State aid is one of the areas of law most vulnerable to being affected by Brexit, as it exists entirely at the level of EU law. UK legislation makes no provision for either the rules or their enforcement.

Keeping State aid rules in place, but with a new enforcer

The UK Government nevertheless wants to maintain the current State aid rules in UK law even in the event of a 'no-deal' Brexit, and to that end has published the State Aid (EU Exit) Regulations 2019 (the "State Aid Regulations") to be made under the European Union (Withdrawal) Act 2018. The State Aid Regulations _ currently in draft and subject to approval by Parliament under the affirmative procedure _ will essentially preserve all the existing substantive rules on State aid, but provide for them to be enforced by the Competition and Markets Authority (CMA) in place of the European Commission.

Businesses and public bodies will therefore continue to be subject to broadly the same rules and procedures regarding State aid, but will now have to notify aid to the CMA instead of the Commission. Existing aid approvals given by the European Commission will remain valid, so public bodies will not have to apply again to the CMA. However, aid which has been notified to the Commission but not approved at the time Brexit takes effect will have to be re-notified to the CMA.

The CMA will also take on responsibility for investigating where non-exempt aid is granted without first being approved by the CMA, and where aid which was either exempt or approved (by the Commission or the CMA) is misused.

The State Aid Regulations give the CMA a number of enforcement powers, including powers to:

  • investigate whether aid is granted and used lawfully, in response to complaints or on its own initiative;
  • order the suspension, interim recovery, termination and recovery (with interest) of unlawful or misused aid;
  • review existing aid schemes to decide whether they would be approved if notified to the CMA afresh, and if not to order their termination;
  • monitor public authorities' compliance with the State aid rules;
  • inspect business premises when investigating the suspected misuse of aid;
  • compel the production of information from aid recipients and third parties; and
  • impose fines on anyone who provides incorrect, incomplete or misleading information, or fails to comply with an information order.

Reflecting the intention for continuity on the substantive law, the State Aid Regulations require the CMA to adopt most of the EU's current State aid guidelines as its own policy, and to publish those by the time the UK leaves the EU (which remains, at the time of writing, 11pm on 29 March 2019). The CMA can also publish its own stand-alone policies, and on 4 March it published draft procedural guidance on State aid notifications and reporting. This guidance focuses on the CMA's proposed process for investigating potential aid. Both the guidance and the State Aid Regulations themselves require the CMA to aim to reach a decision on notified aid, or an investigation of existing aid, within 18 months. However, this is only a "best endeavours" timetable. The CMA proposes to issue further guidance on complaints alleging unlawful aid or misuse of aid, and on investigations into existing aid measures.

What will change for public authorities?

The Regulations impose numerous proactive monitoring and reporting requirements on aid donors. While these are broadly in line with the existing EU law requirements, there are some additions. In particular, the current obligation on Member States to publicise on a dedicated website aid granted under the General Block Exemption Regulation will be pushed down to individual aid grantors. Public authorities will therefore have an obligation to publish on their own websites various types of information relating to block-exempted aid, or at least a link to another site where that information appears. This puts a new onus on individual public authorities to publish information about aid they grant.

The State aid test

One intriguing point is something that is not changing: the test for whether something is State aid continues to include the need for an effect on trade between the UK and the EU (the current test refers to trade between Member States, so the change is just post-Brexit semantics). It is interesting that the core rule still refers to trade only with the EU and not with other countries, which sits uneasily with the premise that the State Aid Regulations will only be required _ at least in the short term _ if there is a 'no-deal' scenario in which trade with the EU will otherwise be treated the same (if not worse, once the UK signs other trade deals) as trade with other countries.

The vast majority of countries are party to the World Trade Organisation (WTO) Agreement on Subsidies and Countervailing Measures (the WTO equivalent of the EU's State aid regime), and so similar restraints apply and can be expected to be included in any post-Brexit trade deals (with the EU or others), although those restraints tend to be much less strict and harder to enforce than the EU regime.

The UK will therefore be very unusual in being a non-EU country that has voluntarily adopted its own domestic legal prohibitions on government subsidies to business, and particularly unusual in having a 'domestic' regime that is not actually concerned with whether aid affects trade within the UK. It is therefore an odd hybrid of an international and a domestic aid regime.

Agriculture and fisheries

The State Aid Regulations are complemented by the recently published State Aid (Agriculture and Fisheries) (Amendment) (EU Exit) Regulations 2019 (the "Agriculture and Fisheries Regulations"), which are also currently subject to Parliamentary approval.

Currently, certain categories of agricultural and fisheries funding are subject to their own distinct State aid rules under EU law, with different exemptions and thresholds below which funding does not meet the criteria to constitute State aid. These rules allow a simpler process for granting certain types of funding to businesses in these sectors, although the substantive scope for providing funding is narrower.

The Agriculture and Fisheries Regulations ensure that the existing State aid framework applying to agriculture and fisheries will essentially continue in the post-Brexit UK regime, again under the CMA's jurisdiction.

Scotland-specific issues

The State Aid Regulations apply UK-wide, so no separate Scottish or other devolved regulations will be made. The UK Government considers that State aid is reserved to Westminster under the Scotland Act 1998, while the Scottish Government believes it falls within the devolved competence of the Scottish Parliament. However, the UK Government has stated in Parliament that the two governments do not disagree on the substance of how to deal with State aid immediately post-Brexit, and so there is no dispute about the State Aid Regulations' application to Scotland. However, if either government were to propose future changes to State aid policy with which the other disagreed, we may see the Supreme Court again being asked to consider whether a matter is within the Scottish Parliament's competence.

A constitutionally interesting point within the State Aid Regulations is that the CMA will not have enforcement powers in respect of aid granted, or required to be granted, under an Act of (the UK) Parliament. It will instead be able to offer only an advisory opinion, which would (like a declaration of incompatibility under the Human Rights Act 1998) have political but not legal effect. This is one of the few substantive changes to the EU State aid rules, which due to the supremacy of EU law, do allow for Acts of Parliament to be declared unlawful if they breach the State aid rules. However, no equivalent protection is conferred on Acts of the devolved legislatures. While that is not necessarily surprising, as the principle of the sovereignty of Parliament (the cornerstone of the UK's unwritten constitution) does not extend to the devolved legislatures, it could put the CMA in the difficult position of ordering the suspension and even termination of aid mandated by Acts of the Scottish Parliament.

In terms of the procedure Scottish public authorities should follow in notifying and otherwise dealing with State aid, the CMA's draft guidance recognises the Scottish Government's position that aid grantors who are devolved bodies in Scotland should only engage with the CMA via the Scottish Government State Aid Team. This is consistent with the current approach taken in Scotland to engaging with the UK Government and the Commission on State aid matters.

Scottish local authorities are key stakeholders in State aid, and COSLA adopted a common position on the matter. In particular, it has been lobbying for a simplified set of State aid rules (including exemptions, the de minimis rule, and State aid guidelines) and for the UK Government to consult stakeholders before agreeing to any stricter State aid criteria in future trade deals, either with the EU or with other countries or trading blocs. It has also argued that, while an independent oversight body should be responsible for reviewing compliance with State aid rules (a desire that has been fulfilled via the CMA's role), the substance of these should be drafted by the UK, devolved and local governments in partnership. As drafted the State Aid Regulations largely maintain the status quo so do not make any substantive changes to the existing State aid rules or process. Over time however, lobbying by COSLA and others may see a shift to the more 'light-touch' State aid process they would prefer, and perhaps even a different approach to defining what constitutes State aid.

The future

The CMA's role is intended to be wholly independent from government, but it remains to be seen how well a domestic State aid regime without any supranational enforcement will hold up against political pressure to help failing businesses, subsidise certain industries or attract foreign investment, and whether and how the regime might diverge from the EU's rules over time. If the UK leaves the EU without a deal we may start to get answers on those issues in the near future.

If you have any questions about State aid issues or how the changes might affect your organisation, please get in touch with Charles Livingstone, Jamie Dunne or your usual Brodies contact.

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