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 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 aid framework is not expected to translate into higher levels of direct support to businesses in the UK as successive governments have supported rigorous state aid controls and have avoided subsidising particular industries or companies. However, pressure on the government to intervene might become more intense.
The government is setting up an independent UK-wide state aid regime. The EU Withdrawal Act 2018 will preserve a general prohibition of state aid from “exit day”. The substance of state aid regulations will not change.
If the UK leaves the EU without an agreement, the government intends to have the new UK-wide state aid regime functioning by the exit day. The Competition and Markets Authority (CMA) will become the UK’s independent state aid authority, in place of the Commission. Public organisations will have to notify their state aid measures to the CMA.
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 and will be allowed to scrutinise allegedly unlawful UK aid, which was granted during the transition, for up to four years after its end date.
The “backstop” Protocol aims to avoid a hard border on the island of Ireland if the UK and EU fail to reach an agreement on the future relationship by the end of the transition. The Protocol foresees a very close UK-EU relationship on state aid. A UK regulator would enforce EU state aid law in the UK, but the Commission would monitor state aid which affects trade between the EU and Northern Ireland. The UK regulator would consult the Commission on its state aid decisions and the Commission would be able to intervene in state aid cases in UK courts.
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 both the UK and EU are keen on preserving a level playing field for their businesses.
In 2018, the UK proposed to follow a common rulebook on state aid whereby the UK continues to apply the existing state aid law. At this point it cannot not be said how much of this "dynamic alignment" could return in the future UK-EU agreement, but state aid appears to be one of the less contientious issues. Therefore, some way of keeping to common rules is plausible.
Also, 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. For example, 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.
What does the EU state aid framework look like?
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:
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:
In case the UK exits the EU without a formal agreement, the WTO rules on subsidies would still apply.
Commons Briefing papers SN06775
Author: Ilze Jozepa