The State Aid (Revocations and Amendments) (EU Exit) Regulations 2020 would remove state aid provisions from the retained EU law that will remain on the UK statute book after the transition period. They are subject to the draft affirmative procedure, meaning they must be approved by both Houses of Parliament before they can come into force. The House of Commons has approved the regulations and the House of Lords is due to debate them on 2 December 2020. Labour has tabled a ‘regret’ amendment to the approval motion. The House of Lords Secondary Legislation Scrutiny Committee has drawn the instrument to the special attention of the House.

EU state aid policy

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 it is done selectively, for example only to specific companies or industry sectors or regions. Generally, EU law prohibits state aid where it would distort or threaten to distort competition between member states, although it may be permitted in some circumstances. EU member states must notify the European Commission before implementing state aid measures, subject to some exceptions. The Commission can 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 was incompatible with the EU rules.

UK’s future subsidy control policy

WTO rules and future consultation

The Government’s policy 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. On 9 September 2020, Alok Sharma, the Secretary of State for Business, Energy and Industrial Strategy, announced that from 1 January 2021, the Government would follow the World Trade Organisation (WTO) rules for subsidy control. Mr Sharma also said the Government would publish a consultation “in the coming months” on whether to go further than the WTO rules and any related commitments the UK enters into in free trade agreements, including whether legislation is necessary.

The WTO regime takes a different approach 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.

Northern Ireland

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. A consent mechanism means that after an initial four-year period from the end of the transition period, these provisions can only continue to apply with the consent of the Northern Ireland Assembly. Article 10(1) of the 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 [European] Union which is subject to this protocol”. Annex 5 lists the specific EU law state aid provisions that this covers.

In its May 2020 command paper on its approach to the protocol, the Government said that state aid provisions in the protocol would apply only narrowly because the protocol “is limited in scope to the movement of goods and wholesale electricity markets”. However, more recently, the Government has emphasised its concerns that state aid provisions of the protocol could be interpreted more broadly:

There is a risk that a maximalist interpretation of article 10 of [the] protocol by the EU, which was never intended but is none the less a risk we must protect against, could give the European Commission extensive jurisdiction over subsidies granted in the rest of the UK, known as reach-back. All the subsidies granted to the services sector in Northern Ireland could be caught even if there is no link, or only a trivial one, to a goods provider.

The House of Lords European Union Committee noted in its report on the protocol, published in June 2020, that its expert witnesses believed the scope of the protocol’s provisions on state aid could be broadly interpreted, such that a UK state aid provision applying to the UK in general could potentially be subject to EU intervention and judicial review. The committee concluded “the only way for the UK to avoid EU intervention in its state aid decisions would be to ensure that its independent state aid policy does not allow for the level of support available to industry to exceed that available under the EU regime”.

United Kingdom Internal Market Bill

The Government sought to address the issue of EU ‘reach-back’ through the United Kingdom Internal Market Bill. As introduced in the House of Lords, the bill contained a clause—clause 45—through which the Government sought to give itself the power to unilaterally determine the interpretation of article 10 of the protocol. It would have allowed the secretary of state to make regulations to:

  • set out when article 10 does or does not apply to state aid granted in respect of activities outside Northern Ireland; or
  • allow article 10 not to be interpreted in accordance with EU legislation or the case law of the European Court.

Clause 45 was in part 5 of the bill as introduced. Part 5 was controversial because the Government acknowledged that the powers in some clauses within it, including clause 45, would “break international law in a very specific and limited way”. The House of Lords voted at committee stage to remove clauses 42 and 44 and agreed without division to remove all the other clauses in part 5, 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’s original provisions are covered in more detail in the Library’s briefing for the Lords stages of the bill. A separate Library briefing covers what happened during the Lords committee stage.

The bill also contained provisions to set out that only the UK Parliament, and not the devolved assemblies, could legislate to regulate subsidies. The Lords voted at report stage to remove this clause. The Lords also voted to add a new clause that would establish the Office of the Internal Market as an independent body and could enable it to become the body responsible for investigating harmful subsidies. The new clause was tabled by Lord Stevenson of Balmacara (Labour) and Baroness Bowles of Berkhamsted (Liberal Democrat).

Future relationship negotiations

The issue of state aid policy has been one of the main sticking points in the future relationship negotiations between the EU and the UK. The EU wants any deal to include commitments on state aid as part of ‘level playing field’ provisions, to ensure fair competition between the UK and the EU single market. The EU has been seeking more detail on what the UK’s future domestic state aid policy will look like. Lord Frost, the UK’s chief negotiator, has indicated the UK is willing to include some high-level principles on state aid in an agreement. However, the detailed design of the UK system will not be worked out until later, after the consultation. Ursula von der Leyen, the President of the European Commission, said on 20 November 2020 that the negotiations had made some headway on state aid.

What would the regulations do?

EU law on state aid is set out across provisions in the Treaty on the Functioning of the European Union (TFEU), EU regulations and Commission decisions, and in provisions that have been transposed into UK domestic law. The terms of the European Union (Withdrawal) Act 2018 mean that directly effective EU treaty provisions, directly applicable EU legislation and EU-derived domestic legislation will all remain in UK domestic law, as ‘retained EU law’, after the transition period. The Government says it needs to make changes to the state aid provisions in retained EU law to ensure that they do not form part of UK domestic law after the transition period. The State Aid (Revocations and Amendments) (EU Exit) Regulations 2020 would disapply EU law relating to state aid that would otherwise be 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.

Although the EU state aid rules would be removed from retained EU law, the Government has explained that this would not affect the application of the state aid provisions in article 10 and annex 5 of the Northern Ireland Protocol. These provisions of the protocol would be given effect in domestic law by section 7A of the European Union (Withdrawal) Act 2018.

Parliamentary scrutiny of the draft regulations

Committee scrutiny

The House of Lords Secondary Legislation Scrutiny Committee drew the draft regulations to the special attention of the House on the ground that they are politically or legally important and give rise to issues of public policy likely to be of interest to the House. It concluded:

These draft regulations propose to revoke the EU state aid rules after the end of the [transition period], in what appears to be a shift from the previous Government’s position which sought continuity of EU rules in a UK domestic policy context in a ‘no deal’ scenario. As this committee has highlighted previously, this approach raises questions about the use of secondary legislation to introduce policy changes about important issues which should more properly be the subject of primary legislation, thus affording a higher degree of parliamentary scrutiny, especially as on this occasion, the policy is one that appears central to the UK’s negotiation position with the EU. We take the view this is neither a welcome nor acceptable use of secondary legislation. The instrument is particularly relevant in relation to Northern Ireland where there remain uncertainties, highlighted by the House of Lords European Union Committee, with regard to the impact of the state aid provisions in the Northern Ireland Protocol on the UK’s new independent state aid regime.

The Joint Committee on Statutory Instruments did not raise any concerns about technical aspects of the regulations.

House of Commons debate

In the House of Commons, a delegated legislation committee debated the draft regulations on 3 November 2020. Chi Onwurah, Shadow Minister for Business, Energy and Industrial Strategy, said Labour agreed with the need for the instrument and would not oppose it. However, she called on the Government to provide more detail about the UK’s future subsidy control regime. She said there was now “regrettably no time left to carry out a meaningful consultation on a new, ambitious plan for state aid before the end of the transition period”. She accepted that the WTO rules would give “a modicum of clarity to stakeholders”, but they were “suboptimal” and did not include provisions on services. Ms Onwurah also sought confirmation the Government would prevent ‘reach-back’. Finally, she expressed concerns about how the proposed UK shared prosperity fund would interact with a UK state aid regime.

In response, Paul Scully, Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy, said the timescale for developing a new UK state aid regime would depend on two things: “our negotiations with the EU and other countries in terms of free trade agreements, and our discussions with businesses and government at every level, including the devolved administrations, to ensure that we get it absolutely right”. He said the Government would publish guidance as soon as possible on the international commitments that will apply in the UK on 1 January 2021, covering the WTO rules and any commitments the UK had made in free trade agreements.

The Commons formally approved the regulations on 4 November 2020.

‘Regret’ amendment tabled in the Lords

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:

but 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.

This is a non-fatal amendment, which means that if it were agreed, it would not block the approval of the regulations.

Read more

Cover image by Shutterbug75 on Pixabay.