As a member of the EU and of the WTO, the UK must follow a number of rules when providing assistance to businesses and industries. This note explains the rules around state aid and subsidies, their motivations and differences. It also looks at what might change after the UK leaves the EU.Jump to full report >>
EU Member States sometimes use public resources to intervene in their national economies by assisting companies or industries. This can range from a government tax relief scheme for investors to a local authority giving a subsidy to a property developer.
This type of assistance is called ‘state aid’ and is normally prohibited because it can distort trade and competition between firms, discourage investment and increase costs to consumers. EU state aid rules aim to create a level playing field so that, for example, British firms can compete fairly with German ones.
But state aid can also be an important and effective policy tool. Exemptions to the EU state aid rules allow for certain beneficial interventions. For example, state aid might be necessary and justified to address a market failure, as when SMEs have difficulties finding investment capital. It may also be necessary to achieve policy goals such as regional economic development or environmental protection. Governments can, for instance, use state aid to stimulate businesses to invest in less developed areas or the development of advanced environmentally friendly technologies.
The European Commission (EC) has strong powers to assess cases of state aid, approve them and enforce stringent ‘claw-back’ mechanisms when state aid is deemed unlawful. The UK has no specific legislation for state aid, as the EU rules apply directly.
Leaving the European Union will alter the state aid regime in the UK.
The absence of the EU state framework is not expected to translate into higher levels of direct support to businesses in the UK as successive governments have preferred rigorous state aid controls and have avoided subsidising particular industries or companies. However, pressure on the government to intervene might become more intense.
The extent to which EU state aid rules will apply in relations between the UK and the EU will be determined by the deal the UK and the EU agree. It is very likely that state aid provisions will be part of the agreement, not least because the EU has insisted on including some sort of controls on state assistance in almost every free trade agreement it has signed with other countries in the past.
While the European Economic Area (EEA) Agreement and Association Agreements with aspirational Member States like Ukraine tend to replicate the EU state aid rules, Free Trade Agreements with South Korea and Canada build upon the less stringent World Trade Organisation commitments on restricting harmful subsidies. In general, the closer the market integration with the EU, the more state aid rules form part of the agreement.
The Government is in favour of an independent UK state aid regime and is already working to create one. The EU Withdrawal Act 2018 will preserve a general prohibition of state aid from “exit day” by transposing the existing EU law into the UK legislative framework. The Competition and Markets Authority (CMA) will become the UK’s independent state aid authority to take over the current role of the EC.
The UK has proposed the EU to follow a common rulebook on state aid whereby the UK continues to apply the existing EU state aid law. At this point, it is unknown how much of this Government proposal will be included in the future EU-UK Agreement, but state aid appears to be one of the less contentious aspects of cooperation, as both sides are keen on preserving a level playing field for their businesses.
If the UK and the EU agree on a transition period, the Government will continue to apply the EU state aid regulations during that time. The EC will continue to assess and approve UK state aid. The jurisdiction over pending cases is still under negotiation.
If the UK exits the EU without a formal agreement, the Government plans to have a functioning UK-wide state aid regime in place by the exit day. The UK public organisations would have to notify their state aid measures to the CMA, instead of the EC. Any previously approved state aid measures would retain their status and any pending notifications to the EC would need to start a new notification with the CMA.
There is a general prohibition of state aid in the EU, but there are some exemptions. If a measure involves state aid, policymakers need to ensure that it is legal. This can be done, for example, by demonstrating that the measure is covered by an exemption in the rules, or by seeking the approval of the EC.
There are three categories of standard exemptions to the state aid rules. If any exemption applies to a state aid measure, then the assistance is normally permitted without the need to seek the EC’s approval. These categories are:
The UK public sector spends less directly and selectively supporting businesses than most other EU countries. In 2016, the UK spent 0.36% of GDP on state aid (excluding railways), while France spent 0.65% and Germany 1.31%.
In addition to EU state aid rules, the UK is party to the WTO Agreement on Subsidies and Countervailing Measures. Under the Agreement, some subsidies are prohibited outright while the rest are ‘actionable’ – meaning that the subsidy is allowed, but other countries can take certain actions if the subsidy harms them. Countries can protect their industries by taxing imports of the subsidised good – this is known as imposing a ‘countervailing duty’.
Although the definition of a ‘subsidy’ under the WTO regime is broadly similar to ‘state aid’ in EU law, the EU rules are a lot more stringent than the WTO rules on subsidies. The key differences are:
Commons Briefing papers SN06775
Author: Ilze Jozepa