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EU state aid and COVID-19

EU state aid and COVID-19

A summary of the latest developments from the European Commission and how state aid impacts UK businesses during COVID-19.

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Although the UK exited the EU on 31 January this year, the Withdrawal Agreement negotiated between the UK Government and the EU provides that during the transition period (due to run until the end of 2020) EU state aid rules will continue to apply and will be subject to control by the European Commission. This has continuing implications for the financial support provided by the UK Government to businesses impacted by COVID-19.

What are the state aid rules?

The state aid provisions in Articles 107 to 109 of the Treaty of the Functioning of the European Union prohibit national governments from giving state aid, such as grants and subsidies, where these distort competition and trade within the EU. Measures which are selective in nature, i.e. restricted to particular sectors, regions or types of businesses, may be prohibited under the state aid rules. The rules are overseen by the European Commission which has the authority to investigate illegally paid state aid and to order national governments to recover such subsidies.

How will the state aid rules be applied during the COVID-19 crisis?

In response to the COVID-19 pandemic, on 19 March 2020 the Commission adopted a ‘Temporary Framework’ that sets out temporary state aid measures that the European Commission considers compatible with the EU internal market and that can be given fast-track approval (experience so far is that approval is being given in days rather than weeks) upon notification by each Member State. This framework was further extended on 3 April 2020.

Under the ‘Extended Temporary Framework’ targeted solutions to companies facing sudden shortages due to the coronavirus outbreak can be provided in the form of direct grants, repayable advances and tax advantages, if all of the following conditions are met:

  • The aid does not exceed EUR 800,000 per undertaking in the form of direct grants, repayable advances, tax or payments advantages (all figures must be gross); 
  • The aid is granted on the basis of a scheme with an estimated budget; 
  • The undertaking was not in difficulty on 31 December 2019 but entered into difficulty thereafter as a result of the coronavirus outbreak; 
  • The aid is granted no later than 31 December 2020; and
  • Certain additional specific conditions are met for the agriculture, fisheries and aquaculture sectors, which are specified in the framework.

What UK state aid approvals have been granted?

Following the approval of the Coronavirus Business Interruption Loan Scheme on 25 March 2020, on 6 April 2020 the UK obtained approval for a £50 billion ‘umbrella’ scheme to support companies affected by the coronavirus outbreak. This allows for the provision of aid in the form of:

  • Direct grants, equity injections, selective tax advantages and advance payments;
  • State guarantees for loans subject to safeguards for banks to channel state aid to the real economy;
  • Subsidised public loans to companies with favourable interest rates;
  • Support for coronavirus related research and development (R&D);
  • Support for the construction and upscaling of testing facilities to develop and test products useful to tackle the coronavirus outbreak; and
  • Support for the production of products relevant to tackle the coronavirus outbreak.

How does this apply to the support measures announced so far?

The following measures announced by the UK Government are subject to the state aid rules and should therefore be subject to the cap of EUR 800,000 per undertaking:

Government-backed loans - Under the Coronavirus Business Interruption Loan Scheme (CBILS) and the Coronavirus Large Business Interruption Loan Scheme (CLBILS) the state aid is constituted of the 80 percent guarantee to accredited lenders who provide loans to businesses under the schemes and, for CBILS, there is also a direct grant to the business as the Government is covering the first 12 months of interest costs on lending. When looked at in isolation, it is likely the direct grant element should fall within the permitted state aid limit of EUR 800,000 as financing provided under CBILS is limited to a maximum of £5 million so the interest rate would need to be circa 16 percent before the limit is breached (assuming no other state aid has been received by the business in question).

Selective grants – direct grants which are restricted to certain sectors or business types, for instance the Retail, Hospitality & Leisure Grant Fund (RHLGF) are considered state aid falling under the Temporary Framework. Under the RHLGF grants are available for each eligible property so for premises which are operated as part of a large chain the cumulative total of grant funding could exceed the threshold. The scheme guidance issued by the Government on the RHLGF puts the onus on businesses to ensure they do not accept grants which would breach state aid rules. We understand that local authorities will be writing to businesses to ask for confirmation that they have not received more than the maximum permitted funding for state aid. We would recommend that the scheme guidance is read carefully by larger businesses (e.g. national retailers) in receipt of multiple grants under the RHLGF.

The Small Business Grant Fund is limited to one grant of £10,000 per business so should not, by itself, give rise to a state aid issue but we understand that local authorities may request recipients complete a De Minimis declaration.

The following are understood not to be considered state aid:

Coronavirus Job Retention Scheme - The good news for large employers is that the Job Retention Scheme (JRS) is not subject to the EUR 800,000 cap as it is not a selective measure and, as such, it should not distort EU competition. The JRS is a wage subsidy which is in principle applicable to all companies, including non-UK companies which have UK employees and operate PAYE.

Payment deferrals of a general nature – Tax payment deferrals are also considered to be outside the scope of the state aid rules to the extent that they are not selectively applied. Time to Pay arrangements and VAT payment deferrals should therefore not be subject to state aid rules.

Business rates relief – According to the UK Government’s guidance (as updated on 2 April 2020) the Government’s assessment is that, given the impact of COVID-19 in the sectors receiving the relief, the Expanded Retail Discount for 2020-21 is not a state aid. The Government states that it has considered this matter in discussions with the European Commission and is content with this analysis following those discussions.

Care is needed when businesses are in receipt of multiple forms of state aid to ensure that they have considered the rules in detail and remain within permitted limits.

For further information please contact:

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