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State Aid

State aid is entirely governed by strict EU rules intended to promote competition within the single market. The bulk of these rules are present in the Treaty on the Functioning of the European Union (TFEU) and the General Block Exemption Regulation 2014 (GBER), and are not enacted into domestic law. As such, the impact of Brexit on State aid in the UK will entirely depend on the UK’s final negotiated arrangement with the EU.

It would seem fairly safe to say that there will be more important priorities around the Brexit negotiating table than a complete renegotiation of the UK’s State aid regime, particularly given the fact that the alternative is for the UK to fall back on similar World Trade Organisation (WTO) rules against state subsidy.

In the event that the UK leaves the EU with a deal that does not include the retention of the current State aid controls, and assuming at the close of negotiations the UK remains outside the single market and thus not subject to EU law where not trading with companies within the UK, the UK will nevertheless have ongoing obligations to comply with WTO rules.

These WTO rules are, in many respects, substantively the same as the present EU State aid requirements. However, there are a few key differences that will significantly affect any future State aid framework in the UK:

Unlike the EU’s State aid framework, there is no procedure under which subsidies or other forms of State aid are notified and approved by the WTO.

There is minimal case-law relating to the WTO provisions on subsidies, so the adoption of the WTO regime would lead to considerable legal uncertainty.

The WTO definition of a subsidy also differs from the EU definition of a State aid.

The WTO regime does not apply to services, only to goods.

The complex EU law approach to the assessment of selectivity in cases involving tax exemption measure has no direct analogue in WTO law.

The enforcement mechanisms for the WTO rules are either state to state dispute resolution (there being no mechanism for private enforcement, injunctions or damages, or for actions to be brought in ordinary courts) or the imposition by the adversely affected state of countervailing duties on products from the infringing state (calculation of the appropriate rate of countervailing duties is generally more complex than calculating the amount of unlawful State aid that has to be repaid).

Given the narrow scope of the WTO State aid rules, and subject to the UK’s final negotiated arrangement with the EU, it is likely that the UK would adopt its own domestic regime. The extent of this regime will depend on the extent to which the EU insists on compliance with State aid rules as a condition of comprehensive trade arrangements. It is worth noting that, with the exception of Switzerland, every other

European country with which the EU has entered into comprehensive trade agreements has accepted that it will comply with State aid rules.

Assuming that the UK’s ability to offer State aid is not subject to any external trade relationships, the UK may be able to subsidise service sectors, as these are not covered by WTO rules. In general, there would also be a greater scope for higher levels of State funding, particularly for large politically sensitive projects involving big business, such as potential future intervention in the steel industry or to further promote nuclear energy in the UK. A benefit of a domestic regime would also be an expedition of State aid cases, as a key problem with the current State aid regime is the amount of time it takes for the overburdened Commission to rule on a case, causing considerable expense and delay to vital publicly funded projects. A purely domestic regime could see almost all State aid cases being resolved by the UK courts, without the expense and added delay of referral to the commission.

It is very likely, for the reasons set out above, that the UK will opt to remain subject to the EU’s State aid framework and that the “Great Repeal Bill” will implement the current State aid provisions of the TFEU, GBER and other State aid EU legislation into domestic law.

 

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In the interim, businesses would be well advised to continue to operate as though the existing State aid framework will be in place for the foreseeable future, and not adopt a “laissez faire” attitude to publically funded projects on an assumption that the future does not involve State aid regulation. Although it is useful to bear in mind that there might be some relaxation of the rules post-Brexit, and potentially a greatly expedited notification and ruling process if State aid is to be finally arbitrated in the domestic courts, in all likelihood there will be little significant change to the State aid framework as it presently operates in practice.

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