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Update: A chapter on subsidies is part of the UK-EU Trade and Cooperation Agreement (TCA). Both the UK and EU must have independent regimes of subsidy control. The agreement includes broad common principles to prevent authorities from giving businesses subsidies, which could be detrimental to trade and investment. See our briefing The UK-EU Trade and Cooperation Agreement: Level playing field (section 3). 

After a consultation, on 30 June 2021 the Government introduced new legislation – the Subsidy Control Bill – to Parliament. The Bill contributes to meeting the UK’s international committments on subsidy control.

As a member of the European Union, the United Kingdom was part of the EU regime on restricting trade-distorting subsidies (“state aid”). EU state aid rules continue to apply to the UK till the end of the transition period on 31 December 2020. After that, the Government has said it will put in place an independent UK subsidy regime. But both EU state aid rules and the WTO Agreement on subsidies and countervailing measures remain relevant in the UK. The extent of this effect will depend upon the result of the UK-EU future relationship negotiations.

This briefing explains what EU state aid rules mean. It also sets out the recent changes brought about in response to the coronavirus outbreak. A further section looks at the state aid rules which apply during the transition period, and the settlement of ‘ongoing’ cases. Finally, the briefing sets out the main principles of the WTO Agreement on Subsidies and Countervailing measures.

For more information on state aid in the UK-EU negotiations see Commons Library briefing CBP 8852, The UK-EU future relationship negotiations: Level playing field.

What is state aid?

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 if it threatens to distort trade and competition between firms, through for example, discouraging investment and increasing costs to consumers. EU state aid rules aim to create a level playing field so that, for example, French firms can compete fairly with German ones.

The EU and its Member States also use state aid as a 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 small and medium enterprises (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 never had specific legislation for state aid, as EU state aid rules apply directly.

What does the EU state aid framework look like?

As a general rule, an EU Member State cannot pay out state aid unless a scheme or an aid measure is approved by the European Commission. Policymakers have to make sure that support is legal through making it compliant with guidelines set out at EU level.

However, there are many exemptions, such as the de minimis rule for assistance worth less than €200,000 over three years and the General Block Exemption Regulation. These exemptions generally allow smaller schemes to be set up without a prior notification in Brussels. In addition, EU state aid rules do not restrict policies open to all businesses, such as a general reduction of corporation tax or changes in employment law.

In 2019, the Commission started an evaluation of the current rules. This is expected to result in amended rules in several areas, including energy and environmental aid. There will also be more flexibility towards transnational projects supporting strategically important technologies and value chains.

In response to the coronavirus outbreak, the EU has temporarily relaxed the usual state aid restrictions to give Member States more flexibility to support their economies.

Has there been much state aid in the UK?

While an EU Member State, successive UK governments have supported rigorous state aid controls and have avoided subsidising particular industries or companies.

The UK public sector has spent less in business support than most other EU countries. In 2018, the UK spent 0.38% of GDP on state aid (excluding railways, and agriculture and fisheries), while France spent 0.79% and Germany 1.45%.

Transition period

During the transition period, the UK continues to apply EU state aid rules and regulations and the EC continues to assess and approve UK state aid measures. The Commission will be able to finish ongoing procedures and take follow-up action beyond the end of the transition. For up to four years after that date, the Commission will also have power to initiate new examinations of UK aid, which authorities may have paid to businesses before the end of transition. This for example allows the Commission to investigate allegations of unlawful UK aid paid out in the past.

The Protocol on Ireland and Northern Ireland foresees that EU State aid Law will apply in Northern Ireland regarding trade between Northern Ireland and the EU. This is limited to trade in goods and electricity. The European Commission will remain the enforcement authority.

World Trade Organisation Agreement on Subsidies and Countervailing Measures

In addition to EU state aid rules, the UK is party to the WTO Agreement on Subsidies and Countervailing Measures. The government has announced that its commitments under the WTO will play an important role in the future UK subsidy regime.

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:

  • The default position in WTO rules is that subsidies are generally allowed, while EU rules consider subsidies to be generally illegal.
  • WTO rules apply to goods, but EU rules include services too.
  • EU rules are applied prospectively (i.e. legality must be proved before awarding any support), while WTO rules are only reactive, and are only triggered if a member country lodges a complaint.
  • WTO rules rely on state-to-state enforcement while under EU rules there are remedies available to businesses and individuals.
  • Under EU rules, a business has to repay illegal state aid. There is no such mechanism to remove anti-competitive effects under the WTO rules.

In case the UK and the EU do not reach a free trade agreement by the end of the transition, the WTO rules on subsidies would still apply.

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