Brexit tax: State aid rules

Brexit Insights
Donald-Drysdale By Donald Drysdale for ICAS

5 August 2016

Donald Drysdale explains why, even after Brexit, the UK will face restrictions on the state aid it can provide to businesses.

What is state aid?

Within the EU, the state aid rules are designed to monitor and constrain measures by member states that might otherwise distort free competition within the single market.

A measure constitutes state aid if it involves the use of state resources, has potential to distort competition and trade in the EU market, and confers a selective economic advantage on the recipients.  Typically, state aid may involve grants, loans, tax breaks or the use or sale of state assets either free or at a beneficial price.

Certain limited forms of EU state aid are permitted. The UK, as a strong supporter of the free market, has tended to make use of these less than some other EU member states.

State aid and UK tax

The EU state aid rules are familiar to business tax specialists, because the UK’s direct tax regime uses tax reliefs and exemptions to incentivise certain desired business behaviours.

Under the rules, a number of UK tax reliefs are permitted because they comprise ‘notified state aid’.  Examples of these are tax reliefs for companies carrying on qualifying activities in enterprise zones, those undertaking research and development, and those in the creative sector (films, animation, high-end television, children’s television, video games and theatre). The domestic laws under which such state aid is given are notified in advance to the European Commission and approved by them.

In addition, EU rules for de minimis state aid allow small amounts of un-notified aid – less than €200,000 over a three-year rolling period – to be given to an undertaking for a wide range of purposes.

Future of the state aid rules

The UK, as a member of the EU, is subject to the state aid rules and will remain so until Brexit finally takes effect.  After Brexit the UK will probably still be subject to the state aid rules if we enter into an agreement that gives us continuing access to the EU single market. However, any one of a wide range of different possibilities may emerge.

European Free Trade Association (EFTA) members Norway, Liechtenstein and Iceland, being in the European Economic Area (EEA), are subject to the EU state aid rules in full.  By contrast, Switzerland is also in EFTA but not in the EEA, and it has a bilateral trade agreement with the EU which imposes state aid rules to a slightly lesser degree.

The UK has been a large player in the EU, and Brexit is an unprecedented event. For these reasons the post-Brexit arrangements which we negotiate with the EU may differ from any which other countries have enjoyed hitherto.

Other restrictions on state subsidies

If the UK leaves the EU and ceases to have access to the single market, the EU state aid rules would cease to apply to UK businesses except those with subsidiaries in EU member states.  It is often overlooked, however, that we would still have to comply with other pre-existing rules on state subsidies.

The World Trade Organisation (WTO) Agreement on Subsidies and Countervailing Measures disciplines the use of subsidies and regulates the actions countries can take to counter the effects of subsidies.  It allows a country to use the WTO’s dispute-settlement procedure to seek the withdrawal of a subsidy or the removal of its adverse effects. Alternatively, the country can launch its own investigation and ultimately charge extra duty (‘countervailing duty’) on subsidised imports which, as a result of the offending subsidy, are found to be hurting domestic producers.

The WTO rules present a number of practical problems – not least because there is no mechanism for advance notification and approval. Instead, business support which a country grants in good faith, in the belief that it won’t produce adverse trade effects, may fall foul of the restrictions retrospectively.

Article supplied by Taxing Words Ltd


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