By Jonathan Branton, Alexander Rose and Alex Eaton, DWF Law LLP
The long awaited Subsidy Control Bill has been awarded Royal Assent, thereby putting into law a statutory UK State aid regime. This will develop, change and build upon the interim Subsidy Control regime which has been in place within the UK since 11pm on 31 December 2020 (which came directly from the subsidy provisions of the EU/UK Trade & Cooperation Agreement (TCA) of December 2020). The main elements of the new Subsidy Control Act 2022 are expected to come into force in Autumn 2022.
What is the Subsidy Control Act?
The Subsidy Control Act regulates the award of financial assistance, as subsidy, by public authorities and their agents to organisations which are engaged in economic activities. In order to be lawfully awarded, a subsidy will need to satisfy the relevant requirements set out in the Subsidy Control Act 2022 and be checked to ensure that there is no “appreciable risk” of triggering a dispute under any other applicable rules, such as those emanating from the UK’s now independent membership of the WTO. The Subsidy Control Act 2022 has progressed from an initial Subsidy Control Bill, through amendments via the House of Lords and on to the final Act (for which we await confirmation of final version).
When does the Subsidy Control Act come into force?
Some elements, such as the ability for the Secretary of State to make Regulations to flesh out the new regime (for example, specifying which subsidies must go for review by the Competition and Markets Authority) come into effect immediately, however the main elements of the new Subsidy Control Act regime are expected to come into force in Autumn 2022. The precise date will be set out in Regulations issued by the Secretary of State in due course.
What are the main elements of the Subsidy Control Act 2022 regime?
- The definition of “Subsidy” is amended, so that it differs in substance from that of a “State aid”.
Under the Subsidy Control Act 2022, a “Subsidy” means any financial assistance given directly or indirectly through public resources by a public authority that confers a specific economic advantage on one or more enterprises, with respect to the production of goods or the provision of services, and which is capable of having, an effect on competition or investment within the United Kingdom or trade or investment between the United Kingdom and another country.
This makes it very plain that the UK law is there to regulate competition on a domestic as well as an international level. Therefore the arguments which were sometimes used in EU State aid law matters to claim that there could be no State aid through lack of potential effects on trade between Member States (often very optimistically given the European Commission’s statement at paragraph 191 of the Notion of State aid) appear to fall away under the new regime, which focusses not only on the relationship with the European Union, but also upon the UK’s internal market.
- Minimal Financial Assistance
The ‘Minimial Financial Assistance’ route is a Subsidy Control exemption that allows up to £315,000 of subsidies to be awarded to an enterprise within a three year period. In many ways this exemption mirrors the De Minimis Regulation route under EU State aid law. However the £315,000threshold for the Minimal Financial Assistance route is more generous than the €200,000 threshold for De Minimis.
- Service of Public Economic Interest
The ‘Service of Public Economic Interest’ route is a Subsidy Control exemption that allows the State to entrust a third party to deliver tasks “in the public interest (including public service obligations)” on its behalf. The rules ensure that the funding is limited to what is necessary to deliver the service and a reasonable profit, as identified in a transparent manner in advance. The Service of Public Economic Interest route is likely to be used for subsidies such as a local authority setting up a social housing association, or the commissioning of transport services to remote areas that would not otherwise pay for themselves. This largely mirrors the comparable provisions for services of general economic interest at EU level.
- The Subsidy Control Principles
The “Subsidy Control Principles” listed at Schedule 1 of the Subsidy Control Act 2022 are:
- Subsidies should pursue a specific policy objective in order to— (a) remedy an identified market failure, or (b) address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns).
Proportionate and necessary
- Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
Design to change economic behaviour of beneficiary
- (1) Subsidies should be designed to bring about a change of economic behaviour of the beneficiary.
(2) That change, in relation to a subsidy, should be:
(a) conducive to achieving its specific policy objective, and
(b) something that would not happen without the subsidy.
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.
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.
Competition and investment within the United Kingdom
- Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.
Beneficial effects to outweigh negative effects
- Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including in particular negative effects on— (a) competition or investment within the United Kingdom; (b) international trade or investment.
This adds a seventh principle (F, above) to those already in place via the TCA, while clarifying the wording slightly. These Subsidy Control Principles are likely to be used for many awards and therefore it is important that there is a clear and consistent understanding of each, and what reasonable evidence is required to be obtained in order to suitably satisfied of each. Draft illustrative guidance has been published by the Department for Business, Energy and Industrial Strategy with this intention.
It should be noted that in the event of a Subsidy Control challenge that a Court would methodically work through each Subsidy Control Principle, assessing the arguments and evidence for each addressed against standards of reasonable decision making under UK public law . Therefore whilst there may be a temptation to fall back on stock statements or upon economic theory, we would recommend that the emphasis is upon always having in place a robust record as to how each individual Subsidy Control Principle has been met for every case.
The Subsidy Advice Unit is part of the Competition and Markets Authority which will be tasked under the Subsidy Control Act 2022 with reviewing Subsidies of Interest (SoI) as may be notiofied to it for an individual opinion prior to award, and Subsidies of Particular Interest (SoPI) as must be notified to it prior to award.
What precisely will constitute SoIs and SoPIs is currently the subject of a public consultation due to close on 6 May 2022. This will be particularly important and will build in further procedural scrutiny for larger subsidies deemed more likely to have a potential to distort competition.
For example, the consultation currently contemplates all subsidies to individual enterprises of a value in excess of £10m will become SoPIs subject to this additional requirement, whilst also anticipating smaller value subsidies in certain pre-definned sensitive sectors such as automotive production to be similarly affected. Once notified the CMA will be responsible for issuing an advisory report which takes account of the effects of the proposed subsidy or scheme on UK competition and investment, and may include recommendations for alteration or further enquiry.
6) Subsidy Control Enforcement
Under the Subsidy Control Act 2022, the Competition Appeal Tribunal (rather than simply the High Court) will review subsidy decisions. Challenges may be brought by way of Judicial Review, by any “interested party”.
An “interested party” for the purposes of Subsidy Control is any person whose interests may be affected by the giving of the subsidy or the making of the subsidy scheme. The Secretary of State always has standing as an interested party.
7) Streamlined Subsidy Schemes
The Subsidy Control Act introduces a mechanism for government to adopt Streamlined Subsidy Schemes to operate as conditional exemptions under the Subsidy Control regime. Provided the funder is able to satisfy the relevant requirements of the Streamlined Subsidy Scheme, it is understood that such awards will be regarded as having complied with the Subsidy Control regime without requiring an individual assessment under the Common Principles as described above. A Streamlined Subsidy Scheme is therefore understood to operate much like a block exemption Regulation at EU level. It is therefore understood that measures brought forward under Streamlined Subsidy Schemes will also automatically be excluded therefore from qualifying as a SoPI and requiring notification to the CMA.
One of the weaknesses of the new Subsidy Control regime is that it can create greater administration for some lower value awards than under EU State aid rules. This is because over 95% of State aid awards proceeded on the basis of well used block exemptions, such as the GBER.
The Government is eager to encourage greater innovation in the award of subsidies, which it hopes to ensure by limiting the creation of Streamlined Subsidy Schemes, at the same time as seeking to ensure funders to do subject more “routine” and uncontroversial interventions to any more administrative burden and/or legal uncertainty than is necessary. Indeed the Government’s Press Release refers to very specific activities being the subject of future Streamlined Subsidy Schemes, including funding towards national security and tackling floods.
Observations on the Subsidy Control Act
The ability of the UK to mastermind its own State aid regime was presented as one of the best opportunities of Brexit and with good reason. Astutely targeted State subsidies can dramatically improve economies, nurturing the businesses of tomorrow and creating new jobs. Provided certain rules are applied, this can be achieved without having an unduly negative effect on competition.
In comparison with the EU State aid regime, the Subsidy Control Act creates a system where it should be easier and faster to fund the largest projects, which would otherwise have required notification to the European Commission for individual assessment, a process which could take a notoriously long time to see through to conclusion – indeed notifications often runn to years, not just months.
The Government has chosen not to recreate the European Commission’s role in a domestic context and instead to keep the Competition and Markets Authority in an advisory role, while otherwise entrusting the national courts to deliver relevant enforcement judgments to keep the system working well. Obviously in time to come the regime may evolve further still but for the time being the Subsidy Control Act builds a comprehensive regime and it is signfiicant to note that the regime goes further (in solidifying a domestic competition regime) than it was simply required to do under the UK’s free trade commitments to the EU in the TCA. This shows the UK as eager to have an effective competition regime in place for its own sake and not merely to fulfil international commitments.
The Subsidy Control Act regime involves some additional administration for some smaller, regular awards. This is because, unless these fall within the Minimal Financial Assistance route, a case needs to be developed against the Subsidy Control Principles which requires the funder to have the capacity and capability to undertake a detailed Subsidy Control assessment. An easy route to solve this would be to introduce Streamlined Subsidy Schemes, but the Government seems intent on only using that route sparingly. One would hope that the Government will involve experts from the public and private sector in the design of such Streamlined Subsidy Schemes, given their importance to the new regime.
Fundamentally the Subsidy Control Act regime relies upon the organisations administering public funding acting as responsible custodians of public finances, in particular making the appropriate enquiries to ensure that they are only ever providing the proportionate and minimum subsidy necessary for each case. All of the Subsidy Control Principles are clearly sensible and represent best practice around grant giving, but recording the necessary evidence for compliance to be relied upon represents a new way of doing things. Undoubtedly this new regime will grow and develop from the discomfort of public bodies which fail to properly adapt to the new rules and therefore fall prey to Judicial Review challenge. In doing so, the system will gradually become more certain for the body administering the award, as well as the subsidy recipient.
Jonathan Branton, Alexander Rose and Alex Eaton, DWF Law LLP