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1.1The coronavirus pandemic and associated economic crisis have required governments in the UK and elsewhere to intervene drastically in support of businesses, which might otherwise face bankruptcy on an unprecedented scale.
1.2As we set out in more detail in our Report of 7 May 2020, one of the key decisions taken by the EU to support those efforts has been to relax its “State aid” rules, which normally restrict how the EU’s national governments can financially support businesses by means of subsidies, tax breaks or other advantages. This “Temporary Framework” allows governments, for example, to guarantee the full principal of bank loans to businesses worth €800,000 (£712,000) or less to encourage lending, or provide direct grants to businesses at risk of collapse because of the pandemic. A first amendment to the Framework was published on 3 April. The temporary relaxation of the subsidy restrictions comes amid a wider effort by the European Commission to review the EU’s State aid rules, which is expected to lead to further — long-term — policy changes in this field from 2021.
1.3The Temporary Framework — and the EU’s policy response to the coronavirus more generally — remain of direct interest to the UK, even though it ceased to be an EU Member State on 31 January 2020. This is so because Article 127 of the Withdrawal Agreement applies EU law to the UK as if still a Member State during a post-Brexit transition period scheduled to end on 31 December 2020.2 In practice, this means the UK has had to seek approval from the European Commission for its COVID-related business support schemes during this time, including the Coronavirus Business Interruption Loan Scheme and various business rate reliefs for the hardest-hit sectors. The Government has confirmed it was consulted on the substance of the Temporary Framework before the Commission formally adopted it.
1.4In our previous Report, we noted that the European Commission had by early May 2020 approved four UK schemes — including an “umbrella scheme” that allows for a wide range of interventions, and the Coronavirus Business Interruption Loan Scheme (CBILS) — under the Temporary State Aid Framework.3 We also concluded, on the basis of information provided by the Department for Business, Energy and Industrial Strategy, that there was “no evidence that the Government has been constrained by EU rules in establishing the coronavirus-related support schemes it deemed necessary to date for businesses, workers and the self-employed”. Nevertheless, we wrote to Paul Scully MP, the Business Minister, on 7 May 2020 seeking further information on the Government’s position on the Temporary Framework, and to clarify its relevance under the Irish Protocol in the Withdrawal Agreement (which requires the continued application of EU State aid rules to “trade between Northern Ireland and the Union which is subject to this Protocol” after the end of the transition period).
1.5Since we wrote to the Minister, a number of developments in relation to the EU’s State aid rules in the context of the coronavirus have taken place which we consider noteworthy enough to provide an update to the House, namely:
1.6On 18 May 2020, the Minister replied to our letter of 7 May with further information on the implications of the EU’s State aid rules during the current crisis. On 27 May, he also submitted a supplementary Explanatory Memorandum setting out the Government’s position on the second amendment to the Temporary Framework published by the Commission 9 May. We consider his submissions in light of the above developments in more detail in the remainder of this chapter.
1.7In the Government’s initial Explanatory Memorandum on the EU’s Temporary State Aid Framework, submitted on 23 April, the Minister for Small Business (Paul Scully MP) said “Government did not offer views” to the European Commission when provided with the Framework, and the first amendment to it, in draft. In his reply to our questions, he further clarified that neither did the Government “provide any comments to the Commission on the first or second amendments to the Temporary Framework”.
1.8We consider this somewhat surprising, given that the other countries to which the Temporary Framework applies have been actively engaging with the European Commission about the EU’s State aid rules in the current crisis. As early as 9 April 2020, the European Commission had already announced that it had sent the EU’s national governments — and, presumably, the UK — a “draft proposal to further extend the scope of the Temporary Framework […] enabling Member States to provide recapitalisations to companies in need”. However, the amendment to the rules was not formally published until 8 May, amid concerns from some countries, as well as the European Commission itself, that the difference in spending power between different Member States was giving businesses whose national governments can borrow at low cost, like Germany and the Netherlands, a disproportionate share of the subsidies being provided in response to the pandemic.6
1.9With respect to the substance of the second amendment to the Temporary Framework, on which the Government apparently had no views to offer, the key change introduced by the Commission was to relax EU State aid restrictions further to allow two types of tax-payer support to businesses:
1.10In his supplementary Explanatory Memorandum of 27 May, the Minister said the UK Government “considers it is appropriate for the European Commission to issue this further revision to the Temporary Framework as it allows for the possibility of further State aid-compliant measures to address the impacts of the COVID-19 pandemic”. He also adds that the Government is “not currently proposing to amend the UK umbrella scheme to encompass measures under the Temporary Framework’s second amendment”. In other words, despite a report in the Financial Times on 24 May about the Treasury preparing to bail-out certain businesses with equity as a “last resort”, the Government says it is apparently not (yet) seeking EU approval for new support schemes that would either involve the State taking an equity share in certain businesses or providing subordinated loans.
1.11A second development we wish to raise is the apparent difficulty some companies have in accessing Government support, because of eligibility restrictions set out in the EU’s Temporary Framework.
1.12In mid-May 2020, it emerged that the Confederation of British Industry (CBI) and sister organisations from the EU had written to the European Commission, warning that its Framework may be overly restrictive. In particular, they singled out the fact that “undertakings [already] in difficulty on 31 December 2019”, based on their debt-to-equity ratio or accumulated losses,11 are banned from drawing support from any COVID-related support schemes approved under EU State aid rules.12 The Commission was said to be “examining the issues raised by the various lobbying groups”, but it has not to date proposed any changes to the Framework or the underlying EU legal definition of “in difficulty”.
1.13The Minister did not raise any concerns with us about the application of the “in difficulty” criterion to determine firms’ eligibility for coronavirus-related government support under the Temporary Framework in his initial Explanatory Memorandum of 23 April 2020, having stated that the Government did not provide any comments to the Commission on the substance of the Framework. Neither his subsequent Memorandum on the amendment to the Framework, nor his letter of 18 May referred to this issue. We are therefore seeking further information from the Department about this issue and what steps, if any, the Government has taken to press the EU for action.
1.14It is unclear at this stage if the Commission is considering further amendments to the Temporary Framework, including with respect to Government support for “undertakings in difficulty”. We will consider any future changes to the Framework in due course.
1.15The third element of our update on the EU’s current approach to EU State aid rules relates to the European Commission’s assessment of support schemes introduced by the UK Government to help businesses. As noted, the UK continues to seek European Commission approval for subsidy schemes for the duration of the post-Brexit transition period. When we published our first Report on the Temporary State Aid Framework in early May, the European Commission had approved four UK support schemes for businesses related to the coronavirus crisis (including, notably the Coronavirus Business and Large Business Interruption Loan Schemes).13
1.16Given the severity of the economic crisis and press reports about the constraints EU rules were placing on the Government’s ability to intervene in support of businesses, we asked the Minister in early May whether any other notifications were planned, and whether any potential UK schemes had been shelved because they were not considered compliant with EU rules. In his reply, he stated that “we are not aware of any Government support schemes related to COVID-19 that were planned but abandoned because of doubts about their compliance with State aid rules”. In particular, he confirmed that the decision to cap the public guarantee for bank loans under the CBILS at 80 per cent of the value of the principal “was the choice of the UK Government”, given that the EU’s Temporary Framework “permits guarantees of up to 90% or 100% for smaller loans”.
1.17The Minister also confirmed an announcement made by the European Commission on 11 May that the EU had issued a fifth approval, in relation to the Government’s £9 billion “Self-Employed Income Support Scheme” (SEISS).14 Moreover, it appears at least two other UK schemes may also be submitted for approval by the Commission under EU State aid rules:
1.18We have provided an overview of all European Commission decisions to date relating to UK Government support schemes in the context of the coronavirus crisis in the Annex to this chapter.
1.19The final development that has occurred since early May which is relevant, albeit tangentially, to the Temporary Framework (and to EU State aid rules more generally), is the Government’s publication of its “Approach to the Northern Ireland Protocol“ in the UK’s Agreement with the EU on its withdrawal from the latter.
1.20As we noted in our previous Report on the Temporary Framework, under the terms of the Ireland/Northern Ireland Protocol in the Withdrawal Agreement, the UK has agreed — at Article 10 of the Protocol — that EU State aid rules will continue to apply to British government business support schemes “which affect […] trade between Northern Ireland and the [EU]” even beyond the end of the post-Brexit transition period. The precise constraints Article 10 could place on UK Government action are still the subject of debate, and a discussion of that nature is beyond the scope of this particular Report.18 However, in the context of the coronavirus crisis specifically, we asked the Minister if the Temporary Framework would need to be explicitly added to the Protocol — which does not mention the Framework, given that it did not exist when the Withdrawal Agreement was ratified — if the Commission’s unusually relaxed approach to subsidy controls is still in effect when the transition period ends and the Protocol takes effect (to provide legal certainty that any UK COVID-related schemes within the scope of the Protocol would still benefit from the Framework).19
1.21In his reply of 18 May, the Minister stated that the UK “can continue to rely on [the Temporary Framework] (to the extent needed for Protocol purposes) […] whether or not it is included in or annexed to [sic] the Northern Ireland Protocol”. Therefore, it appears the Government is confident the Framework does not explicitly need to be added to the Protocol, even if it is still in effect when the transition period ends.
1.22We note the Government’s apparent approval for the substance of the European Commission’s Temporary Framework for State aid, not having provided any comments on the original iteration or the subsequent amendments. The Committee will continue to take a close interest in any future evolution of the Framework, as well as specific Commission decisions relating to COVID-related subsidy schemes established by the UK. It has written to the Minister to seek clarification about the UK’s views of the concerns raised by the CBI in relation to access by “undertakings in difficulty” to Government support under the Temporary Framework, and to clarify if any further proposals for UK support schemes, for example relating to trade credit insurance or direct recapitalisation of businesses by the Government, have been submitted to the European Commission for approval.
1.23The Committee will give further consideration to the question of the application of EU State aid legislation under the Northern Irish Protocol in more detail as part of its scrutiny of the European Commission’s general review of the EU’s rules in this field.
1.24We draw these developments to the attention of the Business, Energy and Industrial Strategy Committee, the Treasury Committee, and the Committee on the Future Relationship with the EU.
The Committee has this week considered your helpful updates on the UK Government’s position on the European Commission’s Temporary State Aid Framework, which as you are aware significantly relaxes the EU’s normal restrictions on taxpayer subsidies for businesses in the context of the coronavirus crisis.
In light of recent developments, we would be grateful if you could expand on the information you have provided to date by:
We look forward to receiving your response by the end of June.
The table below shows the decisions of the European Commission published as of [11 June 2020] in relation to UK support schemes for businesses affected by the coronavirus crisis. The Committee has written to the Department for Business, Energy and Industrial Strategy to clarify if the Government has submitted any further schemes for EU approval
UK scheme |
EU reference |
Submitted for approval by the UK |
Approved by the Commission |
Loan guarantees under the Coronavirus Business Interruption Loan Scheme (CBILS) |
SA.56792 |
23 March 2020 |
25 March 2020 |
Interest subsidy under the Coronavirus Business Interruption Loan Scheme (CBILS) |
SA.56794 |
23 March 2020 |
25 March 2020 |
Umbrella scheme: Temporary State Aid Framework for the UK Government20 |
SA.56841 |
26 March 2020 |
6 April 2020 |
Amendment to the umbrella scheme with respect to the fees charged for loan guarantees |
SA.57078 |
18 April 2020 |
23 April 2020 |
SA.57152 |
4 May 2020 |
11 May 2020 |
1 (a) Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak; (b) Second amendment to the Temporary Framework; Commission numbers: (a) C(2020)1863; (b) C(2020) 3156; Legal base: Article 107 TFEU; Department: Business, Energy & Industrial Strategy; Devolved Administrations: consulted; ESC number: (a) 41148; (b) 41242.
2 Article 132 of the Withdrawal Agreement provides for the possibility of an extension of the transition period until no later than 31 December 2022. However, section 15A of the European Union (Withdrawal) Act 2018 expressly prohibits the Government from agreeing to any extension.
3 We have provided an overview of all European Commission decisions relating to Government support schemes in the context of the coronavirus crisis in the Annex to this chapter.
4 EU law does not prohibit nationalisation of private companies or public undertakings, provided the government in question acts like a private market economy operator “as regards both the purchase price and the management of the nationalised undertaking”. If it does not, EU State aid rules apply.
5 The Government said it “will provide further information on how these provisions should be operated by public authorities before the end of the transition period”.
6 The EU is also engaged in continued discussions about how governments can access the necessary funding to finance the economic recovery schemes (whether they qualify as “State aid” or not), on the basis of a European Commission proposal for a €750bn “Coronavirus Recovery Instrument” to be funded by EU borrowing. We will consider that proposal separately in the near future.
7 The Commission has said that recapitalisation aid “should only be granted if no other appropriate solution is available”. For example, the German Government is buying €300 million worth of shares in struggling airline Lufthansa as part of a €9 billion bail-out package, subject to European Commission approval.
8 These thresholds relate to the amount of the subordinated loan in relation to the beneficiary’s annual wage bill and turnover.
9 The amended Temporary Framework clarifies that countries can provide financial support to travel operators to help them pay for reimbursement claims made by passengers for cancelled journeys.
10 The Commission has inserted a new paragraph to make it explicit that any State aid for the banking sector would be assessed separately under the special rules applicable to that industry, given the wider economic and financial implications of potential bank insolvencies. The amended Temporary Framework specifies that this does not apply in relation to COVID-related Government-backed loans or guarantees for businesses which are provided via banks as intermediaries, nor to selective wage subsidy schemes which does not “exclusively [target] employees from the financial sector”.
11 The European Commission’s legal definition of “in difficulty” in this context is company-specific, as set out in Article 2(18) of the EU’s General Block Exemption Regulation. It can relate, for example, to the proportion of losses in relation to subscribed share capital, or the firm’s debt to equity ratio. This has the effect of automatically disqualifying many companies with have persistent high leverage and low equity, such as those owned by hedge funds, from being eligible for COVID-related support. The aim of this restriction, conceived for ‘normal’ circumstances, is to avoid governments propping up unviable businesses, unless there is an overriding public interest in doing so (in which case the subsidy would have to be approved by the European Commission on the basis of the EU’s existing “Restructuring and Recovery Guidelines“ from 2014, rather than the Temporary State Aid Framework).
12 Sky News, “Coronavirus: CBI pushes EU over bailout rules for cash-starved firms“ (13 May 2020).
13 The UK schemes approved by the European Commission as of [11 June 2020] are listed in the Annex to this chapter.
14 This is the HM Revenue & Customs’ scheme that allows “self-employed individuals or members of partnerships whose business has been adversely affected by coronavirus […] to apply for a […] grant worth 80% of their average monthly trading profits”, up to a maximum of £7,500. The Treasury announced the SEISS on 26 March 2020, and notified it to the European Commission on 4 May. Following Commission approval, the scheme opened for applications on 13 May. The Commission Decision notes that the SEISS falls within the scope of EU State aid rules because “the advantage granted by the measure is selective, since it is awarded only to certain undertakings, in particular to self-employed individuals”. In our Report of 7 May 2020 we noted, erroneously, that the SEISS was outside the scope of EU State aid rules.
15 Insurers have increasingly stopped offering trade credit insurance (altogether or against affordable premiums) because of the economic crisis and the far higher risk of having to pay out. On 13 May 2020, the Treasury said “further details” of the new guarantee would be announced in due course. It is not yet clear to what extent the Government scheme will aim to lower premiums on trade credit insurance, which were already rising before the coronavirus crisis. For example, a Northern Irish meat processing firm told the BBC that if the Government’s support for trade credit insurance would restore “the sort of cover on offer in January [2020]” it “may not be enough” because the market for these type of insurance policies was already “at a very low base because of Brexit”.
16 Measures in support of trade credit insurance are not covered by the Temporary Framework, which only deals with export credit insurance (where the buyer of a good or service is located in another country). These State aid measures are therefore assessed by the European Commission separately.
17 As of 2 June 2020, the Commission does not appear to have published any formal State aid decisions relating to such an equity scheme for any of the remaining 27 Member States.
18 In May 2020, the Government said that it would “provide further information on how these provisions should be operated by public authorities before the end of the transition period”. Separately, the European Commission is evaluating the 2012 the EU’s State aid rules more generally, likely leading to policy changes in 2021.
19 The transition period is due to end on 31 December 2020. The Temporary Framework is not currently listed in the Protocol because it did not exist when the Withdrawal Agreement was ratified. Although the Framework is currently due to expire on 31 December 2020, the same day as the transition period, the recapitalisation and subordinated debt measures described in in this chapter will already be in effect until June 2021 because “solvency issues may materialise only at a later stage as this crisis evolves”. The Framework more generally may also remain in effect beyond December 2020 if the economic crisis necessitates this.
20 The umbrella scheme covers, for example, the Coronavirus Large Business Loan Interruption Scheme (CLBILS).
Published: 17 June 2020