Revised guidance on the application of EU State aid rules in the UK post-Brexit

On 9 June 2023, the European Commission (“EC”) adopted a revised Notice on the application of the EU State aid rules to the UK following the end of the Brexit transition period.  On the same day, the UK Government updated its own statutory Guidance for public authorities on the UK’s international Subsidy control commitments, including the scope and application of Article 10 of the Windsor Framework.  The Windsor Framework further built on and replaced the Northern Ireland Protocol, which applies EU State aid law to UK Subsidies which affect trade between Northern Ireland and the EU (given that the Republic of Ireland is an EU Member State).

This coordinated effort follows the Joint Declaration by the European Union and the United Kingdom in the Withdrawal Agreement Joint Committee of 24 March 2023 on the application of Article 10(1) of the Windsor Framework. The Joint Declaration clarified the circumstances under which Subsidies granted in the UK are likely to fall under Article 10(1) of the Windsor Framework on the basis that they affect trade between Northern Ireland and the EU.  The purpose of the respective guidance notices on Article 10(1) is to provide further detail to enable both public authorities and businesses across the UK to operate with greater certainty whether EU State aid laws apply or not.

Rules applicable in respect of Northern Ireland

The revised EC Notice, which replaces the previous notice to stakeholders dated 10 February 2021, recaps the legal situation since the end of the transition period whereby EU State aid law ceased to apply to any aid granted by the UK except where it affects trade between Northern Ireland and the EU that is subject to the Windsor Framework.  The Notice also serves as a reminder of the rules under the Withdrawal Agreement that the European Commission retains a continued competence for ongoing State aid procedures, it may initiate new administrative proceedings, and it also retains the right to bring an action before the Court of Justice of the EU for non-compliance for any State aid decisions granted by the UK before the end of the transition period for up to four years since the end of this period (i.e. until 31 December 2024).

Importantly, in line with the Joint Declaration, the revised Notice specifies that for a measure to be considered to have a genuine and direct link to Northern Ireland and, therefore, to have an effect on the relevant trade between Northern Ireland and the EU, that measure needs to have real foreseeable effects on that trade. Crucially, the relevant real foreseeable effects should be material, and not merely hypothetical or presumed.

The revised Notice makes clear that it is for the EC to establish that a measure has a ‘sufficiently genuine and direct link’ to Northern Ireland, based on real foreseeable effects, to fall within the scope of Article 10(1).  In this context, the EC will take into account the following considerations:

• Measures granted to beneficiaries located in Northern Ireland are more likely to present a genuine and direct link to Northern Ireland and therefore engage Article 10(1);
• For measures granted to beneficiaries located in Great Britain (i.e. outside of Northern Ireland), the EC must demonstrate a genuine and direct link to Northern Ireland based on the real foreseeable effects of the measure. To assess whether this to the case, the EC will refer to a set of indicators, based on the particular size of the undertaking, the size of the Subsidy, and the market presence of the undertaking in Northern Ireland.  The EC will also take into account any conditions or features of the measure designed to avoid any passing on of an economic benefit.

In addition, the revised Notice contains practical examples to clarify how it will assess measures.  For example, a Subsidy scheme aimed at providing support to manufacturers of goods located in Northern Ireland  will normally fall within the application of Article 10(1) of the Windsor Framework, to the extent that it qualifies as State aid.  The revised Notice also provides a brief explanation that under Article 5(6) of the Windsor Framework, customs duties levied by the UK under Article 5(3) are not remitted to the EU. However, the UK may waive tariff debt or reimburse traders under certain circumstances when goods are brought into Northern Ireland, if it can be demonstrated that the goods are not ultimately destined for the EU. These measures, where they are deemed to constitute State aid and affect relevant trade between NI and the EU, are subject to the provisions of Article 10 of the Windsor Framework.

The UK Government has also updated its statutory guidance on the scope and application of Article 10 of the Windsor Framework by adding Sections 3a and 3b and an Annex acknowledging the Joint Declaration.  The UK guidance goes one step further than the revised EC Notice by including materiality thresholds for Subsidies granted to beneficiaries in Great Britain, including noting that Subsidies of the same size are likely to have different effects when granted to large enterprises vs. SMEs.  The UK guidance acknowledges that although Streamlined Routes were designed for the purposes of the UK Subsidy control regime, the Government believes that Subsidies falling within these thresholds are very unlikely to engage Article 10 of the Windsor Framework.  The Government therefore believes that it is likely that most Subsidies of up to £3m for SMEs in Great Britain will not have a real, foreseeable and material effect on trade between Northern Ireland and the EU which would constitute a genuine and direct link to Northern Ireland.  For large enterprises in Great Britain, the UK Government believes that Subsidies of up to £10m for large companies (i.e. below the £10m monetary threshold for mandatory referral to the CMA’s Subsidy Advice Unit) will be unlikely to have real, foreseeable and material effects on trade between Northern Ireland and the EU which would constitute a genuine and direct link to Northern Ireland and it can be presumed that Article 10 does not apply.  The UK guidance also gives its own examples of determining market presence on the Northern Irish market to give added comfort. For example, it confirms the fact that where a large bicycle manufacturer in the West Midlands receives a Subsidy of over £10m for research and development and that some of these bicycles are sold at market value in Northern Ireland, that does not in and of itself establish that the Subsidy falls within Article 10(1).

Whilst it is anticipated that Subsidies granted in the UK may be within scope of Article 10(1) in very limited circumstances, the sets of revised guidance from the Joint Declaration intends to provide greater confidence to public authorities granting subsidies and enterprises receiving subsidies. Where Subsidies are in scope, they need to either be provided for under the General Block Exemption or other EU State aid exemption framework, or in line with EU State aid law they will need to be individually notified to and approved by the European Commission, taking into account any reporting and stand still obligations.

For further information and the practical advice on the new UK Subsidy regime, please reach out to our specialist Subsidy team at CMS.