The UK Government has announced plans to try to change the way EU State aid law applies under the Northern Ireland Protocol – on the same day that the European Commission has approved a new Regional Aid map for Northern Ireland which identifies ways which State aid for "less favoured regions" may be lawfully awarded under EU law.
In a statement to Parliament, Liz Truss MP, announced that the Government would be publishing draft legislation in the coming weeks that shall "cement the provisions in the protocol that are working, including the common travel area, the single electricity market and north-south co-operation, while fixing those elements that are not, such as the movement of goods, goods regulation, VAT, subsidy control and governance".
How does State aid law apply under the Northern Ireland Protocol?
Article 10 of the Northern Ireland Protocol requires EU State aid law to be applied "to the United Kingdom, including with regard to measures supporting the production of and trade in agricultural products in Northern Ireland, in respect of measures which affect that trade between Northern Ireland and the Union which is subject to this Protocol".
The Protocol is an additional bilateral agreement between the EU and UK existing alongside the EU/UK Trade & Cooperation Agreement (TCA) which includes a chapter on mutual obligations for both parties to maintain a minimum standard subsidy regime. Since 11 pm on 31 December 2020 the TCA has formed the basis of the new UK Subsidy Control regime.
What the Northern Ireland Protocol means in practice is that some limited subsidy measures within the UK remain within the ambit and jurisdiction of EU State aid law rather than the new UK regime. In assessing whether this applies a two stage test needs to be done. Firstly, it is necessary to determine whether the measure is within the scope of the Northern Ireland Protocol (which includes goods and the all-Ireland electricity market) and secondly could the measure affect trade between Northern Ireland and the EU?
In applying the test it is necessary to take account of guidance (published by both the European Commission and the UK Government), case law such as the recent British Sugar v Department for International Trade, EU decisions such as Eventech and texts agreed between the EU and UK. Unsurprisingly it is difficult for public bodies and businesses considering investment in Northern Ireland to navigate the new rules with certainty.
What has changed to make the UK want to amend Article 10 of the Northern Ireland Protocol?
The UK Government has been seeking to remove the application of EU State aid law under the Northern Ireland Protocol for over eighteen months, including publishing a "command paper" with this intention on 21 July 2021.
There is a view within the UK Government that the new Subsidy Control Act 2022 (which received Royal Assent on 28 April 2022) strengthens the argument to remove Article 10 of the Northern Ireland Protocol. This is because the Subsidy Control Act 2022 creates a statutory UK State aid regime which takes UK Subsidy Control law further than it is required to go under the bilateral commitment with the EU set out in the TCA, hence the EU should take comfort that all subsidies within the UK (including Northern Ireland) will be carefully regulated to a high (enough) standard.
The counter argument from the European Commission is that the Subsidy Control Act 2022 is based on the commitments made in the EU-UK Trade and Cooperation Agreement 2020, which was negotiated on the understanding that the Northern Ireland Protocol would be in place.
Is the EU State aid regime stricter than the Subsidy Control Act regime?
It is undoubtedly administratively complicated to try to cater for two different regimes running in parallel (the effect of which can be to go to the lowest common denominator).
There are elements of EU State aid rules that are very strict. For example, financial assistance that falls within the definition of 'State aid' is prohibited unless awarded under an exemption or approved by the European Commission. Measures may be investigated for ten years after the award of aid. Furthermore, the recent Balzano case obliges public bodies to recover awards of State aid, they discover are unlawful, promptly and upon their own initiative.
However EU State aid rules have developed to enable awards to be made. Over 95% of State aid proceeds without significant administrative requirements by meeting the conditions of the General Block Exemption Regulation. This provides legal certainty to potential investors looking for public funding.
The regime envisaged by the Subsidy Control Act 2022 offers flexibility but (as yet) less certainty. This may change in due course if a significant number of Streamlined Subsidy Schemes, which Article 10 of the Act facilitates, are adopted. These would provide safe harbours for certain types of subsidy within specified limits, in a similar way to EU block exemptions. For the time being subsidy awards must comply with a series of general principles without (in the main) precise definition, hence the flexibility depending on circumstances, but also the lack of certainty as to what is necessarily sufficient and what is not. Awards are considered lawful unless successfully challenged by a commercial rival within a prescribed period (which, subject to certain conditions, can be as little as a month). There are fewer routes to legally commit a subsidy, but the requirements for these are, generally, simpler.
There is little case law as to how a Court would consider a challenge under the Subsidy Control rules at this time and, from our experience, inconsistency as to how the principles for considering subsidies are applied by different public bodies. The Government is currently considering what types of award merit review by the Competition and Markets Authority, but the draft legislation envisages that some measures which would have proceeded without scrutiny under the General Block Exemption Regulation will need to be submitted for consideration.
Therefore, although the new rules offer the promise of being more permissive, for some interventions they are more restrictive than the EU State aid rules. Over time we anticipate that these snagging points will be addressed creating a more permissive and clearer system.
The UK Government considers that the last six months of negotiations with Vice-President Maroš Šefčovič has not led to progress, so is now looking at alternative routes to achieve that objective. At this time, the UK Government has not set out how it plans to deliver changes to the State aid commitment at Article 10 of the Northern Ireland Protocol and therefore we await the detail of any draft legislation, which is expected to be published before the end of June 2022.
That said, in our view, the key element of Liz Truss's statement to the House of Commons was that the UK remains open to amending the Northern Ireland Protocol through negotiation. Indeed, we note that the parties agreed wording at Article 13(8) to allow for parts of the Northern Ireland Protocol to be superseded by consent.
Until then, the status quo prevails and bodies contemplating award and receipt of subsidy in or affecting Northern Ireland will need to take a case by case approach to assessing the jurisdiction of EU State aid law, or UK Subsidy Control, and proceeding carefully following the conclusions from that analysis.
DWF Law LLP's lawyers have exceptional experience in competition law issues including State aid and Subsidy Control. Members of our specialist Public Sector team have expertise and experience developed from working within Central Government, Local Government, the European Commission and alongside international companies securing public funding. Please free to get in touch, if it would be useful to discuss any of the issues raised in this article or other matters related to public funding (such as Levelling Up Fund applications and the UK Shared Prosperity Fund investment plans). Our UK offices include Belfast, Birmingham, Bristol, Edinburgh, Glasgow, Leeds, Liverpool, London, Manchester and Newcastle