State aid in the post-Brexit age

In July, Nissan announced a £1 billion investment in Sunderland to produce electric vehicles and batteries. It is not clear what the nature of any UK Government support was to facilitate and encourage that, but the best guess is £100 million+. It is a good reminder of the issues that underpin subsidy control regimes. From a competition policy perspective, state subsidies have the potential to distort markets: back in 2013 it was the French Government injecting half a billion euro into the Peugeot/Citroën group.

On the same day as Nissan's announcement (probably by coincidence), the UK Government published its Subsidy Control Bill, that will introduce into domestic legislation the long-awaited successor rules to the EU state aid regime that applied in the UK pre-Brexit. This has been described as the most significant opportunity yet for the UK to depart, post-Brexit, from the EU way of doing things.

Subsidy control is not just about big-ticket £1 billion+ projects. The rules affect the decision-making and policy goals of public sector bodies across the country – from local councils to central and devolved Governments to enterprise agencies, alongside any number of other organisations entrusted with spending taxpayer funds.

The Subsidy Control Bill

We previously wrote about how the Trade and Cooperation Agreement between the UK and the EU (“TCA”) imposes on each party an obligation to control the granting of subsidies by public bodies. As things stand, those provisions of the TCA have direct effect in UK domestic law, but the TCA allows the UK to replace this with its own more detailed domestic regime to implement the TCA's requirements. This is what the bill seeks to do.

The TCA sets baseline rules for regulating UK subsidies that are very similar to the EU state aid regime, so the most interesting points to note are those where the bill goes beyond what the TCA requires (“gold-plating”, in pre-Brexit parlance):

• A subsidy can be a measure affecting either competition between the UK and other territories (including the EU, as under the TCA) or competition within the UK (the latter potentially aimed at avoiding “subsidy races” between different parts of the UK). When the TCA took over from state aid law, it replaced the test that required subsidies to have an impact on trade within the EU (which the EU courts' jurisprudence turned into a strong presumption of every subsidy) with one that required an effect on competition between the UK and EU (which might therefore be much harder for “purely local” subsidies to meet). The bill may take us back much closer to where we were with EU state aid law – the “test” of an effect on trade within the UK implies a very low threshold and could become as much of a paper tiger.
• There is a fixed de minimis threshold of £315,000 (of subsidy received over a rolling three year period), which is higher than the €200,000 under EU state aid but less than the £331,000 agreed under the TCA.
• The TCA specifies that, to be permitted, a subsidy must (a) pursue a public interest objective; (b) be proportionate and necessary; (c) be designed to change the beneficiary's economic behaviour; (d) not compensate for costs the beneficiary would have funded itself; (e) be the least distortive means of achieving the policy objective; and (f) have positive contributions outweighing its negative effects. In addition to these, the bill adds a seventh principle, that UK subsidies must be designed to achieve their specific objective while minimising any negative effects on competition or investment within the UK.
• The bill specifically prohibits subsidies being given on condition that existing economic activities be moved from one part of the UK to another – so job support grants may be allowed for the creation of new jobs, but not (for example) to transfer a business to a new factory in a “freeport”.
• A threshold of £500,000 is set before subsidies have to be reported on the UK's transparency database, as long as the subsidies are granted under a broader “subsidy scheme” and that scheme has itself been reported.
• The rules on support for “ailing or insolvent enterprises” are something of a return to the complicated “undertaking in difficulty” rules under EU state aid law.

Enforcement

The Competition & Markets Authority will be the “independent authority” required under the TCA to monitor subsidies. Subsidies or subsidy schemes of “particular interest” must be referred to the CMA for a report before they are given. What precisely constitutes a subsidy or scheme of “particular interest” will be determined by regulations that are yet to be published, but based on the Government's consultation paper is likely to be defined by reference to financial thresholds.

The UK Government will be able to refer other subsidies or subsidy schemes to the CMA where it thinks there is a risk of failure to comply with the bill's requirements, or that there is a risk of negative effects on competition or investment within the UK. Public bodies can also make voluntary referrals to the CMA if they wish to test the permissibility of a particular proposed subsidy.

In either case, once referred, a subsidy or scheme may not be implemented until the CMA has reported on it and a “cooling off period” of five working days has passed. However, the CMA cannot prohibit a subsidy from being granted. Persons aggrieved by a particular subsidy, such as competitors of the recipient, can bring judicial review proceedings against the granting authority, which the bill provides will be heard by the Competition Appeal Tribunal. A report by the CMA to the effect that a subsidy would not be consistent with the legislation may therefore in practice result in it never being granted, as such a report would otherwise give a challenger a very good case to take to the CAT.

Where are we now?

The bill does not mark a significant shift away from EU state aid law. The TCA provides for a minimum set of rules which are approximate to but less restrictive than state aid law, and the bill builds on those to a degree. The result is that the UK's new domestic subsidy control law will not be that dissimilar to EU state aid law.

Some things will change – the bill is arguably easier to understand than EU state aid rules were, in large part because it collects them together in a more accessible format than the combination of Commission regulations and ECJ case law in which the bulk of state aid rules are found. The bill also codifies some of the definitions the EU courts had given to state aid terms, which would remove the scope for those to be re-litigated in UK courts.

The most significant change relative to the TCA is that the bill closes the door on the possibility of subsidies being permitted so long as they do not impact on trade with the EU. The possibility of a payment constituting a subsidy if it has an impact on trade within the UK is likely to mean that most grants of public funds will qualify as subsidies and be subject to the “principles” and requirements of the Subsidy Control legislation.

Plus ça change…