The government must bring an end to the UK subsidy control system limbo

State aid, or subsidy control, was one of the major sticking points in trade negotiations with the EU. The Trade and Cooperation Agreement (TCA) that was ultimately signed requires that the UK has its own regime to perform the same role as the EU’s state aid rules – regulating when public bodies can provide subsidies to businesses. However, the TCA gives the UK considerable freedom as to how that system is designed, and the government is now consulting on how to proceed. It will be one of its first opportunities to show the benefits from leaving the EU regulatory orbit.

The government is, rightly, taking its time to consult on the new system to ensure that it is well designed. However, the gap between the end of the Brexit transition period and new legislation leaves subsidy control in limbo. The government needs to provide clearer guidance about how the system is supposed to be operating at the moment.

The Trade and Cooperation Agreement gives the UK freedom to write its own subsidy rules

The EU deal stipulates that the UK must set up a subsidy control regime that abides by certain general principles (such as the need for a subsidy to lead new or bigger projects, and that the subsidy should be no larger than required to generate that additional activity). The regime must also be regulated by an independent body with an "appropriate role".

However, the agreement is not overly prescriptive. The independent body need not have the powerful role of judging the legality of all subsidies before they can happen that the European Commission does in the EU system, nor does the UK regime need to follow the same (often bureaucratic) restrictions or procedures that  EU state aid. When launching the consultation, Kwasi Kwarteng, the business secretary, promised a “new, more flexible system”.^[1]

The current legal situation is messy and could hurt firms and public bodies

But until this new system is legislated for – which will not be for several months – subsidies are governed simply by the subsidy chapter of the TCA. This states that when awarding a subsidy, public bodies must consider how the subsidy abides by the principles set out in the TCA. There is currently no organisation with the power to approve or reject subsidies, meaning that the legality of a subsidy – and the considerations of a public body awarding a subsidy – can only be decided through a court challenge.

The new legal position is – overall – less restrictive than EU state aid rules: the principles in the TCA are designed such that the UK will be able to offer some subsidies that would have been prohibited had it been an EU member. It is likely, for example, that the UK could now provide more support for some projects in disadvantaged regions, or interpret what constitutes a disadvantaged region more broadly than the EU. But exactly how much less restrictive is unclear – and the new system is also more uncertain. The EU regime provides certainty by pre-approving subsidies and by providing templates for subsidies that, if followed, guarantee their legality (these are known as exemptions). Most subsidies in the EU, and almost all offered by smaller public bodies, are approved by this route.

UK public bodies now need to worry about how courts will interpret their role in reviewing decisions and what standards they will apply to that review. Any subsidy is vulnerable to a court finding it breaches the rules and must be repaid. That risk is likely to be small but it is nonetheless leading to caution and could lead to subsidies being cancelled or delayed until the legal position is clarified, which could delay projects. A business having to repay a subsidy that has already been spent because it is ruled illegal is a nightmare scenario that it will be very keen to avoid.

The government should act now to bring an end to this post-Brexit legal uncertainty

The fact that the government did not roll over the EU rules indicates that it wants public bodies to make the most of their new freedom. But rolling over the rules on a temporary basis would at least have provided clarity and would not have required the additional administrative and legal costs public bodies now face. Instead public bodies and business find themselves in a limbo between both worlds.

Legislation for the new UK subsidy control regime will resolve many of these uncertainties and put the regime on sure footing. But the consultation does not close until the end of March and legislation takes time: this is too long for public bodies and businesses to wait. Thus far, the government has issued some guidance on how subsidies can comply with the UK’s international obligations, but this has not been sufficient to avert widespread confusion and uncertainty. This means lots of work for lawyers advising public bodies about the current legal situation. Many public bodies are likely to continue to follow the EU-defined exemptions, but even this route will likely require additional legal advice and it still does not completely guarantee they will escape challenge.

The government needs to clarify its guidance. One option is to make clear that subsidies following the EU exemptions will be compliant with the new regime. Alternatively, if it wants public bodies to take a more flexible approach, it needs to set out how public bodies can document a TCA-compliant assessment of a subsidy, including concrete templates and examples.

The government can and should make these changes in the coming weeks to avert several months of additional uncertainty. Otherwise, subsidy control risks becoming an example of post-Brexit legal uncertainty rather than a triumph of regulatory freedom.

1. Department for Business, Energy & Industrial Strategy and The Rt Hon Kwasi Kwarteng MP, 'Business Secretary sets out new subsidies system that works for the UK', press release, 3 February 2021, www.gov.uk/government/news/business-secretary-sets-out-new-subsidies-system-that-works-for-the-uk