The UK's Subsidy Control Bill received Royal Asset on 28 April 2022 , becoming the Subsidy Control Act 2022 (the "Act"). The new regime will come fully into force on 4 January 2023. The Act has been hailed by the UK Government as a major departure from the EU State aid rules. But just how radical a departure is it and what are the key implications for business?
Following the end of the Brexit transition period on 31 December 2020, the UK ceased to be subject to the EU's state aid regime. Instead, the UK has been subject to the subsidy control commitments set out in the UK-EU Trade and Cooperation Agreement ("TCA"), Northern Ireland Protocol, international free trade agreements with third countries and the WTO subsidy rules. (For an example of how this post-Brexit regime has operated in practice, please see our briefing earlier this year, which discusses a recent challenge by British Sugar to sugar tariffs granted to its competitor).
The Act, once fully in force, will replace those interim rules and provide the framework for UK public authorities to provide financial support.
The Act sets out the framework for implementing the UK's international commitments on subsidy control (including those under the TCA with the EU). However, the Act also goes beyond these international obligations by covering subsidies that have, or are capable of having, an effect on competition or investment within the UK. This is an important safeguard for private sector businesses based in the UK which may be concerned about competitors based elsewhere in the UK benefitting from subsidies (see section 6 below). It reflects the Government's aim to not only comply with its international subsidy obligations, but also to protect UK domestic competition and investment from distortive effects.
Subsidy control was a key battleground in Brexit negotiations, with the UK promising a new state aid system to protect British industry and free up the ability to help struggling companies. The EU, meanwhile, was keen to ensure that a regime similar to its own state aid rules would continue to apply. The TCA state aid provisions represent something of a compromise, allowing the UK some freedom to design its own system but obliging it to go considerably further than would have been required under WTO rules. The UK Government has heralded the new regime as a "clear departure" from the EU regime, enabling "key domestic priorities, such as levelling up economic growth across the UK and driving our green industrial revolution" but "without facing burdensome red tape".
As explained below, there are indeed some significant differences compared with the EU regime. However, it is important to remember that:
The Act sets out the framework to be followed when assessing the grant of a subsidy. Not all financial assistance granted by public authorities, or using public resources, will be considered to be a subsidy. Financial assistance will only be a subsidy for the purposes of the Act where it has certain other characteristics, notably, that the assistance confers an economic advantage on an enterprise.
"Subsidy" is broadly defined and appears unlikely to differ substantially from the EU concept of state aid. As such, it is likely to include a variety of different forms of financial assistance provided from public resources, ranging from grants or loans through to guarantees, certain tax breaks and, potentially, disposals of publicly owned assets at below market value.
However, importantly, an economic advantage is only conferred where the financial assistance is provided on terms that are more favourable than those that might reasonably be expected to have been available on the market to the recipient. For example, a loan provided by a public body at a market rate of interest would not fall within the definition of subsidy.
In line with the EU state aid regime, financial assistance will only amount to a subsidy where it favours one enterprise over another (i.e. it is "specific"). Therefore, financial assistance would not amount to a subsidy where all market players benefit from the same favourable terms.
Financial assistance will also only amount to a subsidy of it has, or is capable of having, an effect on competition or investment within the UK, or trade and investment between the UK and other countries.
Public authorities must assess all subsidies against the Subsidy Control Principles (set out below) during the design process and before granting them (unless the subsidy is exempt – see section 5). There are also certain categories of subsidy which are prohibited in all cases (see below). On 1 July 2022, the Government published Draft Statutory Guidance on the United Kingdom Subsidy Control Regime (the "Draft Guidance") which explains a step-by-step assessment process for public authorities to follow during the design process.
As explained in section 4 of this briefing, certain subsidies must be referred to a new Subsidy Advice Unit ("SAU") within the Competition and Markets Authority ("CMA") for assessment, whilst in certain other cases public authorities will have the option to involve the SAU (but will not be obliged to do so). However, the SAU's assessment will not be binding. This is a significant departure from the EU state aid regime, where (unless exempt), all subsidies required prior approval by the European Commission (without which the subsidy would be illegal).
For reasons of transparency, details of standalone granted subsidies must be included on a central subsidy database. Where a subsidy is awarded as part of a subsidy scheme, it need only be uploaded to the central database where its value is more than £100,000.
The Subsidy Control Principles largely reflect those that the UK was previously subject to under the EU state aid regime. The first seven are general principles which apply to all subsidies. A further nine principles are specific to energy and environmental subsidies: this is one of the areas in which the Act goes further than the TCA requires (although these further principles do not apply to subsidies in relation to nuclear energy subsidy awards). The Draft Guidance explains in some depth how the Subsidy Control Principles should be applied, and sets out a four stage framework for public bodies to follow when designing subsidies. Broadly speaking, the framework is aimed at ensuring that the subsidy is the right tool for achieving the particular policy objective in question, and that the benefits of the subsidy outweigh its negative effects.
The seven general principles are:
The nine energy and environmental principles include:
The Act also prohibits awards of particular categories of subsidy, including:
The Act introduces two distinct categories of subsidies - Subsidies of Interest ("SOI") and Subsidies of Particular Interest ("SOPI"). These categories have been identified by the Government as having greater potential to lead to distortive effects on competition and/or investment.
Public bodies granting SOIs and SOPIs may need to undertake more extensive analysis to assess their compliance with the Subsidy Control Principles. In addition, the Act provides for referral to the CMA's new SAU (on either a mandatory or voluntary basis) for these types of subsidy (see below).
The Act does not actually define what falls within each of these categories. Instead, a draft Regulation, published for consultation on 25 March 2022 (the "Draft Regulation"), proposes the definitions for SOIS and SOPIS as set out below. The consultation closed on 6 May 2022, and the Government published its response in August 2022.
The Draft Regulation proposes that the following will be "Subsidies of Particular Interest" (SOPIs):
The Draft Regulation proposes that the following will be "Subsidies of Interest" (SOIs):
Referral by the public authority to the SAU is mandatory for Subsidies of Particular Interest.
A referral is voluntary for Subsidies of Interest.
The SAU has discretion as to which Subsidies of Interest it will review, and has set out its priorities for review in a draft set of prioritisation principles. The Secretary of State may also direct a public authority to request a report from the CMA where the subsidy is of 'Interest'; or does not comply with the Subsidy Control Principles; or where it is concerned about a risk of negative effects on competition or investment within the UK.
Once the SAU has accepted a request for advice, the SAU will ordinarily need to provide its report within a 30 working day reporting period (extendable by agreement or by the Secretary of State if requested by the SAU). Under the EU state aid regime, the Commission has 20 working days in its initial period to determine whether the state aid is lawful or whether to initiate in-depth proceedings, but this is often preceded by a pre-notification period. In the case of mandatory referrals under the UK regime, the subsidy must not be granted until five working days after the SAU has reported, known as the "cooling off period".
The Secretary of State may also make a post-award referral to the SAU after a subsidy has been granted where there has either been a failure to comply with the requirements of the regime or there is a risk of negative effects on competition or investment within the UK arising as a result of the subsidy.
The SAU's role will be to give independent advice by way of report on the subsidies referred, however those reports will not be binding on the public authority and the SAU cannot prohibit the making of any subsidy.
Under the SAU's newly published Guidance on the operation of its own subsidy control functions, the SAU defines its role primarily as a reporting body, and sets out a step by step analytical framework which it will follow in its assessment of any subsidy or scheme referred to it. However, regardless of the outcome of the SAU process, it is ultimately for the public authority to decide whether to grant the subsidy in question, even if the SAU has produced a negative report. The public authority will need to factor in the risk of challenge if that were to be the case (see Section 6).
To streamline the regime, a limited set of subsidies will be exempt, including:
Further exemptions are provided for, including subsidies for natural disasters, national or global economic emergencies and national security.
Whilst the Act does not contain any specific categories of safe harbour, it does introduce a new concept of Streamlined Routes, or Streamlined Subsidy Schemes. Although there is as yet little detail on the specifics, the Act allows the Government to create Streamlined Routes in order to enable public authorities to grant certain types of subsidies more quickly and easily. Streamlined Routes are pre-assessed by the Government as being in compliance with the subsidy control regime, allowing for subsidies to be awarded more simply without a full assessment against the Subsidy Control Principles. It is yet to be seen how this provision will be used in practice, but it is likely to operate in a manner similar to the EU's state "block exemption" regime, which (among other things) covers certain types of aid for SMEs, research and development, training and infrastructure as well as regional aid; according to the European Commission, over 95% of EU state aid measures are granted on the basis of this exemption regime. Indeed, the Government has published an example of how the Streamlined Routes will work, based on 'Research, Development and Innovation'.
The enforcement regime in the Act is somewhat different from the position under the EU state aid rules. Under the EU rules, a business which is unhappy about an alleged subsidy to one of its competitors essentially has two options:
In practice, most have tended to opt for making a complaint.
Under the Act, by contrast, neither the SAU nor the CMA more generally will have the power to investigate complaints and, in most cases, the only option available to aggrieved parties will be to initiate court proceedings. In England, these will normally be heard by the UK Competition Appeal Tribunal ("CAT"), whilst for the devolved nations, the relevant High Court or Court of Session will have jurisdiction. A possible alternative in some cases might be to lobby the Secretary of State to refer the subsidy to the CMA/SAU (see section 4) in the hope that a negative report from the latter will deter the public authority from making the award or persuade it to make changes. However, this is unlikely to be successful where the Government has a political interest in the subsidy going ahead.
The CAT, or relevant court, will have jurisdiction to review subsidy decisions (including the creation of a Streamlined Route, but not subsidies granted under a Streamlined Route) on a judicial review standard. Challenges can be brought by any "interested party who is aggrieved by the making of a subsidy decision" with relatively short deadlines for action (broadly speaking, one month from the details of the subsidy decision being made public by way of the subsidy database). The short appeal deadline will be welcomed by both public authorities and recipients of aid as it means they will quickly have certainty as to whether or not the grant of a subsidy will be challenged, but perhaps not to the "interested" parties, who will have to be swift in taking action. This contrasts with the position under the EU state aid regime, where it is possible for the European Commission to investigate alleged unlawful subsidies for a period of up to 10 years after the aid was granted (as noted above, under the Act, neither the SAU nor the CMA more generally will have a similar investigatory role).
That said, the CAT will have the power to annul subsidy decisions and to make orders requiring the recovery of subsidies by public authorities. The threat of the courts exercising such powers is likely to make public authorities wary of paying insufficient attention to the Subsidy Control Principles and other rules set out in the Act – and may mean that, where possible, they will prefer to obtain a favourable assessment from the SAU before proceeding (which is also likely to provide a higher degree of comfort to proposed recipients of aid).
