Subsidy control: the new regime

The UK's new subsidy control regime came into force on Wednesday 4 January 2023, changing the rules that apply to awards of financial assistance made by public authorities to organisations engaged in economic activity. This article covers the key changes.

What are the subsidy control rules? 

The subsidy control rules apply to awards of financial assistance made by public authorities to businesses and other organisations engaged in economic activity. Public bodies are obliged to carry out subsidy control checks. Where these checks are found to be deficient, awards of financial assistance from public sector sources may be subject to recovery. 

Why are the subsidy control rules changing? 

Following the UK’s decision to leave the European Union, the Government announced its intention to establish its own framework to regulate the award of subsidies, replacing the EU state aid rules with a domestic regime. The UK implemented an interim regime which applied from 11pm on 31 January 2020 until 4 January 2023. This was primarily based on the subsidy section of the EU/UK Trade & Cooperation Agreement (“TCA”) entered into on 24 December 2020. 

To give effect to a new and complete UK subsidy control regime, Parliament approved the Subsidy Control Act 2022 in April 2022. Part 1 of the Act, which sets out a new definition of subsidy, came into force on 28 April 2022. The remainder of the Act entered into force on 4 January 2023: Subsidy Control Act 2022 (Commencement) Regulations 2022.

The rules are therefore changing in order to create a new UK statutory regime for the regulation of subsidies, one which satisfies the UK's international commitments in the TCA and elsewhere but which also regulates the UK's internal market. To the latter point it is significant that the Act goes beyond what the UK was required to do under the TCA in a number of respects.

What is defined as a subsidy under the UK rules?

Section 2 of the Act defines “subsidy” as: 

“financial assistance which –

(a) is given, directly or indirectly, from public resources by a public authority;

(b) confers an economic advantage on one or more enterprises;

(c) is specific, that is, is such that it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services; and

(d) has, or is capable of having, an effect on – (i) competition or investment within the United Kingdom; (ii)  trade between the United Kingdom and a country or territory outside the United Kingdom, or (iii) investment as between the United Kingdom and a country or territory outside the United Kingdom”.

The test for what is a subsidy is therefore similar, but not the same, as a state aid under EU law. Most notably the final limb introduces a test for effect on trade which can be satisfied with domestic effects alone, where previously a potential cross-border effect had to be observed. While that test was always interpreted restrictively, the new test makes plain that the net is, in effect, cast wider.

Are there are any other rules to be observed beyond the Subsidy Control Act?

Yes. Guidance on the UK’s international subsidy control commitments which need to be taken into account when public bodies make awards has been published by DBEIS, but in most cases the application of broader regimes can be excluded. 

Rules which need to be observed include the UK's commitments on withdrawal from the EU, such as to respect EU state aid for ongoing projects involving legacy European Structural Funds (i.e. ESIF-funded) projects, and for matters affected by the Northern Ireland Protocol. Regard must also be had to the UK's international commitments via trade agreements with third countries (e.g. the TCA) and its membership of the WTO. In most cases this will not involve difficult considerations, particularly when proposed subsidies are unlikely to affect trade in goods to be exported to foreign markets. 

How can subsidies be lawfully awarded under the UK rules? 

Where a subsidy is present, financial assistance may still be lawfully awarded provided certain steps are taken. There are normally five routes under which a subsidy may be awarded. All the relevant requirements of a particular route must be met for it to be safely relied on. Failing this, a subsidy award is not protected by the Act and is at risk. 

The Act also includes a series of prohibitions (e.g. subsidies contingent on the use of domestic over imported goods, or subsidies directly linked to export performance) and exceptional special situations which need to be ruled out. Included within the latter is the need to be sure a beneficiary is not “ailing or insolvent” prior to award, or else particular rules need to be followed for rescue and restructuring subsidies. Many of these rules flow from international commitments (e.g. WTO membership), are similar if not the same to previous EU restrictions, and in most cases they will not bite, but they should always be checked off nonetheless for good measure and as per Government recommendations. 

Minimal financial assistance 

For smaller value awards, funding may proceed under the cover of the minimal financial assistance (“MFA”) provision, which allows financial assistance of up to £315,000 to be made to a single enterprise within a rolling period of three fiscal years, subject to obtaining a written declaration confirming that the relevant threshold has not been exceeded. This effectively mirrors the historic EU de minimis regime, but sets the threshold at a fixed sterling amount and at a significantly higher level than the EU's €200,000.

Subsidy control principles 

A subsidy or subsidy scheme may be lawfully entered into by demonstrating that the measure respects each of the seven subsidy control principles set out at sched 1 to the Act. This involves the public authority properly considering the application of each of the following principles against the relevant facts: 

A. Common interest: Subsidies should pursue a specific policy objective in order to – (a) remedy an identified market failure, or (b) address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns).

B. Proportionate and necessary: Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.

C. Design to change economic behaviour of beneficiary:

1. Subsidies should be designed to bring about a change of economic behaviour of the beneficiary.
2. That change, in relation to a subsidy, should be – (a) conducive to achieving its specific policy objective, and (b) something that would not happen without the subsidy.

D. Costs that would be funded anyway: Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.

E. Least distortive means of achieving policy objective: Subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other, less distortive means.

F. Competition and investment within the United Kingdom: Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.

G. Beneficial effects to outweigh negative effects: Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including in particular negative effects on – (a) competition or investment within the United Kingdom; (b) international trade or investment.

Proper consideration involves building up an audit trail and evidence base, rather than just taking the applicant's word for each of the requirements being met. 

Notably, principle F sets a new requirement that was not mandated by the TCA and will mean subsidy awarding authorities need to consider the specific effects on competition in the relevant market(s) affected by proposed interventions, which is something that was not previously required other than for the largest subsidies requiring notification to the European Commission.

In addition to the principles, checks will need to be undertaken against other categories set out in the Act, including whether the additional principles at sched 2 to the Act apply. 

Services of public economic interest assistance

Lower value awards which fall within the scope of a service of public economic interest (“SPEI”) may be supported through the services of public economic interest assistance (“SPEIA”) route at s 38. This allows up to £725,000 to be given towards an SPEI in the current and two previous financial years, subject to the relevant thresholds and a proper declaration being obtained in advance of the award being made. As with MFA, this mirrors the EU's de minimis rules for services of general economic interest awards.

The notion of SPEI is set out for the award of subsidies to the providers of public services in the general interest, where subsidies are required in order to allow the subsidies to be delivered (normally because of themselves they will not be sufficiently remunerative, e.g. social housing, or transport to remote regions). Larger SPEI awards may be made by following a more prescriptive process which, while requiring measures to be taken to ensure the beneficiary is not overcompensated for the performance of the specific task(s) entrusted to it, also allows for a reasonable profit to be incorporated into the financial assistance offered to the enterprise tasked with delivering the SPEI. Each of the principles must also be met.

Streamlined subsidy schemes

Under s 10 of the Act, a Minister of the Crown may create streamlined subsidy schemes. These are exemptions written up for specific situations and subject to certain conditions, that are written into law and which, once adopted, can be used by public authorities to make multiple lawful awards of subsidies provided all the relevant conditions are met. (See our article at the foregoing link for more information.) Placing a proposed subsidy award within a streamlined subsidy scheme will therefore have similar value to a previous EU block exemption, in that it will allow an awarding authority to consider all the principles to have been examined and found in compliance already when the relevant conditions are met. 

Which awards need to be notified to the Competition & Markets Authority? 

Under s 52(1) of the Act, public authorities must refer any award classed as a subsidy of particular interest (“SoPI”) to the Competition & Markets Authority (“CMA”) prior to the subsidy being legally committed. 

SoPIs are defined within the Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022. The following awards will be classed as a SoPI: 

• subsidy awards of £10 million or above;
• subsidy awards of £5 million or above to sensitive sectors;
• subsidy awards for relocation activities of £1 million or above; and
• subsidy awards for rescue and restructuring activities of £1 million or above.

In addition, any award of £1 million or above will be a SoPI if it means the subsidy awarded to the same enterprise for the same activity in the current and two previous financial years exceeds £10 million, or £5 million for a sensitive sector. If a SoPI is present, the public authority is under a legal duty to submit information as to how it has assessed the award to the CMA through the official portal. The proposed subsidy will then be assessed in line with the CMA's procedures and a public report produced 30 working days from the receipt of satisfactory information. Significantly, any subsidy awarded within a streamlined subsidy scheme is excluded from being a SoPI.

What transparency duties exist under the new regime? 

Public authorities are under a duty to post information on to the Transparency Database within three months of making an award/modifying a subsidy.  

The rules are different for tax measures; likewise awards of £100,000 or less, made under MFA and SPEIA are exempt from the obligation to be put online.

How can subsidies be challenged under the new regime? 

Subsidies can be challenged by way of judicial review brought by an “interested party”, using the process set out at Part 5 (Enforcement) of the Subsidy Control Act. An interested party is defined at s 70(7) as “a person whose interests may be affected by the giving of the subsidy or the making of the subsidy scheme… or… the Secretary of State”.  

The Statutory Guidance states that “subsidy transparency is needed to enable interested parties to view subsidies to decide if they want to challenge a subsidy before the Competition Appeal Tribunal where the interested party believes the subsidy may not meet the subsidy control requirements”.

Therefore the public authority posting the appropriate information on the national database is integral to the working of the new regime because it starts the challenge period under which an interested party may bring a judicial review action against a subsidy or subsidy scheme. 

Subsidies may be awarded by way of individual awards or a scheme. The point of award will normally be considered the moment the commitment to the subsidy becomes legally enforceable, i.e. the beneficiary may rely on it. This is most commonly the moment of execution of a grant funding agreement.

For an individual award the challenge window is opened at the point the award is declared on the national database. For a scheme it is formally possible to start the challenge period at the point the scheme is set up, but this will only be the case where the public authority has grounds to believe that “all the subsidies provided for under the scheme will be consistent with the subsidy control principles”, and all the transparency requirements are satisfied.

In practice, we anticipate it will be difficult to set up schemes unless the public authority knows which beneficiaries will be supported and the value of the financial assistance to be awarded to each. This is because it would appear difficult for the public authority to have properly considered the principles without such knowledge: for example, in order to have adequately gauged the impact on competition and investment, it would be necessary to know the relevant market(s) impacted by subsidy to the beneficiary. The longer the duration of a scheme, the more difficult such an assessment would become as markets change over time. In addition, we expect the courts to be sympathetic to the rights of interested parties in respect of schemes, noting that an interested party is only likely to look to challenge an award when it is apparent that they are affected, which is difficult to know absent identification of the beneficiary.

Awards made under schemes created before the new regime came into force are considered “legacy awards” and subject to the rules in place when the scheme was established.

Challenges will be considered by the Competition Appeal Tribunal in England, Wales and Northern Ireland, and in Scotland using rules tailored to the Court of Session. We strongly recommend that specialist legal advice is taken in the event of a potential challenge arising. 

Observations on the UK's new subsidy control regime

The ability of the UK to mastermind its own state aid regime was presented as one of the opportunities of Brexit. Astutely targeted state subsidies can dramatically improve economies, nurturing the businesses of tomorrow and creating new jobs. Provided appropriate safeguards are created, such awards do not need to have an unduly negative effect on competition. 

In comparison with the EU state aid regime, the Subsidy Control Act 2022 creates a system where it should in principle be easier and faster to fund the largest projects, which would otherwise have required notification to the European Commission for individual assessment, a process which could take a notoriously long time to see through to conclusion – indeed notifications often run to years, not just months. Likewise, the EU's ability to approve larger subsidies was considered inflexible, regulated as it is by a series of guidelines which set limits to different types of intervention.

The Government has chosen not to recreate the European Commission's role in a domestic context and instead to keep the CMA in an advisory role, while otherwise entrusting the national courts to deliver relevant enforcement judgments to keep the system working well. In time to come the regime will no doubt evolve further still but, for the time being, the Act builds a comprehensive regime, and it is significant to note that the regime goes further (in solidifying a domestic competition regime) than it was required to do under the UK's free trade commitments to the EU in the TCA. This shows the UK as eager to have an effective competition regime in place for its own sake and not merely to fulfil international commitments.

The Subsidy Control Act regime involves some additional administration for some smaller, regular awards. This is because unless they fall within the minimal financial assistance route, a case needs to be developed against the subsidy control principles, which requires the funder to have the capacity and capability to undertake a detailed subsidy control assessment. An easy route to solve this would be to introduce more streamlined subsidy schemes, but the Government seems intent on only using that route sparingly.  

Fundamentally, the new regime relies on the organisations administering public funding acting as responsible custodians of public finances, in particular making the appropriate enquiries to ensure that they are only ever providing the proportionate and minimum subsidy necessary for each case. Each of the subsidy control principles seem sensible and represent best practice around grant giving, but recording the necessary evidence for compliance to be relied on represents a new way of doing things. Undoubtedly this new regime will grow and develop from the discomfort of public bodies which fail to adapt properly to the new rules and therefore fall prey to judicial review challenge. In doing so, the system will gradually become more certain for the body administering the award, as well as the subsidy recipient.

Inevitably when a new regime becomes operational, some pinch points emerge. We anticipate that the use of schemes will be rather limited because of the difficulty in applying the principles unless the identity of the beneficiary and value of the award is known. Likewise, we anticipate that there will be calls for more streamlined subsidy schemes which give legal certainty for awards that meet all the relevant conditions. These are particularly popular with public authorities that frequently make lower value awards that are uniform in nature; however the Government has decided only to establish three at the outset of the new regime. 

Conclusion

Public bodies will need to adapt and update their approaches to meet the new rules set out in the Subsidy Control Act 2022. Although presented as a simplification, many of the rules are rather technical and therefore we recommend training staff to spot subsidies and knowing when to seek help in developing the main routes to achieve compliance.