State Aid and The Withdrawal Agreement: Key Points

03 Dec 2018 | by George Peretz QC

The UK Government’s intention to maintain the EU State aid rules has been clear for some time.  I briefly discussed the reasons why it has taken that view – and done so without significant opposition – in a piece I wrote here.  The intention to hold onto the State aid rules was strong enough for the Government to commit to maintaining them even on a “no deal” Brexit.  But we now have a deal, subject to the vagaries of UK politics (which I shall not attempt to predict).  What has it got to say about State aid?

There are really three sets of issues here.  The first is what might be called the planned withdrawal period – the transition period and the arrangements for handling cases that straddle the end of the transition period.  The second is the management of State aid under the “backstop”, that is to say the Ireland/Northern Ireland Protocol which it is hoped will never be operational but which will come into force if no final agreement is reached before the end of transition.  And the third is the political declaration that sets out the outline of the final relationship.

Transition

The transition regime is brutally simple: the UK remains a Member State for all purposes save those associated with having any say in legislation or decision-taking: Article 127(1) simply provides that all EU law continues to have effect in the UK.  So there will be no change in the State aid rules at all during the transition period, save that the UK will lose its vote in any State aid legislation or decision-making by the Council.

The transition period, however, will have a definite end (though what that will be has not been decided).  What happens to ongoing procedures at the end of transition?  The answer is to be found in Article 92, which provides that the Commission will remain competent to resolve any State aid investigation that has been allocated a case number by the end of transition.  The Commission will then proceed as normal either to raise no objections, find no aid, or start a formal investigation (Article 92(5)).

Further, Article 93 provides that the Commission will remain competent to initiate new State aid procedures for up to four years after transition end.  These will presumably only relate to aid granted before the end of transition (aid granted after transition end not being a matter falling under EU rules, subject to the backstop), and hence will be investigations of unlawful aid or misuse of aid.

The Commission decisions that result from these investigations will be binding “on and in” the UK: so private parties as well as the UK itself will be bound: Article 95.

One issue not dealt with is how the Commission will approach an aid notified before the end of transition but which will cover a period extending to after the end of transition.  To the extent that the measure is to be implemented after the end of transition, it will presumably fall outside the Commission’s jurisdiction.  But a measure implemented before the end of transition might well have many of its effects on competition (and many of its benefits in terms of the aim of the measure) after the end of transition.  It is not clear, at least to me, quite how the Commission is supposed to deal with such post-transition effects: but for what it is worth, it seems to me that the Commission could only properly take into account effects occurring before the end of transition (not least because the measure could be withdrawn and re-implemented the day after transition, at which point the Commission would have no jurisdiction over it.

Backstop

The existence of strong State aid provisions in the backstop should come as no surprise.  The backstop involves a customs union between the whole UK and the EU.  In a customs union, the EU is deprived of its ability to apply countervailing measures to subsidised imports.  So an inevitable quid pro quo of a customs union is bound to be cast iron guarantees that unacceptable subsidies will not be granted to UK businesses exporting to the EU.

There are two aspects to the backstop: rules that apply in Northern Ireland (more accurately, to measures affecting trade between Northern Ireland and the EU) and rules that apply to Great Britain (more accurately, to measures affecting trade between Great Britain and the EU).

As for Northern Ireland, Article 12 of the Protocol states that the State aid provisions set out in Annex 8 shall apply “to the United Kingdom … in respect of measures that affect that trade between the part of the territory of the United Kingdom to which [the Union Customs Code] applies by virtue of Article 6(2) of this Protocol and the EU which is subject to this Protocol.”

That less than luminously clear provision needs unpacking. “The territory of the United Kingdom to which [the Union Customs Code] applies by virtue of Article 6(2) of this Protocol” is Northern Ireland, excluding its territorial waters.  And the “trade … which is subject to this Protocol” is goods trade, subject to the “holding provision” for fisheries products set out in Article 6(1), fifth paragraph.  Annex 8 to the Protocol sets out (I think) all relevant State aid legislation.

The net effect is that the UK remains subject to the EU State aid rules (including enforcement by the Commission and the Court of Justice) in relation to measures that affect trade in goods as between Northern Ireland and the EU.  That provision is evidently likely to cover many measures taken by the devolved administration in Northern Ireland.  But it is also important to appreciate that that provision could well include any UK Government measure that extended to Northern Ireland such as, for example, a tax break.  It even appears to bring in measures that do not extend as such to Northern Ireland, but (for example) benefited UK businesses that also produce goods in Northern Ireland.

Meanwhile, further State aid provisions apply to measures affecting trade in goods between Great Britain and the EU (technically, trade to which Article 1 of Annex 2 applies).  Part Four of Annex 4 sets them out.  The key point is that Annex 8 to the Protocol – which, as I have said, consists of all EU State aid law – applies to the United Kingdom: Article 7(1).

But two features of this “GB regime” stand out and distinguish it from the “Northern Ireland regime” described above.

First, there is a general carve out for all UK agricultural support up to a maximum to be set by EU/UK agreement through the Joint Committee – Articles 7(2) and 8.  Failing agreement, however, the carve-out is to be suspended (Article 8, last paragraph), which would appear to put the UK in a less than powerful negotiating position.

Second, and of more general interest, the powers of the Commission are to be exercised by the UK independent authority set out in Article 9 – which will be the Competition and Markets Authority (CMA).

Article 9 of Annex 4 then sets out what powers the CMA is to have.  It is to be operationally independent and to have guarantees of independence.  More startlingly, it is to have “powers and functions equivalent to those of the [Commission] acting under [EU State aid law]”.  And its decisions are to produce in the UK “the same legal effects as those which comparable decisions of the [Commission] acting under [EU] State aid law … produce within the [EU] and its Member States.”

This is strong stuff.  The Commission has powers to declare Acts of Parliament that confer State aid to be unlawful: and where that happens, they are of no effect.  The CMA is, it appears, to have equivalent powers with the same legal effects.  That would appear to give the CMA, which performs its functions on behalf of the Crown, the power to declare an Act of Parliament to be unlawful as inconsistent with the State aid rules set out in Article 8.  This is, to put it mildly, a considerable constitutional innovation: a critic might go so far as to say that the CMA is to have the power to declare Acts of Parliament to be of no effect that it took a revolution and a Dutch invasion to remove from the hands of the Stuart Kings.  On the other hand, of course, the Commission has (since 1973) had these powers as part of the UK’s membership of the EU: and these provisions could be seen as simply “bringing home” those powers.

Article 11 requires the UK Courts to enforce the standstill provisions in Article 108(3) TFEU, to review the CMA’s decisions, to enforce those decisions and penalise non-compliance, and to award damages for breach of Article 108(3).

The CMA is, however, not left to “get on with it” subject to the scrutiny of the UK courts.  Article 10 requires it to liaise closely with the Commission: and it is required to send the Commission drafts of all decisions, and then take “utmost account” of the Commission’s opinion (which is to be given three months to opine, which will have the effect of slowing down State aid approvals during the backstop period).  Finally, under Articles 13 and 14, the EU is to have power to take “appropriate remedial measures” if it considers that the UK’s application of the GB State aid regime “threatens to seriously undermine the conditions of competition between [the UK and the EU]”.  The Commission will therefore retain significant powers to step in if it feels that the CMA is being insufficiently robust in preventing unacceptable State aid.

The backstop provisions are in many ways startling: but of course it is hoped that they will never be needed because the final relationship will resolve the Irish border problem.  So we should look at what the final relationship has to say about State aid.

Final relationship

Paragraph 79 of the political declaration says: –

The future relationship must ensure open and fair competition. Provisions to ensure this should cover state aid, competition, … and relevant tax matters, building on the level playing field arrangements provided for in the Withdrawal Agreement and commensurate with the overall economic relationship. The Parties should consider the precise nature of commitments in relevant areas, having regard to the scope and depth of the future relationship. These commitments should combine appropriate and relevant Union and international standards, adequate mechanisms to ensure effective implementation domestically, enforcement and dispute settlement as part of the future relationship.

This is not particularly enlightening.  However, the reference to “building on the level playing field arrangements provided for in the Withdrawal Agreement” does seem to indicate that the backstop model may serve as a starting point for discussion of the State aid provisions of the future relationship, though plenty of room is left for a looser relationship (as would seem appropriate if the future relationship excludes a customs union and is a form of “Canada plus”).

Conclusion

 At the time of writing, predicting the fate of the withdrawal agreement is similar to predicting the fate of a small sailing ship about to be hit by a hurricane: its survival looks open to serious doubt, but is by no means out of the question.  Possible alternative outcomes appear to include a referendum including an option to remain in the EU, application to join EFTA/EEA, or “no deal”.  What does, however, seems to be tolerably clear is that the State aid rules will, in one form or another, continue to apply to the UK.

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