Post Brexit: ‘State Aid’ remains a sticking point for EU-UK negotiations as UK ‘hardens’ its ‘red-line’
Neither the UK nor EU has been willing to compromise and yield ground on their ‘red-line’ on ‘state aid’ policy during negotiations on the future relationship between them. The EU wants any ‘deal’ to include commitments on state aid as part of a set of ‘level playing field’ provisions. This would ensure ‘fair competition’ between the UK and the remaining 27 EU member states who operate under a unified regime – the ‘single market’.
The EU, therefore, has asked for full disclosure on the detail of the UK’s future domestic state aid policy.
The UK’s chief negotiator, Lord Frost, has indicated that the UK is willing to include some ‘high-level principles’ on state aid in any agreement. However, the detailed design of the UK system has not yet been worked out. That will come later – allowing time for wider consultation before setting the UK’s ‘long-term’ policy.
The UK Government position is that at the end of the transition period, the UK will have its own domestic subsidy control regime to replace EU law on state aid. From 1 January 2021, the UK will – according to the Secretary of State for Business, Energy and Industrial Strategy, Alok Sharma MP – follow the World Trade Organisation (WTO) rules for subsidy control.
Sharma also said the Government would publish a consultation “in the coming months” on whether to go further than the WTO basic rules and related commitments as the UK enters into in free trade agreements.
The WTO regime is fundamentally different from the EU’s state aid rules. For example, subsidies are allowed by default rather than being generally prohibited – and prior notification and approval is not required.
Far from looking to compromise and move closer to the EU in order to reach a ‘deal’ by 31 December, the UK Government is driving through legislation which would remove state aid provisions from the ‘retained EU’ law that will remain on the UK statute book after the transition period. The House of Commons has approved the ‘State Aid (Revocations and Amendments) (EU Exit) Regulations 2020’ with the House of Lords scheduled to debate them on 2 December 2020.
Labour has tabled a ‘regret’ amendment to the motion and the House of Lords ‘Secondary Legislation Scrutiny Committee’ has drawn the instrument to the special attention of the House.
Special provisions on state aid apply to Northern Ireland. Under the Northern Ireland Protocol, Northern Ireland remains part of the UK’s customs territory but will continue to apply the EU’s customs code, VAT rules and single market rules for goods.
The EU defines state aid as “an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities”. This includes things like subsidies, grants, interest or tax reliefs, guarantees, the granting of preferential terms, and so on – where this is done selectively – for example, only to specific companies or industry sectors or regions.
EU law prohibits state aid where it would ‘distort or threaten to distort’ competition between member states. State aid may be permitted in some circumstances – but before implementing state aid measures, EU member states must notify the European Commission. The Commission is empowered to approve aid which helps achieve defined policy objectives such as ‘regional economic development’ or ‘better environmental protection’. The Commission also has powers to recover state aid if it is incompatible with the EU rules.
The Withdrawal Treaty Protocol provides that EU law on state aid shall apply to the UK “in respect of measures which affect that trade between Northern Ireland and the EU which is subject to this protocol”. Annex 5 lists the specific EU law state aid provisions that this covers.
United Kingdom ‘Internal Market’ Bill
The UK Government sought to address the issue of EU ‘reach-back’ by proposing the ‘United Kingdom Internal Market Bill’. The bill contained a clause through which the Government sought to give itself the power to unilaterally determine the interpretation of ‘article 10 of the protocol’.
Controversially, clause 45 of the bill clause would, in the Governments own admission: “break international law in a very specific and limited way”.
The House of Lords voted at committee stage to remove a number of clauses, including clause 45. The Government said immediately after committee stage that it would reintroduce the clauses the Lords removed when the bill returns to the Commons in December.
The bill also contained provisions to set out that only the UK Parliament, and not the devolved assemblies, could legislate to regulate subsidies.
United Kingdom ‘State Aid (EU Exit)’ Regulations
The Commons formally approved the regulations on 4 November 2020.
The House of Lords is due to debate the regulations on 2 December 2020. Lord Stevenson of Balmacara, Shadow Spokesperson for Business, Energy and Industrial Strategy and International Trade, has tabled an amendment to add the following wording to the end of the motion to approve the regulations: “that this House regrets that the Regulations replace retained European Union State Aid rules with a yet to be defined new subsidy regime, and calls on Her Majesty’s Government to delay implementation of the regulations until (1) they have consulted widely on their proposals, (2) they have sought the agreement of the devolved administrations, and (3) the primary legislation detailing how the United Kingdom’s new subsidy regime will operate after the end of the transition period has received Royal Assent.
EU and state aid
EU law on state aid is set out across provisions in the ‘Treaty on the Functioning of the European Union’ – TFEU. The State Aid (Revocations and Amendments) (EU Exit) Regulations 2020 would disapply EU law relating to state aid otherwise retained in domestic law by the European Union (Withdrawal) Act 2018. They would do this by: ensuring directly effective TFEU provisions ceased to be recognised and available in domestic law; revoking directly applicable EU law provisions; amending retained EU law and relevant provisions of domestic law.
Commenting on the trade talks and the three ‘sticking points’ on 20 November 2020, the President of the European Commission, Ursula von der Leyen, said that the negotiations had: “made some headway on state aid”.
What is state aid? European Commission (europa.eu)
World Trade Organisation (WTO) rules for subsidy control
Draft State Aid (Revocations and Amendments) (EU Exit) Regulations 2020 – House of Lords Library (parliament.uk)
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