The UK’s new subsidy control regime

Insight

27.08.2021

The UK Government’s authority to determine and monitor state subsidies was one of the key arguments of the Brexit debate and a major sticking point in the post-Brexit trade negotiations with the EU. Implementing a regime which, on the one hand, has sufficient control to satisfy the European Commission’s requirement to maintain a “level playing field”, and on the other, enough flexibility to allow government to exercise new-found post-Brexit freedoms, was never going to be easy.

The Trade and Cooperation Agreement (TCA) published in December 2020 gave us some indication of what the proposed resolution to this may look like. This has taken further shape by the publication of the Government’s Subsidy Control Bill 2021 (Bill). This briefing sets out how the Bill will handle subsidies if it makes it through Parliament without substantial amendment. We have also noted the implications for certain organisations that previously relied on the EU’s block exemption and other frameworks to make use of critically needed state funding – such as those engaged in research and development (R&D) and in cultural activity.

Current rules governing State aid in the UK

Before we turn to the Bill, a brief note on the status of the law as it currently stands today. From 1 January 2021, EU State aid law no longer applies to the UK (except in certain limited cases relevant to trade between Northern Ireland and the EU). In place of the former State aid rules, the TCA introduced a framework in relation to what it refers to as “subsidy” controls. First, there are technical questions as to how the TCA’s subsidy control provisions can be implemented in UK domestic law. Second, even putting aside such questions and assuming that it is applicable [1], the TCA provides only broad principles which the EU and UK as parties to the TCA must follow. There remains very little guidance on the application of such principles or on the exemptions – this means that at present there is no detailed subsidy control regime in the UK.

The Department for Business, Energy and Industrial Strategy (BEIS) has published some guidance available here on the UK’s international subsidy control commitments. The guidance states that it is “designed to help public authorities understand the UK’s international commitments on subsidy control, in advance of the development of the UK’s own subsidy control regime.” While the legal status of BEIS’s guidance (and of the obligations under the TCA to which it refers) is technically unclear, it is sensible for public authorities that might be considering any measure that confers an economic advantage to have regard to this guidance for the time being.

The Subsidy Control Bill

The Bill helps to flesh out the Government’s intent in relation to the granting of subsidies, up to a point, and is expected to come into force in 2022, subject to Parliamentary approval. But it is worth noting at the outset that the Bill itself is still quite broad, largely carrying over the concepts of the TCA and lacking in detail. A number of key components of the regime, such as subsidies that will be exempt under “subsidy schemes”, are as yet unknown (and in some cases will need further consultation and secondary legislation).

Inevitably, therefore, in the absence of further guidance and the relevant secondary legislation (and eventually case law), there will be continued questions as to the interpretation and application of the Bill.

The Bill:

defines “subsidies” as arising when a public authority confers an economic advantage on “enterprises” (businesses but also potentially public authorities and charities to the extent that they are engaged in economic activity for an economic purpose) using public resources which distort, or may distort, competition. A concept not too dissimilar from the EU’s “State aid”;
widens the definition of subsidy to include subsidies granted by public authorities which have, or are capable of having, an effect on competition within the UK, acknowledging that the purpose of the new regime is not just having to ensure compliance with international treaty obligations, but also to manage domestic competition;
applies to “public authorities” which includes any person who exercises function of a public nature but excludes both the UK Parliament and the devolved legislatures (though Schedule 3, para 6 of the Bill applies the subsidy control principles to subsidies provided by means of devolved primary legislation);
carries over from the TCA the obligation on public authorities to apply the subsidy control key “subsidy control principles” (detailed below). The public authority should not grant a subsidy unless it considers that such principles have been complied with;
exempts “subsidy schemes” and “streamlined subsidy schemes” (the latter for low-risk subsidies where a “streamlined” subsidy scheme route is available), which must be made in accordance with the subsidy control principles, and may be the subject of secondary legislation;
introduces the Competition and Markets Authority (CMA) as the UK’s subsidy regulator who will, in certain cases, provide advice about whether a subsidy complies with the subsidy control principles. This will be mandatory in high-profile cases and voluntary in other cases, but the CMA’s view is not binding;
requires transparency with key information on subsidies to be published on a central database;
excludes certain kinds of subsidies including unlimited guarantees to businesses, subsidies that are contingent on export performance or use of domestic goods and services; subsidies given on the condition that the business relocates its activities from one part of the UK to another; and subsidies granted to ailing or insolvent enterprises with no viable restructuring plan; and
exempts subsidies for natural disasters, national or global economic emergencies and national security, or for “minimal financial assistance” where the total amount received over a three financial year period is less than £315,000.

The concept of a “subsidy” will be broadly familiar. However, it is less clear how the definition of “public authority” as any person who exercises “function of a public nature” will apply to organisations which are “hybrid” authorities, such as universities and museums, who can carry out public functions but are not ‘pure’ public authorities. The same form of words can be found in the Human Rights Act (HRA) from which we can borrow some guidance on interpretation. Case law on the HRA divides a hybrid organisation’s activities between those functions that have a “public flavour” which is relatively narrowly construed and those that do not. The key issue for these “hybrid” authorities is whether they will fall under the new subsidy regime when performing commercial functions that may not relate to their public functions, for instance, collaborative research with industry.

The subsidy control principles

The central obligation for a body awarding a subsidy or making a “subsidy scheme” will be consideration of whether the “subsidy control principles” apply. These principles, which largely mirror the principles under Article 366 of the TCA, are set out in Schedule 1 of the Bill and include that the subsidy (or subsidy scheme):

pursues specific public policy objectives to remedy identified market failures or an equity rationale (such as social difficulties or distributional concern);
is necessary and proportionate;
is designed to change the beneficiary’s behaviour to achieve the objective;
does not subsidise costs that would be borne in any event;
is not applied to an objective that could be achieved via a less distortive means;
is designed in a way to minimise any negative effects on UK domestic competition and investment; and
leads to a positive contribution to the public policy objective that outweighs the negatives from the market distortion.

The principles are broadly underpinned by the concepts of “proportionality” and “necessity” and are seemingly sensible. However, they are only principles. As yet there is no equivalent to the EU’s block exemptions which gave concrete form to certain kinds of acceptable aid. Until subsidy schemes or secondary legislation are made, it is not possible to point to any equivalent exemptions, such as those for organisations engaged in R&D or cultural activities, and those organisations face some uncertainty as to how the principles might apply in practice. It is also clear that subsidies will be expected to be well-directed towards priority policies but there is no guidance yet as to what such policies are or how a public authority can ensure its subsidies are appropriately targeted.

It is an intention of the Bill to be less prescriptive and therefore reduce administrative burden. This may helpfully provide wider scope to manoeuvre when granting R&D subsidies – in theory they will allow funding in a wider variety of situations than the old EU rules which had a detailed and sometimes cumbersome definitions of what R&D could be. However, clearer guidance is needed to help public authorities and other entities engaged in specific areas such as R&D know how they can demonstrate that their grant or receipt of subsidy complies with the principles and proceed with a degree of legal certainty needed to invest in R&D with confidence that they will not face clawback on allocated resources.

The Bill leaves important details to be filled in by the Secretary of State. For example, “subsidies of particular interest” require mandatory referral to the CMA for assessment and the CMA is subject to an obligation to publish its report within 30 days (no doubt to accelerate the process and not hold projects up which is itself a good thing) but there is no indication of what the term “particular interest” means. So, while there is an attempt at improving the system of granting of subsidies, there is an ambiguity as to how it will apply in practice. Similarly, the system will be reliant on streamlined routes for the majority of subsidies, but the detail on these routes has yet to emerge.

The Bill introduces a higher “de minimis” threshold with financial assistance up to £315,000 over the last three years being exempt from the regime provided that the exemption does not apply if its application would contravene export performance or use of domestic goods prohibitions and there is a particular notification procedure to follow. From the BEIS guidance, it seems that the clock has not been re-set by the new threshold but is cumulative with sums granted prior to the new regime, so organisations should be mindful of aid granted in the years running up to 1 January 2021.

Subsidies can be challenged by an aggrieved “interested party” for a review by the Competition Appeal Tribunal (CAT). In many cases the challenge period will start from the “transparency date” (ie the entry of information about the subsidy on the central subsidy database) or when the interested party first “knew or ought to have known” about the decision. The challenge window is short (one month in most cases) which is significantly shorter than the EU system in which the European Commission had up to 10 years from date of last award in which to investigate. This shortening of the challenge period will be welcome to grantors as it can provide some comfort that once a certain period has passed they have effectively found “safe harbour” and the subsidy cannot be challenged.

Although the granting authority is not bound by the CMA’s report and in theory the authority could receive a report and proceed to grant a subsidy regardless of what the report says, as a matter of public law (and is likely to often be the case in practice) the public authority will have to take into regard what the CMA says. However, this duty to have regard to the report is not technically specified in the Bill and so leaves open the possibility of potentially damaging subsidies going unchallenged in court if there is no willing “interested party” and the authority ignores the CMA’s report. It also puts the onus on the granting body to ultimately “self-assess” the granting of the subsidy albeit in light of the CMA’s report – and good record keeping of what the grantor has done, for what reasons and the documents to support it will be crucial to this process.

A more streamlined subsidy control regime which is reflective of the UK’s priorities could have wide benefits, not least in terms of enabling R&D and in turn the growth and development of key and emerging sectors. However, R&D fundamentally involves risk and investment and for now guidance and certainty on what is permissible does not exist. This is needed to ensure that the granting public body can be comfortable it is following the rules, to avoid investment being forcibly returned. While such guidance (and the introduction of schemes) is awaited, there is inevitably a risk that any gains from removing the EU system will be eroded by the caution which public authorities may feel is warranted without it.

[1] The most likely means for the TCA subsidy rules to apply is by way of the EU (Future Relationship) Act 2020, section 29.

If you require further information about anything covered in this briefing, please contact Peter Wienand, Anisha Birk, 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.