In this post, George Peretz Q.C. of Monckton Chambers assesses whether the UK government can remove the EU State aid regime by secondary legislation and, if so, whether it should do so.
According to Alex Rose of DWF, the current government has drafted a Statutory Instrument under the EU (Withdrawal) Act 2018 (“the Act”) which would remove the EU State aid regime after the end of the transition period.
The reason why some form of legislation will be required before the end of this year to deal with State aid is straightforward. Absent further legislation, the Act preserves, by section 4, directly effective EU law rights in UK law after the end of transition. Those rights include – as the Explanatory Notes to the Act recognised – rights under Article 108(3) TFEU. Article 108(3) confers directly effective rights and remedies on parties adversely affected by the implementation of a new State aid measure which is not exempt and which has not been cleared by the Commission.
Article 108(3) makes no sense whatsoever once the UK is out of the EU, not least because (leaving aside Article 10 of the Northern Ireland Protocol for the moment) the UK Government will no longer be able to notify measures to the Commission.
That was why the May government – which decided to retain the State aid regime after a no-deal Brexit – put forward draft legislation, to have been made in the form of a statutory instrument under section 8 of the Act, which would in the event of a no-deal Brexit in 2019, have transferred the Commission’s role to the Competition and Markets Authority (and to some extent to the Secretary of State) but which would have left the basic structure of the regime unaltered.
Assuming that the current government, in contrast to its predecessor, wants to remove the State aid regime altogether, could it do so? The key power lies in section 8 of the Act, which confers wide powers on Ministers to make such provision to amend retained EU law as they may consider appropriate to correct “deficiencies”. Examples of where a Minister may consider that there are “deficiencies” include cases where unamended EU law “contains anything which has no practical application in relation to the United Kingdom … or is otherwise redundant or substantially redundant” or “confers functions on, or in relation to, EU entities which no longer have functions in that respect under EU law in relation to the United Kingdom”.
Both of those conditions would seem to apply: in particular, the reference to the Commission in Article 108(3) is clearly a case of functions being conferred on a body which no longer has relevant functions after the end of transition (again, we are leaving the Northern Ireland Protocol on one side for the moment).
However, the wide powers conferred by section 8 are not unlimited. The then Government accepted in its response to the Delegated Powers Committee report on the Bill that became the Act that “the more apparently wide a power is, the more the courts will feel obliged to impose some limitation based on the context and probable legislative intent”. And in evaluating context the courts are bound to note that the White Paper that foreshadowed the Bill stated that “the [Bill] will not aim to make major changes in policy or to establish new legal frameworks in the UK beyond those that are necessary to ensure the law continues to function properly from day one.” The abolition of any form of State aid control would – on any view – look like a “major change in policy”.
Further, State aid control is not, obviously, a reserved matter under the devolution Acts (which do reserve anti-competitive practices, mergers, and monopolies to Westminster but make no reference to State aid). If it is not a reserved matter, then the Sewel convention would require the consent of the devolved governments to legislation in this area that affects their nations. The convention is not legally enforceable (as was established in the first Miller case) and in any event includes the adverb “normally”, but it would appear to apply to any such legislation.
The ability of the current government to scrap the State aid regime by secondary legislation (as opposed to by an Act of Parliament) would therefore appear to be open to considerable doubt. But should it go down this route (assuming it can)?
There are, in my view, five powerful reasons why it should not.
First, the Conservative Party promised in the general election campaign that it would retain a domestic anti-subsidy regime. Details were somewhat vague, but it promised certainty (with a “clear role for a government body to help manage the system”) and would make it clear that government would not “bail out failure”. The promises can be found here. Those promises appear to exclude getting rid of the State aid regime and putting nothing in its place.
Second, it is unrealistic to expect the EU to agree any free trade agreement with the UK if the UK refuses to have in place some form of effective domestic anti-subsidy regime. The recent EU White Paper makes clear its concerns about foreign subsidies to companies exporting to or trading in the EU, and what it sees as the weaknesses of the obvious remedy permitted by WTO rules, namely countervailing duties (namely that they cannot apply to services, do not deal with foreign companies that manufacture in or otherwise operate in the EU, and are an “after the event” remedy that takes time to put in place).
Moreover, politically, it would be impossible for EU politicians to sell to their voters the idea that the UK – with its huge volume of exports to the EU, particularly in services where the UK is seeking unprecedented levels of access – could freely subsidise its domestic players while pocketing the protection it gets from the fact that no EU member State is free to subsidise its domestic players without getting Commission approval. To say that is not to say that the UK needs to agree to apply the EU State aid rules as such: the EU’s legitimate interests are (a) in making sure that the UK does catch most subsidies that could harm the EU (whatever regime it adopts) and (b) that there is a way of managing cases where the UK’s different approach leads to the approval of UK subsidies that genuinely harm the EU, ultimately by some form of dispute resolution backed by the ability to take retaliatory measures. But it is to say that “we won’t have any enforceable domestic regime” is not likely to be an option for the UK, if it genuinely wishes to seek a final relationship incorporating at least some of its declared objectives.
Third, even if the current government attempts to scrap the State aid regime, Article 10 of the Northern Ireland Protocol – which continues after transition to have direct effect in the UK under section 7A of the Act and Article 4 of the Withdrawal Agreement – effectively ties the UK into the EU State aid regime post transition, with the threshold for its application (a potential effect on trade in goods between Northern Ireland and the EU) being both low and subject to the final interpretation of the Commission, national courts and ultimately the Court of Justice of the EU. The Protocol is very likely to catch, for example, general business tax measures extending to UK companies that operate in the NI goods sector or huge aid packages such as those needed to deal with the Covid-19 crisis. Ministers might wish to reflect on how they will explain to bemused voters why, months after a no deal end of transition, the UK government is being told by a court or by the Commission that Ministers have to notify such measures to, and get the clearance of, the Commission before they can implement them. If that is to be avoided, Article 10 will have to be renegotiated with the EU as part of the final relationship agreement. But if there is to be any hope of renegotiating Article 10, the UK will have to put on the table an enforceable and robust domestic anti-subsidy regime.
Fourth, some form of domestic regime is likely to be needed to prevent the huge fiscal powers given to the devolved governments (and, if the current government is serious about English devolution, English local government) being used in ways that disrupt the UK internal market. Those powers were devolved on the assumption that EU law would deal with such issues: take away EU law, and you have a problem.
Finally, fifth, a domestic anti-subsidy regime forces standards of rationality and proportionality on decisions that involve spending public money in ways that distort competition. As the Conservatives pointed out during the general election campaign, such a regime enhances investor confidence. Moreover, if you remove the State aid regime and do not replace it, judicial review may move into the space that it leaves, as those adversely affected by government spending decisions seek to challenge those decisions on general public law grounds of fairness and rationality.
There are therefore very strong reasons why the current government should take forward its election promises and devise an effective domestic UK anti-subsidy regime. But time is now tight and there are serious risks of major errors being made if a new regime is rushed through Parliament at the last minute.
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