The Subsidy Control Act 2022 is the UK’s post-Brexit regulatory framework for subsidy control. The oversight activities of the CMA, acting through its dedicated unit, the Subsidy Advice Unit (SAU), is an important part of the new regime. It has two main functions: providing non-binding advice to public authorities, and monitoring and reporting on the effectiveness of the subsidy control regime and its impact on competition and investment in the UK.
This guidance note brings a clearer picture of how the SAU will work in practice, decisions on which it has discretion, and areas where public authorities may need to pay particular attention.
What is the Subsidy Advice Unit?
The SAU won't decide whether a subsidy can be given, or directly assess whether it complies with the subsidy control requirements. This is what it will do:
- Support public authorities’ decision making regarding the design and assessment of subsidies to ensure they're based on a strong assessment of their compliance with the subsidy control requirements
- Provide advice in respect of certain subsidies or subsidy schemes – subsidies or schemes of interest (SSoI) and subsidies or subsidy schemes of particular interest (SSoPI)
The SAU’s advice to public authorities will be non-binding, and it has no power to prohibit the grant of a subsidy. This means public authorities ultimately bear the responsibility for deciding whether to award a subsidy or make a scheme. However, it's unlikely that many public authorities would have the risk appetite to ignore the SAU’s advice given the potential implications of a judicial review.
The Competition Appeal Tribunal will hear appeals by interested parties (or the Secretary of State for Business, Energy, and Industrial Strategy) against subsidy decisions, using judicial review principles and will have the power to impugn an unlawful subsidy. An interested party may wish to complain if it views a subsidy as incompatible with the subsidy control principles, or if it considers that no Assessment of Compliance was undertaken or that a subsidy fell within the SSoPI category but was not referred to the SAU.
Subsidy categorisation framework
There is a framework for categorising subsidies as SSoPI or SSoI. A subsidy will be a SSoPI if any of the three following conditions apply:
- The total amount of the subsidy (together with any related subsidy given to the same enterprise) awarded in the current financial year and two previous financial years exceeds £10 million
- The subsidy concerns a “sensitive sector” and the total subsidy amount (together with any related subsidy given to the same enterprise) exceeds £5 million across the current financial year and two previous financial years
- The subsidy is given for “restructuring ailing or insolvent enterprises, including insurance companies and deposit takers”
The “sensitive sectors” include the manufacture of basic iron, steel, motor vehicles, motorcycles, air and spacecraft; the production of electricity, aluminium and copper; and ship building.
Subsidies or schemes of interest classification
Alternatively, a subsidy will be classed as a SSoI if one of the following applies:
- The subsidy is in excess of £5 million per enterprise but doesn't meet the SSoPI criteria
- The subsidy is given “for rescuing ailing or insolvent enterprises, or for liquidating or providing liquidity support to deposit takers or insurance companies”
Public authorities should be mindful of these when looking at support, particularly marginal cases.
There are three main types of referrals to the SAU:
- Public authorities are required to refer to the SAU SSoPIs or subsidies called-in by the Secretary of State (ie, mandatory referral)
- The SAU also has a discretion to provide such advice in relation to any SSoIs which are referred to it on a voluntary basis (ie, voluntary referral)
- The Secretary of State also has the power to refer a subsidy or scheme to the SAU post-award in certain circumstances (ie, post-award referrals)
The SAU is required to prepare and publish reports on assessments of subsidies and schemes which are referred to it. In the case of mandatory referrals, with a 30-working day ‘reporting period’, beginning on the date on which notice is given to the public authority that the request complies with the requirement to provide certain minimum information. In the case of post-award referrals, this 30-working day reporting period begins on the earlier date on which the information required under the Secretary of State’s direction is provided to the SAU and the day after the information period ends.
The SAU has discretion in deciding whether to prepare a report following a voluntary referral, for which it will need to take appropriate decisions about the types of SSoIs on which it focuses its resources. Its decisions in this regard will be informed by the Prioritisation Principles.
The minimum information which public authorities must submit on making a voluntary referral is the same as under mandatory referrals, except public authorities must explain why the subsidy is a SSoI rather than a SSoPI.
There are a limited number of exemptions from referrals, a government policy to encourage public authorities to use the subsidy control principles route, requiring examination of each individual case to the facts and circumstances. These exemptions include streamlined subsidy schemes and minimal financial assistance. The value of these exemptions is that they allow awards to be made without detailed and time-consuming analysis. However, it's worth noting that the opportunity for public authorities to use these routes is more limited than under EU state aid rules.
What is the SAU’s review process?
Overview of review process
Discussions are intended to reduce the risk that the SAU will reject the request for a mandatory or voluntary referral due to incomplete information, by identifying information that should be submitted. Pre-referral discussions are voluntary, and the SAU is unable to advise on the design of subsidies, whether measures qualify as a subsidy, or meet the criteria for referral. It also can't advise on how a public authority should undertake the Assessment of Compliance. However, public authorities are encouraged to approach the SAU for discussion, and in good time, before referring any subsidies that may meet the definition of SSoI or SSoPI, especially for complex or novel measures.
While discussions are voluntary and may not generate advice with respect to subsidy design or qualification, they're likely to facilitate a smoother process for public authorities.
They're required to submit their request for a report before the subsidy is given, through the SAU’s Public Authority Portal (PAP). They'll need to submit two separate self-contained documents: determination of how the measure meets the definition of SSoPI or SSoI, and the Assessment of Compliance with the Subsidy Control Requirements.
Preliminary assessment process map
Upon receipt of a mandatory or voluntary referral request, the SAU has five working days to do a preliminary assessment on whether it will provide a report.
1 SAU receives referral request from public authority before a subsidy is given or a scheme is made.
2 The request must:
- include all the information to be included in the subsidy database
- if applicable, provide information specified by the Secretary of State
- explain why the criteria for a SSoPI or SSoI are met
- contain an Assessment of Compliance and any evidence relevant to the assessment.
3 In the case of an SSoI, the SAU will apply the Prioritisation Principles. If the SAU doesn't prioritise the request, it gives notice to the public authority that it won't prepare a report and sets out the reasons. If the SAU prioritises the request, the SSoI moves to Step 4.
4 If the requirements of Step 2 are met, the SAU gives notice to the public authority and prepares a report. If the requirements of Step 2 aren't met, the SAU gives notice that the request doesn't comply with the requirements and sets out the reasons.
Reporting period and transparency
The 30-working day reporting period starts on the day SAU notifies the public authority that it has accepted the referral.
The SAU publishes the referral information on its website to ensure review transparency.
Published information is likely to include the information that would be entered in the subsidy database which the public authority is required to submit in its request.
The public authority may be asked to provide an appropriate non-confidential description and provide links to published announcements of the subsidy, to be included in the information the SAU will publish.
Third parties, such as subsidy recipients, their potential competitors, or customers will have the opportunity to make relevant representations, eg, to identify alternative ways the authority could have achieved the same aim, or impacts on markets, competition and investment that would be relevant to the Assessment of Compliance.
The SAU will primarily base its evaluation on the information in the public authority’s referral request, and public authorities won't routinely be able to refine or clarify information after the submission of their request. The SAU will publish its report on its website before the end of the reporting period.
Public authorities will need to take care to ensure their submissions are carefully considered, comprehensive and robust to third party challenge at the point at which the referral is made.
It's also important that confidential information is clearly identified with sufficient explanation for the claim, including the nature, magnitude and likelihood of any harm that may be caused by its disclosure.
Substantive evaluation of assessment against the principles
The SAU’s task is to evaluate the public authority’s assessment rather than carrying out its own. There are two fundamental questions the SAU will consider:
- how well does the public authority’s assessment address the subsidy’s compliance with the subsidy control requirements?
- has appropriate evidence been identified and used in the assessment, and are the public authority’s analysis and conclusions generally consistent with that evidence?
The SAU’s evaluation must consider any effects of the proposed subsidy on competition or investment within the UK, and the framework that will be used by the SAU is based on the 4-step assessment framework set out in BEIS Statutory Guidance, which correspond to the seven subsidy control principles.
Mapping the 4-step subsidy control principles framework
Step 1: Identify the policy objective, ensure it addresses a market failure or equity concern, and determine whether a subsidy is the right tool to use
Principle A: Common Interest
Principle E: Least distortive means
Step 2: Ensuring that the subsidy is designed to create the right incentives for the beneficiary and bring about a change
Principle C: Designed to change economic behaviour of beneficiary
Principle D: Costs that would be funded anyway
Step 3: considering the distortive impacts that the subsidy may have and keeping them as low as possible
Principle B: Proportionate and necessary
Principle F: Competition and investment within the UK
Step 4: Carrying out a financial assessment against the subsidy control principles and making any final changes necessary to achieve compliance with these
Principle G: Beneficial effects to outweigh negative effectives
The SAU’s evaluation of the public authority’s assessment will be included in the SAU report. This won't provide a pass/fail evaluation, but will identify any shortcomings and may include advice about how the public authority’s assessment might be improved and how the proposed subsidy may be modified to ensure compliance with the Subsidy Control Act.
This means that certain types of subsidies are more likely to be reviewed by the SAU. Subsidies of higher monetary value and lengthy timespan may be at greater risk of review, or where the subsidy recipient has a dominant market position. Similarly, novel subsidies or those in more sensitive sectors may be more likely to be scrutinised by the SAU. Over time, a clearer picture may emerge as the SAU deliberates over voluntary referrals.
Six key steps to take
Public bodies will need to adapt their approaches to ensure subsidies meet the new rules set out in the Subsidy Control Act 2022. This requires an understanding of how the SAU will work in practice.
If a public authority is considering providing financial support to an entity, there are six key steps:
1 Consider the proposed financial support against the four subsidy tests set out in the Act to determine whether it is a subsidy. This may include consideration of whether the support could be restructured.
2 Establish the categorisation (SSoPI or SSoI) to determine the referral type, associated requirements and SAU process. A particular focus on justification of subsidy type may be necessary for support that is on the margin, and consideration of the Prioritisation Principles in the case of SSoI.
3 Engage in pre-referral discussions with the SAU.
4 Assess the proposed subsidy against the 4-step assessment framework set out in BEIS statutory guidance, which correspond to the seven subsidy control principles to balance efficiencies and harm from subsidy.
5 Prepare the referral information for submission, including: the determination of how the measure meets the definition of SSoPI or SSoI, and the Assessment of Compliance with the Subsidy Control Requirements.
6 Submit request for a report before the subsidy is given through the SAU’s Public Authority Portal (PAP).
Ultimately, public authorities bear the responsibility for deciding whether to award a subsidy and will need to take care to ensure their submissions are carefully considered, comprehensive and robust to third-party challenge at the point at which the referral is made.