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?
The UK Subsidy Control Act 2022: what you need to know
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.
What difference will the Subsidy Control Act make to state aid in the UK?
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.
Is it a radical departure from EU state aid rules?
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:
- Many of the proposed principles are similar to those applicable under the EU state aid rules;
- It will remain possible for private parties to challenge subsidies in court;
- EU state aid rules will still apply to subsidies covered by the Northern Ireland Protocol; and
- Historically, the UK has provided substantially lower levels of state aid than many EU Member States.
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
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.
General Subsidy Control Principles
The seven general principles are:
- Principle A (common interest): Subsidies should pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale (such as social difficulties or distributional concerns or, as has been added since the draft Bill, also local or regional disadvantage).
- Principle B (proportionality): Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
- Principle C (designed to change economic behaviour): Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change in economic behaviour must be conducive to achieving the specific policy objective and the change should be something that would not happen without the subsidy.
- Principle 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.
- Principle 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.
- Principle F (competition and investment within the UK): Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition and investment within the UK.
- Principle G (beneficial effects outweigh negative effects): Subsidies' beneficial effects should outweigh any negative effects, in particular those on competition or investment within the UK and on international trade and investment.
Energy and environmental principles
The nine energy and environmental principles include:
- Principle A (aims): Subsidies in relation to energy and environment shall be aimed at, and incentivise the beneficiary, in (a) delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market; or (b) increasing the level of environmental protection compared to the level that would be achieved in the absence of the subsidy.
- Principle F (taxes and levies): Subsidies in the form of partial exemptions from energy-related taxes and levies in favour of energy-intensive users shall not exceed the total amount of the lax of levy concerned. (NB levy does not include network charges).
The Act also prohibits awards of particular categories of subsidy, including:
- Unlimited guarantees to businesses;
- Subsidies that are contingent on export performance or the use of domestic goods and services;
- Subsidies given on the condition that the enterprise relocates all or part of its economic activities from one part of the UK to another (however, in a departure from the text of the Bill, the Act provides for relocation subsidies to be be permitted where a relocation subsidy is for the purposes of reducing economic or social disadvantage); and
- Subsidies granted to “ailing or insolvent” enterprises where there is no credible restructuring plan and the subsidy does not contribute to an objective of public interest. Any subsidy granted to an "ailing or insolvent" enterprise must be in the form of a loan or a loan guarantee.
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 total amount of the subsidy (including any related subsidies to the beneficiary) is more than £10 million; and the subsidy is not granted in a sensitive sector
- The total amount of the subsidy (including any related subsidies to the same beneficiary) is more than £5 million and is granted in a sensitive sector; or
- Restructuring subsidies: i.e. a subsidy for restructuring an ailing or insolvent enterprise, or for restructuring an ailing or insolvent deposit taker or insurance company.
The Draft Regulation proposes that the following will be "Subsidies of Interest" (SOIs):
- Rescue subsidies: i.e. a subsidy for the purposes of rescuing an ailing or insolvent enterprise; or for rescuing an ailing or insolvent deposit taker (a person who has permission to carry on the regulated activity of accepting deposits) or insurance company
- For the purposes of supporting liquidity provision for an ailing or insolvent deposit taker or insurance company
- All other subsidies of between £5 to £10 million which do not meet the SoPI criteria are SoI
Mandatory and voluntary referrals
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 role of the CMA/SAU
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).
How is this different from the EU state aid regime?
- A somewhat more permissive approach: Under the EU regime, all subsidies – unless exempt – require prior approval by the European Commission. The Act, by contrast, provides that the CMA, through the SAU, will only assess a subset of non-exempt subsidies – and as noted above, the SAU's view will not be binding.
- No investigative role for CMA: Under the EU regime, the European Commission can also investigate alleged illegal subsidies in response to complaints or on its own initiative; the CMA/SAU has no such powers under the Act.
To streamline the regime, a limited set of subsidies will be exempt, including:
- Minimal financial assistance, where the total amount of minimal and Services of Public Economic Interest (SPEI) financial assistance received over the elapsed part of the current financial year and the two financial years immediately preceding the current financial year is less than £315,000. (Note: SPEI are public services that would not be supplied (or would not be supplied under the required conditions) without public intervention, and which are of particular importance to society. Examples of an SPEI could include social housing or rural public transport services).
- SPEI assistance, where total amount of minimal and SPEI financial assistance received over the elapsed part off the current financial year and the two financial years immediately preceding the current financial year is less than £725,000.
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:
- Complain to the European Commission; or
- Initiate court proceedings in the Member State where the aid was granted.
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.
Review and remedies
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).