid laws, two key differences should be noted. First, while both EU state aid law and the TCA exempt subsidies granted below a certain value threshold, the threshold set by the TCA is approximately double that set by the EU. Second, the TCA exempts all subsidies granted to the audio-visual sector, an exemption that does not exist under EU state aid law. 

For a period of 4 years following the end of the Brexit transition period i.e. until 31 December 2024, the European Commission may commence proceedings against the UK Government in relation to state aid granted in the UK prior to the end of the Brexit transition period where such aid may breach EU law. In other words, EU laws applicable to the grant of state aid before the end of the Brexit transition period will continue to apply to that grant, at the very least, for the next 4 years.

In addition, individuals and businesses are still able to bring claims in the UK courts in relation to state aid granted by the UK Government on the basis that, at the time it was granted, it breached EU state aid law. That said, any such claim must ordinarily be brought in the UK courts within three months of it being granted. Accordingly, time is fast running out in relation to any such claims, with the latest a claim could be brought in the UK courts being the end of March this year in most cases (unless, for example, the grant of aid was never publicised at the time, in which case a claimant might be able to persuade a court to allow it more time) .

Under the subsidy provisions of the TCA, which are now part of UK law (see Question 2 or more detail), UK courts have the power to review compliance by public authorities, including the UK Government, with the TCA rules governing subsidies, as enshrined in UK law (see Question 3 for more detail).

Furthermore, under the new UK subsidy control regime, individuals and/or businesses are able to directly challenge subsidies granted by UK public bodies in breach of the TCA subsidy rules by bringing a claim in the UK courts, provided that they (i) are an interested party i.e. their interest may be affected by the grant of the subsidy (in particular competitors), and (ii) they have standing to bring such a claim. The ability of private parties to challenge subsidies granted by UK public bodies in breach of the subsidy rules under the TCA is expressly acknowledged in guidance issued by the UK Department for Business, Energy & Industrial Strategy.

In practice, there are two ways in which private parties can challenge state aid that appears to breach EU state aid law: (i) through making a complaint to the European Commission, or (ii) by bringing a claim in the courts of the relevant EU Member State on the basis that the public body that granted the aid in question failed to obtain prior approval from the European Commission.

It appears that a UK business, so long as it qualifies as an interested party, would still be able to bring a complaint to the European Commission regarding state aid. For these purposes, an interested party is defined as any person, undertaking or association of undertakings whose interests may be affected by the granting of the aid, in particular competitors of the beneficiary. That said, the European Commission has a discretion and not an obligation to consider complaints and may in practice decide to give higher priority to complaints raised by businesses from EU Member States.

The same principle applies in relation to challenging state aid in the courts. In other words, provided it is an interested party, a UK business should still be able to bring a private action in the courts of an EU Member State to challenge aid granted by an EU public body without prior approval from the European Commission.

While the TCA provides some much needed certainty for UK businesses by establishing the baseline standards that the UK subsidy regime must meet, including the principles that must be applied when determining whether a subsidy is lawful, some of the details and practicalities of the new regime remain unclear.

The role of the UK's independent subsidy authority

Probably the most crucial aspect of the new regime that still lacks clarity is the proposed role of the independent subsidy authority that the UK Government is obliged to establish under the terms of the TCA. While the most obvious candidate for the independent authority is the UK Competition and Markets Authority (CMA) (as was going to be the case under proposals put forward by the Theresa May administration), the UK Government is yet to appoint the CMA (or any other body) as such (arguably in breach of the terms of the TCA). In addition, not only is the identity of the independent authority still unknown, so are the details of the functions it will fulfil. It is not yet determined whether the role of the UK's independent subsidy authority will involve the direct approval of proposed subsidies or be merely advisory, or indeed whether it will have the power to establish legally binding guidance on the types of subsidies that will be permissible under the UK regime, also known as safe harbours or block exemptions, that would allow businesses and public bodies to self-assess whether proposed subsidies are lawful or not.   

Uncertainties around private enforcement

Further, while the TCA provides private parties with the ability to challenge subsidies that breach the subsidy principles it establishes (see Question 6 for more detail), it does not set out how such a challenge can be brought and on what basis. For example, it is currently unclear what kind of private parties will have a standing to bring a challenge and, most importantly, what legal standard must be met for a challenge to be successful i.e. would it be sufficient to demonstrate that a subsidy has been issued in breach of the TCA principles or would a higher threshold need to be met, for example, that the public body who issued the subsidy had acted irrationally?

Legislation would help resolve uncertainty

The continued uncertainty around the details and practicalities of the new UK subsidy regime is a result of the UK Government failing to introduce any specific UK implementing legislation. In other words, the new UK subsidy regime is based solely on the minimum standards set by the TCA, as directly implemented into UK law (see Question 1 for more detail). While some guidance has been issued by the UK Department for Business, Energy & Industrial Strategy in this regard, clarity for businesses operating in the UK and UK public bodies alike on the application and functioning of the new UK subsidy regime is likely to only be provided through much-needed UK implementing legislation. 

On 3 February 2021 the UK Government launched its public consultation on the UK's bespoke subsidy control regime and the UK implementing legislation that would need to come into force in this regard. The consultation invites views on whether any overarching principles or exclusions are needed in addition to those set out in the TCA. Most importantly, however, the consultation requests input from the public on the role and powers of the UK's future independent subsidy authority. We will provide updates on the outcome of the consultation and details on the proposed UK legislation as and when these are published.