Subsidy Control Act 2022: what does the new regime mean for you?

Speed read

The Subsidy Control Act 2022 (the Act) will come into full force and effect on 4 January 2023. The Government intends the Act to offer a more flexible approach to subsidy control – notably by moving away from more prescriptive notification and approval mechanisms, with a detailed list of exemptions (as under the EU State Aid rules) and adopting instead a principles-based and self-assessment focused approach to compliance.

The EU State Aid regime emerged from decades of refinement. While some might see its detailed rules as more “prescriptive”, they also offered a degree of certainty. The UK’s new regime lacks the same detail and places a heavier burden of self-assessment on public authorities. Time will tell if this fulfils the Government’s aim for more flexibility, or whether it simply leads to less certainty and anti-competitive effects.

The article below provides a detailed overview of what the new regime will mean (with some comments specific to cultural organisations, universities and research institutions in the UK).

The key features of the Act are as follows:

• Subsidy. The Act’s definition of “subsidy” resembles the definition under EU State Aid rules – though with an (inevitably) added focus on competition within the UK, acknowledging that the purpose of the new regime is not just ensuring compliance with international treaty obligations, but also managing domestic competition.
• Routes. The Act adopts a more risk-based approach than under EU State Aid rules, notably by providing for different layers of compliance obligations, depending on the category of subsidy which is proposed to be awarded. There will be:
  
  
  • a “streamlined route” for categories of subsidies that are at low risk of distorting competition, trade or investment,
  • a “special route” for Subsidies and Schemes of Interest (SSoIs) which have a potential, and Subsidies and Schemes of Particular Interest (SSoPIs) which have a higher potential, of leading to undue distortion and negative effects on domestic and / or international trade, competition or investment, and
  • a “default” route, which will apply to all other subsidies.
• Self-Assessment. Under the EU State Aid regime, there was a “standstill obligation” and (unless an exemption applied) a requirement for “pre-approval” of subsidies. By contrast, under the Act, public authorities will generally be responsible for deciding whether or not the proposed subsidy complies with the principles of the UK regime and whether or not ultimately to provide a subsidy (except in respect of SSoIs and SSoPIs – on which see the role of the new Subsidy Advice Unit below).
• Transparency. Transparency is a fundamental part of the Act, the policy rationale being that public disclosure of key details about subsidies and schemes will promote open and fair competition, and accountability. The transparency rules require public authorities to upload details of both subsidy schemes and standalone awards which exceed £100,000 to a database maintained by BEIS (available here).
• Subsidy Advice Unit (the SAU). The SAU has been established within the Competition and Markets Authority to provide independent advice on subsidies or schemes with greater potential to lead to undue distortion and negative effects on domestic and / or international trade, competition or investment. Where a subsidy or scheme meets (or could meet) the definition of a SSoPI, public authorities must refer their assessment to the SAU for independent evaluation. Where a subsidy or scheme meets (or could meet) the definition of a SSoI, public authorities may make a voluntary referral to the SAU for advice. The SAU has no power to prohibit a subsidy or scheme – its role is advisory only. However, the advice of the SAU will be published and made available for the public to view free of charge.
• Competition Appeal Tribunal (the CAT). The CAT has jurisdiction to review subsidy control decisions and importantly has the power to direct a public authority to recover a subsidy (in whole or in part) from its recipient.

Background

Following the UK’s decision to leave the EU, the Government announced, in September 2020, plans to design a “new, bespoke regime for subsidy control within the UK” – departing from the EU State Aid rules – that “will be flexible, agile, and tailored to support business growth and innovation, as well as help to maintain a competitive free market economy and protect competition and investment in the UK”, view here. The Subsidy Control Bill was introduced to Parliament the following year, in 2021, and received Royal Asset on 28 April 2022 – becoming the Subsidy Control Act 2022 (the Act).

Some elements of the Act came into force on 28 April 2022, including a new definition of “subsidy”. Whilst it was initially anticipated that the remainder of the Act would come into force this autumn, the Government announced last month that the Act will now come fully into force on 4 January 2023.

In the meantime, the interim regime based on the UK and EU’s Trade and Cooperation Agreement (the TCA) remains applicable, as well as the UK’s commitments under its membership of the World Trade Organisation and its free trade agreements. However, importantly, the new definition of “subsidy” given under the Act will apply.

Whilst the Act does not, by any means, represent a sweeping away of EU State Aid rules (as previous Government announcements have perhaps suggested), it does represent a more flexible approach to subsidy control – notably by moving away from rigid notification and approval mechanisms, and adopting instead a principles-based and self-assessment focused approach to compliance.

In this article, we examine the key features of the new subsidy control regime and what the Act will mean for cultural organisations, universities and research institutions in the UK.

Key features

Definition of subsidy

• Section 2(1) of the Act defines a “subsidy” in similar lines and according to similar criteria as the definition under the EU State Aid rules – though with an (inevitably) added focus on competition within the UK, acknowledging that the purpose of the new regime is not just ensuring compliance with international treaty obligations, but also managing domestic competition.
• Under the Act, to be considered a subsidy, there must be financial assistance which: 
  
  
  • is given, directly or indirectly from public resources by a public authority,
  • confers an economic advantage on one or more enterprises,
  • is specific, such that it benefits one or more enterprises over one or more enterprises with respect to the production of goods or services, and
  • has, or is capable of having, an effect on competition or investment within the UK, or trade or investment between the UK and another country or territory.
• Financial assistance is a wide concept and includes any kind of support or market transaction that is considered to have a financial value for the recipient, such as: 
  
  
  • a direct transfer of funds (such as a grant, a loan or an equity investment),
  • a contingent transfer of funds (such as a loan or rent guarantee),
  • the foregoing of revenue that is otherwise due (such as a tax relief or exemption),
  • the provision of goods or services (for example as a benefit-in-kind), or
  • the purchase of goods or services.

Routes and categories of subsidy

• The Act adopts a more risk-based approach than that under the EU State Aid rules, notably by providing for different layers of compliance obligations, depending on the category of subsidy which is proposed to be awarded.
• Streamlined route. There will be a “streamlined route” for categories of subsidies that are at low risk of distorting competition, trade or investment. Provided the subsidy meets the relevant criteria, public authorities will not need to assess compliance specifically against the subsidy control principles. The Government has recently published illustrative examples of how this streamlined route will work in practice (available here).
• Special interest route. There will be a “special route” for subsidies which may have greater potential to lead to distortion of the market. The Government has identified two such categories: namely Subsidies and Schemes of Interest (SSoIs) which have a potential, and Subsidies and Schemes of Particular Interest (SSoPIs) which have a higher potential, of leading to undue distortion and negative effect on domestic competition or investment and / or international trade or investment. Public authorities intending to grant SSoIs or SSoPIs will be subject to a voluntary or mandatory referral process to the newly established subsidy advice unit (more on which below). The Government has also recently published illustrative regulations and guidance on SSoIs and SSoPIs (available here).
• Normal route. The “default” route will apply to all other subsidies. Under this route, public authorities will be required to self-assess compliance against the subsidy control principles prior to granting a subsidy.

Subsidy control principles

• The Act sets out seven subsidy control principles – six of which the UK is already bound to comply with under the TCA (and which are themselves very similar to the EU State Aid laws) and one additional principle which focuses on the protection of the UK internal market.
• Public authorities will need to ensure that they consider these principles when designing a subsidy, and must not grant a subsidy unless they are of the view that it is consistent and complies with the principles.
• The seven principles are:
  
  
  • Subsidies should pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns).
  • Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
  • Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change, in relation to a subsidy, should be conducive to achieving its specific policy objective and something that would not happen without the subsidy.
  • Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
  • Subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other, less distortive, means.
  • Subsidies should be designed to achieve their specific policy objectives while minimising any negative effects on competition or investment within the United Kingdom.
  • Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including, in particular, negative effects on competition or investment within the United Kingdom and / or international trade investment.
• Subsidies and schemes relating to the energy and / or the environment must be also assessed against further energy and environment principles.

Transparency requirements

• Transparency is a fundamental part of the Act, the policy rationale of course being that public disclosure of key details about subsidies and schemes will promote open and fair competition, and accountability.
• The transparency rules require public authorities to upload details of both subsidy schemes and standalone awards which exceed £100,000 to a database maintained by BEIS (available here).
• The details must be uploaded within three months of the public authority’s confirmation of its decision to grant the scheme or award, unless the subsidy award is given in the form of a tax measure – in which case the upload deadline is one year beginning with the date of the tax declaration.
• The Act provides the Government with the ability to set the transparency rules by regulations, which may change the thresholds at which details of subsidies must be uploaded to the database as well as the deadlines within which those details must be uploaded. For now, Section 34 of the Act sets out the information which must be uploaded to the database.

Exemptions

• Minimal Financial Assistance (MFA) and Services of Public Economic Interest Assistance (SPEI). Similar to the EU State Aid regime’s “de minimis” provisions, MFA allows public authorities to award low value subsidies. To rely on MFA, no recipient can receive more than £315,000 over the “applicable period”.
  
  The applicable period is: (i) the elapsed part of the current financial year (ie from 1 April), and (ii) the two financial years immediately preceding the current financial year.
  
  SPEI relates to essential services provided to the public such as postal services, social housing and certain transport networks. To designate a service as an SPEI, the public authority must be satisfied: (i) the service is provided for the benefit of the public, and (ii) the service would not be provided, or would not be provided on the terms required, by an enterprise under normal market conditions.
  
  If a subsidy qualifies for MFA or SPEI, the public authority will not need to comply with the majority of the subsidy control requirements – but will still need to comply with the applicable transparency requirements.
• Emergencies. There are exemptions to the subsidy control requirements in relation to certain subsidies given in exceptional circumstances. These exemptions exist to allow public authorities to respond to natural disasters, national or global economic emergencies, national or global economic emergencies, or for reasons of national security and financial stability.

Prohibitions

• The Act prohibits some categories of subsidy outright. These are as follows:
  
  
  • Unlimited Guarantees. A subsidy that would guarantee an unlimited amount of liabilities or debts, or which would guarantee a finite amount of liabilities or debts but over an indefinite period.
  • Export performance. A subsidy that is contingent in law or fact, whether solely or as one of several other conditions, upon export performance relating to goods or services.
  • Use of domestic goods or services. A subsidy that is contingent on the use of domestically produced goods or services.
  • Relocation of activities. A subsidy which contains a condition requiring the recipient to relocate, where that relocation would not occur without the subsidy.
  • Ailing or insolvency enterprises. A subsidy which has as its purpose the recue or restructuring or provision of liquidity to ailing or insolvent enterprises, deposit takers or insurance companies.
  • Other. There are other specific prohibitions and requirements for subsidies for insurers that provide export credit insurance, or for air carriers for the operation of routes.

New Subsidy Advice Unit (SAU)

• The SAU has been established within the Competition and Markets Authority (CMA) to provide independent advice on those subsidies or schemes that have greater potential to lead to undue distortion and negative effects on domestic competition or investment, and / or on international trade or investment.
• Where a subsidy or scheme meets or has the potential to meet the definition of a SSoPI, public authorities must refer their assessment to the SAU for independent evaluation. Public authorities must not grant the subsidy until: (i) the SAU’s advice is published; and (ii) the expiry of a short five working day cooling off period.
• Where a subsidy or scheme meets or has the potential to meet the definition of a SSoI, public authorities may make a voluntary referral to the SAU for advice. The SAU has discretion to decide which SSoIs it will review.
• Where a subsidy or scheme is neither an SSoPI or SSoI public authorities will not be able to request advice from the SAU.
• Importantly, the SAU does not have the power to prohibit the making of any subsidy or scheme – its role is advisory only. It will therefore be for public authorities to decide whether to follow the advice of the SAU. However, the advice of the SAU will be published and be available for the public to view free of charge. So, where the SAU’s advice is not followed, the risk of a successful legal challenge of the public authority’s decision to grant a subsidy may increase.

Competition Appeal Tribunal (CAT) to hear applications to review subsidy decisions

• The CAT has been granted jurisdiction to review subsidy control decisions. The CAT can review a subsidy decision on general public law grounds (ie on the basis that the subsidy decision was illegal, irrational, biased or otherwise unlawful), or it can review whether the authority carried out its duties that are specific to the subsidy control regime (ie to consider the relevant subsidy control principles, and to decide whether the subsidy granted was consistent with those principles).
• Interested party. An “interested party” can ask the CAT to review a subsidy decision. An interested party is anyone whose interests may be affected by the giving of the subsidy or making of the scheme. Interested parties would typically include: (i) competitors of the recipient of the subsidy, (ii) trade associations active in the relevant sector, (iii) local administrations, and (iv) the Secretary of State.
  
  An interested party can also ask the public authority for information about the subsidy by way of a “pre-action information request”. This must be made in writing, stating that the request is made only for the purpose of deciding whether to apply for review of a subsidy decision. The public authority must respond to pre-action information requests within 28 calendar days, but may impose some proportionate restrictions on the information provided (for example to protect commercially sensitive information, confidential information, information subject to legal privilege and information that would be contrary to the public interest to disclose).
• Reviewable decisions. Interested parties may apply to the CAT for a review of a public authority’s decision to: (i) grant a subsidy, (ii) create a subsidy scheme, or (iii) create a Streamlined Route.
  
  To apply for a review of a subsidy decision, the interested party must set out a notice of appeal or request for permission to intervene, and send this to the Registrar of the CAT within one calendar month of: (i) the date the subsidy decision is uploaded to the BEIS subsidy database or the date they first knew or ought to have known of the subsidy, (ii) the publication of the SAU’s report, or (iii) the public authority responding to their request for pre-action information (each as applicable).
• Remedies. The following remedies are available to the CAT:
  
  
  • Mandatory order – to require the relevant public authority to perform its legal duties,
  • Prohibiting order – to prohibit a public authority from carrying out an unlawful act (eg from granting a particular subsidy, or additional subsidies under a scheme),
  • Quashing order – to set aside an unlawful decision and deprive it of legal effect (eg to set aside a wrongly made subsidy decision and require the public authority to reconsider and re-make the decision),
  • Declaration – to clarify a principle of law at issue in the case,
  • Injunction – to direct the public authority to do or refrain from doing a specific act, including on an interim basis (eg to require a public authority to refrain from making a subsidy decision until the CAT has reviewed the case), and
  • Recovery – to direct the public authority to take back the subsidy from the beneficiary, including the amount of the subsidy to be recovered (if not all of it) and the timeframe for doing so.

Key takeaways

Government intervention. The establishment of the SAU, the expanded remit of the CAT and the Government’s more general powers to issue (quite prescriptive) secondary legislation, all confer greater powers on the Government to intervene in the UK’s subsidy control regime. It remains to be seen how involved the Government will be – not least given the current political climate – however, the Government has consistently stated that it does not want “a return to the failed 1970s approach of Government trying to run the economy”, view here.

Self-assessment. There is a notable divergence from the traditional approach taken to compliance under the EU State Aid regime, in at least two key ways.

• Under the EU State Aid regime, there was a “standstill obligation” and a requirement for “pre-approval” of subsidies. By contrast, under the UK’s new subsidy control regime, public authorities will be responsible for deciding whether or not the proposed subsidy complies with the principles and whether or not to ultimately make a grant of the subsidy (save, of course, in respect of SSoIs and SSoPIs – in which case the voluntary and mandatory reporting process outlined above will “kick in”).
• Under the EU State Aid regime, public authorities typically sought to avoid the notification requirement by structuring the proposed aid so that it “fitted” within a Block Exemption Regulation, and therefore did not qualify as “State Aid” and fell outside the ambit of the regulations. Again, by contrast, the UK Government has said that it will not create block exemptions under the UK regime.

What does this mean for cultural organisations, universities and research institutions?

Definition of public authority (granting subsidies)

• The Act defines “public authority” as “a person who exercises functions of a public nature”. It is not clear how this definition will apply to organisations which are “hybrid” authorities, such as museums and universities – who carry out public functions but are not “pure” public authorities.
• The draft Statutory Guidance to the Act provides that where bodies exercise a mix of functions of a public and private nature, it will be important to look at whether the financial assistance comes from public resources.
• The concept of public resources is to be considered quite broadly – resources will be considered public where they have come under “public control” prior to being granted to the subsidy recipient. This will therefore include resources of public authorities at any level of central, devolved, regional or local government, as well as publicly or privately owned companies where a public body has an “influence” and is able to direct the use of such resources. Factors relevant to determining “influence” will include the degree of control exercised by the public authority; and the relationship and ownership structure of the parties (though, even if a company is majority owned by a public authority this will not necessarily be determinative, particularly if the company is otherwise run independently of the public authority).

Definition of enterprises (receiving subsidies)

• To constitute a subsidy, financial assistance must be granted to an “enterprise” which is defined as a person or group of persons “engaged in an economic activity that entails offering goods or services on a market, to the extent that the person [or the group] is engaged in such an activity”.
• The status of “enterprise” is therefore conferred purely on the basis of the activities that such persons or groups are engaged in – not their legal status. Accordingly, it is not relevant whether the enterprise is governed by public or company law, whether they are publicly or privately financed, or whether they are for-profit or not-for-profit.
• As per the above, where an enterprise engages in economic and non-economic activities, it will be considered to be an enterprise only in relation to those activities which are economic in nature. As such, where public authorities provide financial assistance in support of a “hybrid” enterprise’s non-economic activities, the assistance will not be considered to be a subsidy provided that the funds are not – and cannot be – used to cross-subsidise the economic activities (eg by use of separate accounts).
• In addition, certain enterprises may perform economic activities which are ancillary to a primary non-economic activity. The draft Statutory Guidance to the Act provides that where such activities are “intrinsically linked or are directly related and necessary for the performance of the non-economic activity, and where such economic activities are limited in scope, such activities will not be caught under the subsidy control regime”. Such ancillary activities might include a café, gift shop or parking facility at a museum.

Economic activities outside the scope of the Act

• The following activities will not be considered to constitute an economic activity for the purposes of the Act:
  
  
  • education services organised within the national education system, which are both funded through public funds and supervised by the Government,
  • education services which are principally funded, whether directly or indirectly, through public resources (including where students, or their families, pay fees toward the provision of those services). However, where education services are principally funded through private resources, for example the resources of students and parents, or through the operator’s own commercial revenues, these services will be considered economic activities),
  • cultural activities which can be accessed by the general public, free of charge. (Though, where the public are required to pay a fee, this does not necessarily entail that the activities are commercial in nature – unless the activity is primarily funded through fees paid by the public), and
  • financing of the construction, development, maintenance and operation of infrastructure and sites used for activities related to culture, heritage and nature conservation, if it is not intended to be commercially exploited.

Identifying whether a financial measure is a subsidy

To ensure there is a benefit to wider society, public authorities may only give subsidies to pursue a specific policy objective which: (i) remedies a market failure, and (ii) addresses an equity concern.

• Market failure. This occurs where market forces alone do not produce an efficient outcome. In a research and development (R&D) context, for example, it can be difficult for an individual business, that privately funded R&D activity, to exclude other businesses or wider society from capturing some of the benefits of this (eg through intellectual property protection). As a result, fewer businesses may invest in this type of R&D activity. Likewise, certain research (eg of experimental or theoretical nature with no direct practical application) can increase the overall level of knowledge in society and may even spur innovation in other businesses and sectors, but may not provide sufficient commercial benefits to incentivise an individual business to undertake it. Therefore, intervention by public authorities by way of subsidies may incentivise businesses to do so.
  
  Before granting the subsidy, public authorities should establish the existence of the market failure, assess its significance, and demonstrate how the subsidy will address the issue so as to provide a more efficient outcome.
• Equity objectives. These seek to reduce disparities between different groups in society or geographic areas – that is, they do not aim to achieve a more efficient outcome, but instead aim to redistribute the benefits of economic activity between different groups or areas. In the context of cultural organisations, this might include subsidies targeted at extending access to cultural or educational amenities and promoting the engagement of disadvantaged or under-represented audiences.
  
  Before granting the subsidy, public authorities should identify the inequality which they are seeking to address. Public authorities should use supporting evidence to demonstrate this, including measures or statistical indicators set against appropriate comparators (such as regional or national averages). The public authority should then identify how the subsidy could act to remedy this inequality, and ensure that the policy objective will not be achieved in the absence of intervention.

If you require further information about anything covered in this briefing, please contact Peter Wienand, Genna Morgan or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, November 2022