Are you thinking of seeking government support for your business? Craig Reed and Katy Mattingley discuss some of the key questions you need to ask yourself to adhere to the UK Subsidy Control Regime under the latest guidance and draft bill.
Prior to Brexit, when businesses and individuals received government support, the UK was required to follow the EU State Aid legislation. In these circumstances, subject to certain prohibitions and exemptions, the UK would seek approval from the European Commission for the provision of governmental resources to an organisation which qualified as state aid.
Post Brexit, following a transitional period, from 1 January 2021, the UK must adhere to its own Subsidy Control regime as set out under the UK Subsidy Control Commitments in the UK-EU Trade and Cooperation Agreement. Whilst the regime is evolving, there appears to be no system of prior approval and the onus is on the recipient to ensure any aid received, if qualified as a subsidy, adheres to the UK Subsidy Control Commitments.
While the UK’s Subsidy Control Regime has not yet been set out in legislation, government guidance on the UK's subsidy control commitments is currently available. On 30 June 2021, the Subsidy Control Bill was presented to parliament. Whilst the bill is not expected to be passed and written into legislation until 2022, it provides a clear sign of what is to come and, perhaps provides some further guidance on how to adhere to the UK Subsidy Control Commitments.
Here are some of the key questions which the recipient of state resources must ask themselves in order to adhere to the UK Subsidy Control Regime under the guidance and draft bill:
1 Does the aid qualify as a subsidy1?
A subsidy is defined as financial assistance from public resources by a public authority. To be a subsidy it must first confer an economic advantage on one or more enterprises that is specific, it then must either have an effect on:
competition or investment within the UK, or
trade between the UK and a country or territory outside the UK
investment between the UK and a country or territory outside the UK
This could include cash payments, grants, loans provided at below market rates and/or loan guarantees.
2 Is the subsidy exempt?
Exempt subsidies2 include:
Subsidy of less than £315,000 over three years which is classified as minimal financial assistance. For example, provision of a cash grant to an enterprise of less than £315,000 on a cumulative basis over the last three years is exempt from the UK Subsidy Control Regime and can be awarded
Subsidy of less than £725,000 over three years where it is for a services of public economic interest (SPEI). SPEI comprises the state provision of services that are not supplied by market forces alone eg public transport, postal services and healthcare
Subsidy for combatting natural disasters such as flooding, safeguarding national security and responding to a national or global economic emergency
Subsidy given by or on behalf of the Bank of England in pursuit of monetary policy
3 Is the subsidy prohibited3?
Prohibited subsidies have been defined as:
those that have unlimited state guarantees
those that are contingent on export performance
those that are contingent on the use of domestic over imported goods or service
those that are explicitly contingent upon relocation within the UK
those that are granted to ailing or insolvent enterprises with no credible restructuring plans.
For example, giving a subsidy to a widget manufacturer linked to exporting a certain tonnage to another country.
4 Does the subsidy qualify for the streamlined route?
The bill sets out a potential streamlined route allowing lower risk subsidies to be provided by public authorities more quickly and easily without having to assess compliance with the principles or other subsidy control requirements. This is yet to be defined but could, perhaps, be used to reflect nuances for different sectors and categories of subsidies, including transport, R&D, skills, disadvantaged areas and culture and heritage subsidies.
5 Is the Subsidy of Interest?
Subsidies of Interest are those that are considered to be subsidies that have a higher likelihood of distorting effect on UK competition and international trade. In these cases, there must be a thorough consideration and documentation of compliance to the seven principles (see point 8) and the recipient can ask the CMA’s SAU to review compliance, albeit the SAU’s decision will not be binding. The secondary legislation has yet to define a Subsidy of Interest.
6 Is the Subsidy of Particular Interest?
Subsidies of Particular Interest are those subsidies that are considered to have the highest likelihood of having distortive effects on UK competition and international trade. In these cases, there must be a thorough consideration and documentation of compliance to the seven principles (see point 8) and these cases are required to be reviewed by the SAU however the SAU’s assessment and decisions will not be binding. The secondary legislation has yet to define a Subsidy of Particular Interest.
The CMA will be responsible for monitoring the UK’s adherence to the Subsidy Control Regime, with the establishment of a Subsidiary Advice Unit (SAU). The SAU will act in an advisory capacity and have the ability to assess Subsidies of Interest and Particular Interest, and those called in by the Secretary of State (see point 6 and 7), however the decisions by the SAU will be binding.
8 Does the subsidy meet the seven principles?4
Subsidies, which are not prohibited, exempt or subject to the Streamline Route must meet seven principles3:
1 The Subsidy should pursue a specific Policy Objective to remedy market failure or address equity rationale
2 The Subsidy must be proportionate and limited to what is necessary to achieve the Policy Objective.
3 The Subsidy must bring about a change in behaviour of the beneficiary to address the Policy Objective
4 The Subsidy must be targeted to be additional to costs that would be incurred in the absence of the Subsidy
5 There must be consideration of alternative policies that would cause less distortive competition effects in the UK and internationally. The Policy Objection should not be capable of being met by less distortive means
6 The Subsidy must be designed to minimise the effects on competition and investment within the UK
7 The Subsidy must be assessed to ensure the benefits of the Subsidy are greater than any harmful impact in the context of competition and investment and the UK, and international trade and investment
9 How will the UK Subsidy Control Regime be enforced?
The Authority issuing the aid must publish details regarding all subsidies or subsidy schemes on the subsidy control information database, that has already been established by BEIS. Unless it does not exceed £500,000, has been awarded under a subsidy scheme and where an entry for the scheme has already been made on the database.
Interested parties may challenge subsidy decisions in the relevant court5 within one month from the relevant date which may be, for example, the date on which a relevant entry is made on the subsidy control database.
If the subsidy is found not to be compliant with the Subsidy Control Regime, remedies can include recovery orders, injunctions, prohibitions and damages.
Whilst full details of the UK’s Subsidy Control Regime remains to be set out in legislation, what is clear is that public authorities need to ensure that any aid granted is carefully considered in light of the definitions of a subsidy, and that any subsidy is reviewed in detail against the prohibitions, exemptions and/or the seven principles and documented accordingly in order to avoid or defend any challenge.
Exempt subsidies as set out in Part 3 Chapters 1-4 of the Bill
Prohibited subsidies as set out in Part 2 Chapter 2 of the Bill
Seven principles as set out in Schedule 1 of the Bill. There are additional principles for Energy and Environmental Subsidies
The CAT must apply the judicial review standard in its review in proceedings in England, Wales and Northern Ireland, and the same principles as the Court of Session would apply for proceedings in Scotland.