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Brexit: what happens to the law on State aid?

A UK "leave" vote on 23 June 2016 will trigger a number of events, most particularly setting the UK on a path to leaving the EU - a so-called "Brexit". On day 1 after such a vote the law will still be the same, but after that a timetable for change will start to emerge.

A pivotal issue among many will be what happens to the law on State aid.  The simple answer is that the rules and enforcement systems as they are would be likely to remain with us for at least two years, and then new possibilities emerge, depending on the new relationship with the EU. 

Some “Brexiteers” have made claims about how EU State aid rules have prevented the UK from saving its steel sector, for example, but would and indeed could a new UK State aid law afford to be radically different, and what might the consequences of such a difference be anyway?. 

We therefore consider what difference Brexit is likely to make to the ability of the UK State in all it forms to disperse public funding to business. 

What is State aid law? Go to section »

Timetable for change – 2 years? Go to section »

Period of uncertainty? Go to section »

Would the UK need a State aid law following Brexit? Go to section »

Where would new State aid laws come from? Go to section »

How might a UK State aid law work in practice? Go to section »

Would the substance of State aid regulation be likely to be very different? Go to section »

Conclusions Go to section »

Brexit legal campaign

What is State aid law?

UK law on State aid currently derives from EU membership of the EU, specifically Articles 107 and 108 of the EU Treaty.  The law sets what is to be considered State aid to begin with (as opposed to standard public spending), and thereafter prohibits the giving of State aid across the EU unless otherwise exempted by the European Commission.  Exemptions are delivered either: (i) by “block” (ie. pre-defined categories of legitimate aid and relevant limitations for such that can be granted without further reference); or(ii) by individual notification of proposals to the Commission from Member States, which the Commission then assesses case by case and judges whether to approve or not.  The European Commission is the guardian of administering and enforcing the rules in a consistent manner across the EU, and national courts across the EU (including in the UK) apply that law directly and/or refer matters to the European Court of Justice in case of difficulty on points of law.   

Timetable for change – 2 years?

A vote to Brexit is likely to trigger the UK government to serve notice under Article 50 of the EU Treaty of its intention to leave the EU.  This then starts a two year process in which the UK would attempt to negotiate the terms of its exit and future relationship with the EU.  An exit agreement can only be secured by a qualified majority within the EU Council (ie. representatives of the remaining Member States). If no agreement can be reached by default, the UK would cease to be an EU member at the end of the two-year period after it had given notice. The possible exception to this timetable is if an extension of time is granted, but this requires the agreement of all remaining Member States.  Thus we will likely have an approximate two year countdown towards a new regime of some sort, whether or not involving a transitional regime of some sort. 

Period of uncertainty?

The only certain thing to occur following a Brexit vote is a period of uncertainty. The UK would be the first Member State to serve notice to leave.  With no precedent to follow no one can say yet exactly what an exit will look like, either in practice or timescale to implement (and/or any transitional arrangements).  For at least the notice period (likely two years), however, EU State aid law as it stands will continue to apply and UK Courts and the European Commission will be duty bound to administer it in respect of the UK as before until exit happens, or other negotiated transitional arrangements come into force. 

This means all current UK State aid notifications to the Commission must (in theory) continue to be assessed as usual, and new notifications must continue to be accepted and processed.  As a side issue, but inter-related to State aid, all projects in receipt of EU funding will continue to receive their down payments and be subject to the same monitoring and enforcement.  How such funding streams will be transitioned then phased out will be another element of negotiation. 

Would the UK need a State aid law following Brexit?

The answer to this is a fairly unequivocal “yes” but what exact shape such laws would take would depend in part on the new relationship the UK sought with the EU.  State aid has always been  a fundamental pillar of Competition Law, all of which aims to uphold the level playing field.  The UK has always been a driving force for this within the EU and shows this in all enforcement of domestic Competition Law over issues such as restrictive agreements (cartels), abuse of dominance and merger control. It would diminish the point of protecting fair competition in all of these other ways if the same could be readily damaged by unfair subsidies being given out without regulation.

On another level, one thing the leave camp is generally agreed on is that a post Brexit UK would look to rely on World Trade Organisation (WTO) membership as a central pillar of its global trading relationships with other countries going forwards.  The WTO has a universal set of minimum standards and trading rules.  Deployment of subsidies is one of these (in the form of the Agreement on Subsidies and Countervailing Measures or “ASCM”).  What this means in practice is that some forms of subsidy are universally outlawed to the extent that were the UK to introduce the same post Brexit, the UK could find itself on the receiving end of unpleasant dispute settlement proceedings in the WTO brought by other countries (possibly even the EU), the result of which being trade sanctions against the UK.  EU State aid law currently guards against the adoption of any such subsidies.  The ASCM also deals with other types of subsidy which although not illegal are deemed “countervailable”, which means exported goods found to be subsidised and causing injury to domestic producers in other markets may be subjected to additional tariffs (known as “countervailing duties”) on entry into those other customs territories.  This works in similar fashion to anti-dumping duties.  What all the above means is that unregulated subsidies to business in a post Brexit world would likely lead to trade sanctions at the very least.  This in turn means the UK would be most unlikely to move to a new regime of no regulation of subsidies/State aid.

Where would new State aid laws come from?

This will depend first on the new relationship with the EU.  New rules will either flow from a new negotiated framework with the EU, or in the absence of that fall to UK law only. 

Some EU laws (eg. procurement) will automatically continue if not altered as they are direct implementations into UK law of EU Directives.  This is not the case for State aid, which relies on EU Treaty principles, caselaw and directly effective Regulations.   Those would cease to apply on exit.

Otherwise, if the exit is negotiated into a new relationship along the lines of, for example, Norway, then there is a simple transfer of State aid rules from the full EU context to the European Free Trade Association (EFTA) or European Economic Area (EEA) variant.  This largely means “business as usual” in so far as State aid regulation is concerned.  The EEA option has the advantage of simplicity; it has existed since 1994 and allows its member to participate in a large part of the EU's internal market without being obliged to participate in other EU policies, such as agriculture, fisheries, judicial affairs, foreign policy and so on.  However, central to the agreements these countries have with the EU is also the application of EU legislation concerning the internal market (such as free movement of goods and people). For these reasons such a solution may not find favour. 

Alternatively the UK may well attempt to negotiate its own free trade agreement with the EU (along the lines of the agreement with Canada - as yet not ratified), in an attempt to provide for better market access than that provided by WTO rules.  However this would not necessarily mean the elimination of tariffs or quotas and it is likely that any such agreement would again necessarily entail commitments on State aid that very similar to the current regime. 

How might a UK State aid law work in practice?

Assuming this would fall to new UK law only, a new regime would require underlying laws to set out the substance of what was legitimate or not, and an enforcement regime (probably including an independent regulator in addition to the Courts) to uphold it.  

To deliver the level playing field and fair competition across the EU it has always been necessary to have one supra-national authority (the European Commission) responsible for enforcing the same.  The idea has been that since the point of State aid law is regulating what the State does it is of little value asking the individual States themselves to regulate themselves. 

To make sense then, a new UK law would require a regulator to oversee it independently of government.  The obvious choice would be the Competition and Markets Authority (CMA).  The CMA is independent of government and already has a broad range of powers overseeing the protection of and consumers and the market from anti-competitive outcomes, whether by mergers, cartels or dominant companies behaving abusively. 

A UK State aid law would need fundamental principles of what was an aid and what wasn’t, and then to be effective we expect it would need a mechanism to approve aids within certain guidelines.  It is always more practical to have something akin to EU block exemptions setting out what could be done legitimately without further recourse, but to retain discretion for bigger and more important or difficult cases falling outside that, as will always arise from time to time (eg. Tata Steel).  This would amount to a domestic State aid enforcement regime designed to protect fair competition in the UK going forwards. 

A newly independent UK government might consider it appropriate to alter the focus of the policy in some areas, for example to alleviate restrictions on aid for steel production, but for every such variation made, the UK’s trading partners (including the EU) might have some problem with the same that would have negative consequences for other trade agreements or relationships under negotiation. 

Would the substance of State aid regulation be likely to be very different?

There would no doubt be political discussion of the merits of State intervention and at what level, and prevailing political parties in power may have differing views on that.  What seems to be a general consensus view always, however, is agreement on the need for protection of fair competition.  Hence unrestricted State intervention seems impossible to conceive (for that and because it would assuredly result in trade sanctions and make negotiating trade agreements more difficult).

Some elements of UK central and local government consider State aid currently too invasive and are particularly irked by the notion that EU State aid law is restricted to issues having “a potential effect on trade between Member States”, yet this in interpreted by the European Commission very widely, even for issues appearing relatively local in nature.  This is a recurring theme in day to day practice, but UK Competition Law already replaces such effect on trade between Member States notions from EU law in other contexts with effect on trade in the UK or a part of it.  For this reason it would be surprising if a UK State aid law did not have a very similar concept, which would ultimately mean little or no change and if anything the potential effect on trade in the UK concept would be even easier to fulfil.

Conclusions

For a number of reasons it seems very likely that a post Brexit UK would still want and need to apply a disciplined State aid law that might quite probably look a lot like EU State aid law as it stands today, even if only enforced on a domestic basis.  Failure to do so could lead to a fundamental hole in the upholding of the level playing field in the UK generally, as well as trade sanctions and/or difficulties in negotiating good fair trade agreements with other countries, including the EU. 

It therefore seems highly unlikely that the State aid regime would simply fall away, thus leaving the UK authorities to invest in and subsidise UK industry at will.  It is much more likely that a similar, if not even more stringent regime be implemented, as a requirement of the UK's ability to demonstrate fair and open competition and a regime which enforces the same, thus helping the UK continue to trade freely on the world stage.

One way or another it therefore appears likely that State aid law will stay with us in much the same form for at least the foreseeable future.  Even if there is in due course some change in who enforces it, this will not happen overnight and for the sake of maintaining fair competition as well as good trade relations internationally, the substance may ultimately not differ too much from the widely accepted principles developed by the EU over time anyway. 

Aricle by Jonathan Branton, Partner and Head of EU/Competition at DWF LLP and Helen Feinson, Solicitor, EU/Competition, DWF LLP

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Jonathan Branton

Partner - Head of EU/Competition

I lead the firm in EU/Competition issues, specialising in behavioural antitrust, merger control, public procurement and State aid, and all related issues of public funding, including the UK’s Regional Growth Fund, ERDF and ESIF. I also head up the firm’s Brussels office and the firm’s cross-discipline Central and Local Government sector group.