A bold new world?

Kieran McGaughey provides some practical tips for local authorities in tackling the new subsidy control regime.

Christmas Eve seems like a lifetime ago. I am guessing that, for many of you, your thoughts by then had turned to turkey and mince pies, rather than European competition law. Not so the EU and UK negotiating teams, who were putting the final touches to a hard-fought trade deal. Central to the previous stalemate had indeed been the thorny topic of State aid. Parachuted, out of nowhere, from the relative obscurity of public sector legal teams to the forefront of national media.

The Trade and Co-operation Agreement (TCA)

And so then, from 1st January 2021, we have entered into a bold new world. Finally Brexit-ed from Europe, but with a trade deal in place under the TCA. The provisions of that trade deal will very much shape the future of subsidy control here in the UK (“subsidy control” being the new terminology replacing “State aid”). This article is not intended to provide you with a detailed legal analysis of the new regime. There is a wealth of helpful articles out there which do so, from lawyers much more qualified to undertake such an assessment. The Department for Business, Energy & Industrial Strategy (BEIS) have also published their Technical guidance on the UK’s international subsidy control commitments, which is compulsory reading (available here). I do hope, however, to raise some practical suggestions and discussion points around changes necessitated by the new regime. These action points have been gleaned from recent webinars, the above guidance, and useful discussions with local authority colleagues:

1. Your authority will need to update its standard grant funding agreements to reference the new Subsidy Control Rules. Note that the State Aid Rules will still apply in certain, limited circumstances (where the Northern Ireland Protocol is engaged and/or the funding derives from certain EU funds). So you will need to consider how your terms and conditions reflect this possibility. If the intention is to have a single template funding agreement, it may be prudent to reference those State Aid Rules "to the extent that they apply"/"are engaged" etc. The new regime also means that any clauses dealing with registration/reporting requirements will need amended – see further at point 6 below. Also note that in the meantime it is the UK courts, rather than the Commission, who will ultimately be the arbiter of what is/isn’t permitted under the new subsidy regime. Your clawback clauses may also need updated then, in advance of any UK enforcement body being established.
2. It would be sensible to liaise with colleagues to update other relevant documentation at your council. For example, the State aid section of funding application forms, any policies and procedures that reference State aid, de minimis letters/declarations etc. Note the new higher, general de minimis threshold under the TCA of 325,000 Special Drawing Rights (circa £345,000) per beneficiary over a three-year period. The message I am hearing is that the traditional EU de minimis is expected to be treated cumulatively to these new provisions under the TCA. If so, it would be prudent to be asking questions of potential recipients about both types of de minimis. Hopefully some further guidance will emerge to clarify the position more definitively.
3. It would also seem prudent to ask applicants to justify how any future award is lawful in terms of subsidy control, in the same way you would have asked them to justify why it was State aid complaint. Perhaps, for example, by asking them to identify how the 6 principles in the Annex 2 form of the BEIS guidance are respected. Albeit the council will also need to satisfy itself of such compliance (not least for reputational reasons...) and to record its assessment.
4. In terms of the Northern Ireland Protocol, it may also be a good idea to ask applicants about any NI operations (perhaps in funding application forms?) And, where these do exist, how the applicant will ensure the proposed funding can be managed in such a way as to be compliant - see, for example, the table at section 7 of the BEIS guidance. (The precise application of the Protocol is the source of debate however, with apparent ground between the UK government/BEIS interpretation and that of the European Commission – see for example this article from George Peretz QC: https://uksala.org/eu-commission-issues-notice-to-stakeholders-on-brexit-and-state-aid/. As such, there is an argument that any enquiries may need to delve a little further than the above…)
5. You may wish to consider preparing a template form and guidance notes for your council's staff in respect of the 6 principles, to assist them in completing the Annex 2 form above. This may require input from economic/policy colleagues and external legal support etc. Whilst the form is daunting at first glance, some of the language here does have clear parallels with the State aid regime. In particular, Articles 6.2 and 6.3 of the General Block Exemption Regulation (GBER) may offer assistance in justifying compliance with the third and fourth principles. Whilst not using the words explicitly, these principles on the form do appear to deal with the necessary “incentive effect” for subsidies or aid. That will be a more familiar concept then for State aid practitioners, awarding funds under the previously oft-used GBER exemption.
6. Likewise it may be worth liaising with colleagues to prepare a subsidy reporting template for your council setting out: the legal basis and policy objective or purpose of the subsidy; the name of the recipient of the subsidy; the date of the grant of the subsidy, the duration of the subsidy and any other time limits attached to the subsidy; and - the amount of the subsidy or the amount budgeted for the subsidy. (for relevant subsidies under the TCA the above information must be made publicly available, on an official website or a public database, within 6 months of the award being made)
7. Many commentators have suggested that whilst the State aid rules do not apply in most cases (see above), they continue to serve as a very useful reference point for awards. Offering, as they do, a tried and tested rationale of why certain measures are permissible and proportionate. I understand a number of local authorities, proceeding tentatively onto this uncertain terrain, are adopting such an approach. So perhaps our bold new world is not so bold and new after all…. If your authority is risk averse, and many are, this is certainly something to consider. Note any stance in this regard would need to be reflected in your approach to the terms and conditions and funding applications described above, so that recipients are clear where they stand. The new regime is however meant to signal increased flexibility and deregulation. Hopefully, then, some new UK block exemptions will emerge to replace GBER. This would offer the kind of legal certainty that is much valued by funders and recipients alike, providing more confidence for a clean break from the past.
8. Speak with local government colleagues to ascertain what approach they are taking, and whether there is any useful information they can share with you (or vice versa). Collaboration and knowledge sharing is very much at the heart of our ethos in Lawyers in Local Government (LLG). Internally, why not organise training for those likely to be most affected at your Council (major projects, funding teams, legal colleagues etc)? You may be feeling confident in your knowledge of the new regime (no, me neither…) If not, I'm sure many external law firms would be happy to facilitate this. Sometimes free of charge, if you ask nicely!

Conclusion

The new regime may appear daunting at first. But, as they say, “the show must go on”. Funding and major projects will be important to support our local authorities and communities in recovering from Covid 19. Doing nothing is not an option, as failing to embrace the new legal regime could itself leave your council’s decisions open to challenge. It is hoped that the above suggestions will equip you with a little more confidence in this new world, however boldly you decide to approach it….

Kieran McGaughey is a Commercial Solicitor at Newcastle City Council, and a Director of Lawyers in Local Government (LLG). He is also their National Lead for Partnership & Procurement Law. You can contact Kieran by email at This email address is being protected from spambots. You need JavaScript enabled to view it. or connect with him on LinkedIn here: https://uk.linkedin.com/in/kieran-mcgaughey-29383b66