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UK-EU Trade and Cooperation Agreement – the impact on state aid to businesses

The Government has an opportunity to provide swift access to finance, to do so in a transparent manner and to ensure businesses get what they need.

The UK-EU Trade and Cooperation Agreement “(the Agreement”) summary maintains that the deal done “ends the EU state aid regime in Britain and allows us to introduce our own modern subsidy system so that we can better support businesses to grow and thrive in a way that best suits the interests of British industries”.

One of the challenges that the European Structural Funds have faced has been the lengthy procurement processes and the general nervousness and uncertainty on state aid rules. Will the Agreement bring this to an end and ensure access to finance for SME businesses and large infrastructure and development processes swiftly and with certainty? 

Why did the Government continue to fight so hard?

It is widely known that the EU wanted the UK to simply continue to follow EU state aid rules — something which, even pre- COVID, most ‘Brexiteers’ would see as an antithetical to sovereignty and independence. COVID, with the immediate need for public money to be provided to support businesses in the UK, clearly strengthened the Government’s resolve to ensure it had the ability to aid businesses as it saw fit without red tape and delays – not just in times of economic crisis but also in more normal times, to sustain economic growth more swiftly and easily. But it’s not just COVID; commentators have often observed that the UK was not utilising EU funds to finance and support the successes in our economy, almost always sticking to the belief that aid should and could only be provided to businesses where there was a financial gap (whilst adhering to the ever-changing ‘undertaking in difficulty’ regulations).

What are the new rules – who is policing it?

Free from the EU legislation, the Government would be able to provide aid. So does this mean (as our clients are already querying) ‘de minimis’, ‘Block Exemption’, is consigned to the past? Not quite. 

The UK is to establish an independent state aid authority; it appears that this authority would not be required to vet subsidies in advance. The UK would be required to adhere to broad principles which ‘shape the design’ of both sides’ systems, looking to ensure that the granting of the aid ‘does not have damaging effects on trade between the parties in subsidy policy, labour and social policy, or climate and environment policy’.

Companies in the EU will be able to challenge state aid awarded to UK rivals in the UK’s national courts if they feel it does not comply with common principles set out in the trade deal. UK companies will have equivalent rights in the EU. 

Commentators have stated that this could provide uncertainty; in the current system, opinions and a degree of certainty can be given in advance of aid being made. Pursuant to the new agreement, the intermediary bodies distributing funds and the recipient businesses will have to ‘wait to see’ if the subsidy is challenged. However, the agreement goes on to provide specific principles on subsidies that would be viewed as particularly distortive, for example those prohibited by the World Trade Organisation (“WTO”) or aid set out above such as labour and social policy – so there is a steer and subsidies made pursuant to the current system could always be challenged in any event so that criticism is likely to prove unfounded. 

The Agreement requires both sides to be transparent and includes provisions on the role of domestic courts in reviewing domestic subsidy decisions. As the summary of the trade deal sets out, this reflects existing practice under the UK’s system of judicial review.

Perhaps this will shift the mindset of how the monies can be utilised and widen the scope of ‘eligible’ businesses.

Remedies – what happens if the subsidy is in breach of the Agreement?

A Partnership Council will supervise the operation of the trade deal at a political level and this will be supported by a network of other committees, including on trade. Any decisions made will be by mutual consent. The UK must agree to anything for it to be binding.

The UK and EU have also agreed that, in certain circumstances, domestic courts should have the power to order recovery of subsidies that have been granted illegally under domestic law. 

Either side would also be able to unilaterally impose tariffs to counter the effect of trade-distorting subsidies, although the other party could then call for accelerated arbitration.

The Agreement adds ‘The system that has been agreed upon does not compromise the UK’s sovereignty in any area, does not involve the European Court of Justice in any way’.

Finally, as the summary report notes, the UK and the EU have agreed a reciprocal mechanism that allows either side to take swift action where a subsidy granted by the other party is causing or is at serious risk of causing significant harm to its industries. These measures can be challenged using an accelerated arbitration procedure and there is the possibility of compensation if a party has used these measures in an unnecessary or disproportionate manner.

And what about public procurement? The trade deal sets out that the UK can maintain a separate and independent procurement regime and will enable the Government to enact reform of the current system. The Agreement provides for a ‘transparent and non-discriminatory framework of rules’ for trade in public procurement. These rules are based on the WTO Government Procurement Agreement, with some additions. The Government is confident this ‘will provide businesses with additional opportunities and will benefit contracting authorities through increased competition, creating better value for money for the taxpayer’.

Under this framework, the Government has the opportunity to provide swift access to finance, to do so in a transparent manner and to ensure that businesses get what they need.

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