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Paul is a director and partner at Trowers & Hamlins who has advised various London councils, the GLA and Homes England on legal and ...more
What replaces EU state aid rules – and how does it apply to the housing sector?
Paul McDermott looks at how the government has replaced the state aid rules that applied under the EU, and what it all means for social landlords and the housing sector
When the UK left the EU’s single market on 31 December, Britain waived goodbye to state aid rules for any public funding or investment made after that date. The state aid system was designed to prevent governments distorting markets by favouring some business over others. It also governed funding for social and affordable housing; although subject to conditions it allowed public subsidies for these (as Services of General Economic Interest or SGEIs).
“The public sector now has to consider whether a subsidy would conflict with a range of UK trade deals (not just the one with the EU). The housing sector is likely to have to make adjustments”
The EU-UK Trade and Co-operation Agreement (TCA), or as it is more commonly known ‘the Brexit deal’, sets out a framework for ‘subsidy control’ rules which the UK will use to develop a bespoke British system to replace state aid. British rules do not yet exist and, as a temporary measure, parliament incorporated the TCA’s subsidy section into domestic law, which means UK pubic bodies must comply with it.
This is a significant change which the public sector is working hard to adjust to.
Alhough the principles of subsidy control appear similar to state aid (they need to be as the TCA also applies to the EU), the detail of those in the UK will diverge over time. The current UK government views subsidy control as part of the UK’s wider trade policy and not an end in itself. This is reflected in the fact that the public sector now has to consider whether a subsidy would conflict with a range of UK trade deals (not just the one with the EU). The housing sector is likely to have to make adjustments to how it applies and accounts for public support for social/affordable housing as new UK rules are developed.
The TCA includes special provisions for what it terms ‘Public Services of Economic Interest’ or PSEIs. PSEIs are treated more favourably than more commercial activities. Most of the public sector is working on the assumption that PSEIs will include social and affordable tenures (the TCA is not explicit about what a PSEI is, although neither was state aid).
“Support for market housing is for now likely to remain ineligible for subsidy”
The state aid ‘regulations’ which set out a methodology for calculating the maximum amount of permitted affordable housing subsidy no longer apply. However, the TCA’s underlying principles are similar and, at least in the short term, the public sector is still likely to limit its support to help plug any viability gap.
The affordable and social housing sector should seek to engage in government consultations about UK changes to the new subsidy system, as such changes may have a direct impact on future support for the sector as well as the cost of administering that. These changes will include the creation of an independent body to oversee the application of subsidy in the UK. It is possible that this body may also have the power to investigate the recipients of subsidy and possibly issue UK subsidy regulations. These might extend to rules governing public sector support for affordable and social housing.
Support for market housing is for now likely to remain ineligible for subsidy. The exception, as under state aid, would be limited support for market rented homes. Interestingly this may not be a static situation, as the TCA subsidy principles would permit some support if the market was found to have failed – although in practice, this is only likely to be triggered by a government’s objective future assessment of the housing market.
State aid law still applies to agreements entered into before 11pm on 31 December 2020 with the public sector for grant, subsidised loans and/or subsidised land. State aid law applies even where payments are made after 2020, unless such agreements are varied from 1 January 2021 to give additional payments/benefits – in which case the new subsidy system applies to the additional amounts.
‘Interested parties’ (which will include rival businesses) have the right to take action in the UK courts about subsidy awarded by public bodies. This right applies from 1 January 2021. I anticipate that once the independent body is established, it is also likely to deal with complaints.
Paul McDermott, partner, Trowers & Hamlins
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