The UK’s new subsidy regime: a marsh of uncertainty

In this post, George Peretz Q.C. of Monckton Chambers assesses the UK’s new subsidy control regime as it currently applies. In particular, he looks at the newly-published UK Government Guidance and the effect of section 29 of the EU (Future Relationship) Act 2020 as it applies to subsidy control.

Quite extraordinarily, the shape – at least for the moment – of the UK subsidy control regime after the end of transition became apparent only the day before it happened. This was when BEIS failed to use its huge Henry VIII powers to make specific provision for a subsidy regime (see section 31 of the EU (Future Relationship) Act 2020, and also paragraph 14 of Schedule 5 to that Act, which allows section 31 regulations to be made in ‘urgent’ cases without being laid before Parliament first), but rather published guidance headed “Complying with the UK’s international obligations on subsidy control: guidance for public authorities”.

The problems with the guidance start with the title, which refers only to “international obligations”.  But, from the point of view of any UK public authority, there are two, very real, sets of domestic legal obligations in play. In a dualist system, that matters.

Article 10

First, Article 10 of the Protocol on Ireland/Northern Ireland (which forms part of UK domestic law by virtue of Article 4 of the Withdrawal Agreement and section 7A of the EU (Withdrawal) Act 2018) prohibits the grant of any State aid that affects trade in goods or electricity between Northern Ireland and the EU unless that aid is consistent with EU block exemptions or has been notified to and cleared by the European Commission. 

The BEIS guidance – which is also guidance on the meaning of Article 10 to which public authorities must have regard under section 48 of the UK Internal Market Act 2020 – starts off the relevant section of its Technical Guidance by noting that “for the substantial majority of subsidies in Great Britain the Protocol will not be engaged.”  That is doubtless true, but does not help anyone to identify the “minority” of cases where it is engaged.  A couple of paragraphs further down, the same point is reformulated: “In certain limited circumstances, these provisions may also apply to aid measures granted in the rest of the UK, if these could have an effect on trade between Northern Ireland and the EU. Such aid will need to be granted in compliance with EU State aid rules”: a claim which leaves open the question of what those “certain limited circumstances” are (or, indeed, whether that phrase adds anything at all to the rest of the sentence).

It then goes on to claim that “Article 10 does not directly apply to services so NI will enjoy new freedoms to provide subsidies for services, subject to the UK’s own independent subsidy control regime”: a statement that is also true, but places a lot of weight on the adverb “directly” – implicitly conceding that a subsidy to a service provider that indirectly benefits suppliers of goods (such as a subsidy for road freight operators that enable them to make lower delivery charges to Northern Ireland factories) could well fall within Article 10. 

The section then goes on to place weight on the declarations of the Joint Committee that I discussed here: for the reasons I set out, those declarations do not really assist, given their limited legal force (they are a governmental gloss on text that falls to be interpreted by the courts, and in particular the Court of Justice of the EU) and their anodyne nature.  It is notable, however, that the guidance feels the need to gloss what is itself a gloss.  Thus, the guidance claims that “[i]n practical terms, this declaration means that subsidies granted in Great Britain are only in scope of Article 10 where there is a clear benefit from and a genuine, direct link between the subsidy and companies in Northern Ireland.” But that gloss on the gloss is questionable: the Joint Committee declarations make no reference to the notion that there must be a “clear benefit” (and the phrase is oddly left hanging: a “clear benefit from” what and to whom?): and, in the declarations, the phrase “genuine, direct link” is about the effect on trade, while, in BEIS’s gloss, it is about the nature of the link between the subsidy and “companies in Northern Ireland”.

The guidance gets back on to firmer ground when it concludes that “this guidance cannot provide legal certainty or address every potential circumstance a public authority may encounter.”  Its invitation that “if there is any doubt about whether the NI Protocol applies, advice should be sought from the BEIS or DEFRA Subsidy Control teams, for industrial and agricultural measures respectively” may be one that is taken up rather more than BEIS would like.  As to the point that “[t]he UK will only notify measures to the Commission when public authorities and the relevant Department’s Subsidy Control team agree that this is legally required”, the guidance should have made it clear that the risk, in a case where a measure is not notified when it should have been, is that a UK court could hold that it was State aid that was notifiable under Article 10 and therefore unlawful (and order recovery with compound interest of any grants made): that risk is one which both public authorities and recipients/funders will be well advised to bear in mind, however restrictively BEIS chooses to interpret the provision.

Section 29 of the EU (Future Relationship) Act 2020 (EURA) and the subsidies provisions of the Trade and Cooperation Agreement (TCA)

The second set of domestic law provisions is the Chapter on subsidies in the TCA – which I analysed here (if you have not read that analysis, you might want to do so now). 

As I pointed out, those provisions committed the UK, under Articles 3.9, 3.10, and 3.11 of the TCA respectively, to:

• an independent authority or body that will play “an appropriate role” in its regime;

• a power for courts to review compliance with the principles set out above by granting authorities and to review decisions of the independent authority, to do so on application by interested parties with standing, and to grant remedies including injunctions and orders to recover assistance granted; and

• a power of recovery if an application is made in time (there are complex provisions as to what “in time” means) by an interested party on the ground that a measure should have been treated as a subsidy but was not, or has misapplied the principles applicable to that subsidy.

Those are commitments in international law that in themselves have no domestic effect.  But section 29(1) of the EURA provides that:

“Existing domestic law has effect on and after the relevant day with such modifications as are required for the purposes of implementing in that law the [TCA] … so far as the agreement concerned is not otherwise so implemented and so far as such implementation is necessary for the purposes of complying with the international obligations of the United Kingdom under the agreement.”

That section turns all parts of the subsidies (or, indeed, any other) chapter of the TCA, to the extent that the UK is obliged to implement it, into domestic law.  It is a form of weak direct effect (“weak” because, as subsection (2) goes on to say, that direct effect is overridden by any specific legislation designed to implement the TCA – but that is not the case for the moment in the area of subsidies).

So, as a matter of domestic law, it follows that a UK court is now required, when asked by an interested party within the time limits laid down in the subsidies chapter, to review compliance by granting authorities with the principles set in the subsidies chapter and to grant remedies including injunctions and orders to recover assistance granted: see the UK’s obligation in Article 3.10 of the TCA.  Indeed, the BEIS technical guidance eventually gets round to accepting that analysis (in section 5, a section that unhelpfully conflates discussion of the UK’s obligations in other FTAs in relation to subsidies with the much more onerous, and effective in domestic law, TCA obligations), when it points out that: –

“ public authorities should be mindful of the possibility that some complainants may already seek to challenge subsidy awards by reference to the principles and their effect in domestic law by virtue of provisions in the [EURA]. The UK and EU have also agreed that, in certain circumstances, domestic courts should have the power to order the recovery of subsidies that have been improperly granted under domestic law (e.g. a subsidy that was in scope of, but did not comply with the principles). Recovery could follow from a successful judicial review of the decision to grant the subsidy, provided that the judicial review was commenced within the time period specified in the TCA.”

As I pointed out in my analysis of the subsidies chapter in the TCA, that chapter follows the overall structure of the EU State aid rules (with some clear differences) – albeit that, with the relentless determination of the Académie Française faced with a list of English expressions commonly used in French, it insists on finding new names for old concepts (for example, “economic actor” as opposed to “undertaking”).

Where we now are, therefore, is that any public authority considering granting a “subsidy” [aid] (including a tax break, loan or guarantee) has to bear in mind that any disaffected third party with “standing” could apply to have the decision quashed on the basis that it failed to comply with the principles set out in Article 3.4.1 or other relevant principles, or was prohibited under Article 3.5.

A host of questions arise at that point.  For example: –

• In England and Wales, that task would appear to fall to the Administrative Court on judicial review.

• What test is the Administrative Court supposed to apply in assessing consistency with the principles?  Merits review? Or irrationality/lawfulness/procedural fairness review?

• If it is merits review, how are the procedures of the Administrative Court (not conducive to consideration of contested and complex economic and factual evidence) going to work here?  If it is not merits review, is that consistent with the requirements of the subsidies chapter?

• Who has “standing”? (Article 3.10(d) refers to “an interested party with standing to bring a claim … under that Party’s law” – rather circular in the present context: though NB that Article 3.7.6 defines “interested party” as anyone “whose interest might be affected by the grant of subsidy”, which might include, for example, someone liable to pay taxes to the authority at issue.)

Lawyers will all enjoy sorting those points out.  But let us focus on the immediate practical effect, which is that any authority, or private funder/recipient, considering any measure which could be a subsidy and which could arguably fall foul of the Article 3.4.1 principles is going to have to take legal and (quite possibly) economic advice.  That advice will, in the nature of these things, be qualified: and qualified, in particular, by the point that no one has any clear idea how a High Court judge is going to approach these questions on a judicial review application.  And there is nothing that can be done about that uncertainty: even if BEIS is willing to advise in a helpful way (the guidance seems to indicate that it is, but time will tell), its advice will be no more authoritative than anyone else’s. 

It is at that point that the current government’s failure to do anything to put in place an independent subsidy authority – a failure that I and others have been warning it about for many months, and which is an evident breach of the subsidy chapter  – begins to have immediate, practical, consequences.  (I suspect – but obviously do not know – that the EU may have assured the UK that that breach of the TCA will be ignored, at least for the moment: and it is not obvious who would have standing to judicially review the current government’s failure to comply with its (now domestic law) obligation to put one in place or, perhaps more fatally, what the remedy would be, given the huge discretion as to the role of such a body given to the UK government.) Those immediate, practical consequences arise because (though the UK is not constrained to give such an authority anything more than an “appropriate role” – Article 3.9.1) an obvious and useful set of functions for such an authority would be: to develop policies and guidelines for application of the Article 3.4.1 principles; to issue block exemptions (cases where the Article 3.4.1 principles were found always to be satisfied); and to issue individual clearance decisions that would (unless successfully judicially reviewed) bind courts and prevent any litigation based on supposed non-compliance with the principles.  In cases of doubt, such an authority could provide the safe harbour that granting authorities – and recipients and private funders – need in order to proceed with a large project.

But we have no such authority. Rather, what we now have is a mess.  We have as domestic law a set of provisions (the subsidy chapter of the TCA) that were not written as domestic law.  The structure of those provisions is consistent with the familiar State aid rules, but the terminology creates scope for endless re-fighting of old battles about what those terms are to mean.  We have broad policy principles that have to be followed but no body able authoritatively to apply them below an Administrative Court judge (and no clarity about how such a judge is supposed to go about applying them). 

The current government promised us an escape from the EU State aid rules and a more permissive, “levelling up” attitude to state subsidy: what it has delivered is a regime that combines a substantial continuation of the EU State aid rules (Article 10) with a regime that as it now stands could hardly be better designed to deter public subsidy by making it commercially uncertain.  It is quite some achievement.

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