The Subsidy Control Act 2022 – legislation to create a UK Statutory State Aid regime receives Royal Assent

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?

  1. 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:

Common interest

  1. 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

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

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Subsidy Control Bill: BEIS consults on what subsidies can be, or must be, referred to the CMA

On 25 March, BEIS issued a consultation on the regulations that will define what subsidies have to be referred to the CMA before implementation (“subsidies of particular interest”) and what subsidies can be referred, either by the granting authority or by the Secretary of State (“subsidies of particular interest”). The Bill leaves the power to define those classes to the Secretary of State.

The consultation paper discusses general thresholds set by reference to the size of the subsidy, as well as additional criteria based on the economic sector (eg cars, steel, shipbuilding, and aircraft) or type of subsidy (eg rescue and restructuring subsidies).

The closing date for responses is 6 May.

If anyone would be interested in contributing to the response of the Joint Working Party of the UK Bars and Law Societies on Competition Law to this consultation, please let me know (gperetz@monckton.com).

GEORGE PERETZ QC

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Subsidy Control Bill – Illustrative Guidance and Regulations (by Angelica Hymers and Alex Kynoch of Browne Jacobson)

It has been a turbulent couple of years for those involved in subsidy control, and 2022 will be equally challenging. The Subsidy Control Bill (Bill) will take effect in 2022. It will form the backbone of the UK’s new subsidy control regime, but many commentators have raised questions over the transparency and efficacy of the new approach. Early drafts of illustrative guidance, illustrative regulations, policy statements and illustrative examples have just been published by the Government to show how three key areas of the new subsidy control regime will operate:

The Subsidy Control Principles (Principles);

Streamlined routes; and

Subsidies or schemes of interest/particular interest.

Subsidy Control Principles

The Principles are broadly drafted, and our experience with the current interim regime has been that they can be difficult to interpret and apply, particularly at a sub-central level where the granting authority may not have sufficient oversight to determine what standard of evidence is required in order to demonstrate the subsidy’s compliance with the Principles. Clear guidance which directs a granting authority as to the evidence required to demonstrate compliance with the Principles would be extremely helpful here. This will be vital for smaller authorities which do not have the same resources to undertake economic appraisals as larger authorities, or government departments.

The Illustrative Guidance (Guidance) published by the Government is intended to give a sense of what the final guidance on the practical application of the Principles will be like, and it should be noted that it is subject to change.

The Guidance sets out a four-part framework (essentially a grouping of the Principles) for public authorities to use to ensure that a subsidy is consistent with the Principles. It confirms that the depth of analysis needs to be proportionate to the size and potential distortive impact of the subsidy or scheme in question. Where the subsidy is relatively lower in value or has very few potentially distortive features, it will require a less detailed analysis, whereas, more extensive analysis will be required for novel and contentious subsidies, and those with more distortive design features. This will be the case for Subsidies/Schemes of Interest or Subsidies/Schemes of Particular Interest for which there will be a separate Annex to the Guidance for granting authorities to consider – although this is not yet available. This approach is as anticipated, but the Guidance appears to require a detailed analysis even in the case of low value subsidies. It may be that this process is ‘short circuited’ for low value/less distortive subsidies by the establishment of streamlined subsidy schemes (see below).

The draft Guidance is currently incomplete, but it is clear that a significant effort will be required from public authorities applying the Principles. Much of this should be done as part of the granting authority’s business case in respect of a particular action in any event. However, the Guidance appears to require significant analysis of certain economic matters which are unlikely to be within easy reach of many sub-central authorities without seeking external support. Therefore, it appears that there is a risk that under the new UK regime, subsidies can be granted by authorities with imperfect information which may have distortive effects which were not anticipated, or which were disregarded in the pursuance of a particular objective.

How rigorously will the Principles be applied?

Public authorities have, of course, been used to applying the State aid rules, which give a fairly prescriptive route to determining whether a State aid exists and whether it can be granted lawfully or not. This was often a question for lawyers. However, as well as ensuring compliance with the legal process, public authorities now need to undertake a level of economic, policy and commercial analysis which was not previously required. While clearly some level of analysis in these areas has always been necessary for robust decision making, the Guidance appears to require a far higher standard of assessment. Although these are not questions of law, the involvement of legal teams may provide a stronger and more consistent approach. If decisions on compliance with the Principles are taken without legal support, there is a danger that wider issues (for example, relating to prohibited subsidies) and/or the Principles will be misinterpreted or not properly applied, and in these circumstances an authority may grant a subsidy unknowingly.

A less than rigorous approach can soon become institutionalised, and because the Competitions and Markets Authority (CMA) does not currently appear to be able to instigate an investigation into a subsidy on its own initiative, there is a risk that this type of issue goes undiscovered. This is compounded by the fact that subsidies which are given ‘unknowingly’ will not find their way onto the transparency database, and therefore, cannot be subject to scrutiny in that manner either.

Although significant discretion is afforded to granting authorities, the decision-making process must not become a ‘tick box exercise’, undermining the effectiveness and reliability of the new regime and putting authorities at risk of successful challenge.

Streamlined Subsidy Schemes/Streamlined Routes

Clause 10 of the Bill provides a power for ministers to make ‘streamlined subsidy schemes’. The Policy Statement issued by the Government on Streamlined Routes (or Streamlined Subsidy Schemes as they are referred to in the Bill) provides that these are routes for public authorities to grant subsidies more quickly, where the subsidy is routine and low risk or aligned to UK priorities. These Streamlined Routes will be designed by the Department for Business, Energy & Industrial Strategy (BEIS), and some illustrative examples have been published for Heat Networks (Clean Heat) and Research, Development and Innovation (RD&I), although the Policy Statement suggests that other ‘clean heat’ and RD&I projects may be captured by these routes in future.

Subsidies awarded under a Streamlined Route will be exempt from referral to the CMA and cannot be subject to call-in – although they are still open to challenge by way of judicial review. However, the intention is that these subsidies have been pre-assessed as being compliant with the Subsidy Control regime, and so the risk of challenge may be lower (although that will of course depend on whether the Streamlined Route is properly designed and applied).

The Streamlined Routes appear to work in a manner similar to the General Block Exemption Regulation (GBER), in that there are specific parameters within which a subsidy may be granted. However, both illustrative schemes published appear to require further development before they could be used effectively.

If the Streamlined Route approach is delivered effectively, it would provide much needed certainty for granting authorities, enabling them to make subsidies quickly and efficiently within certain parameters. This assumes the conditions imposed are sufficiently user-friendly to enable sub-central authorities to confidently apply them. Care will be needed to ensure any conditions do not require granting authorities to undertake a disproportionate level of assessment, otherwise the streamlined subsidies may be no quicker than applying the Principles.

Subsidies/Subsidy Schemes of Interest and of Particular Interest

The Policy Note on Subsidies and Schemes of Interest and Particular Interest provides that granting authorities intending to grant subsidies or schemes of interest will have the option to make a voluntary referral to the CMA for assessment of their subsidy prior to award. Whether a subsidy will be a subsidy of interest will be defined by regulation, but the recently published policy notes provide that subsidies over a certain value threshold, or with certain design features (not yet confirmed), or subsidies for rescuing an ailing or insolvent enterprise (or certain other subsidies of a similar nature which are subject to restrictions under the Bill) will fall into this category.

If the criteria for a subsidy to be a subsidy of interest are not clearly defined and limited, there is a risk that the CMA may become overly burdened by public authorities seeking the CMA’s views. Legal certainty is very important to public authorities and many funding recipients, and in the absence of clear rules and guidance, there is a real risk that referrals to the CMA will become a matter of course when granting a subsidy which falls within this category. Clear guidance for application of the new regime has been promised but is still clearly a work in progress.

Some subsidies (those ‘of particular interest’) must be subject to scrutiny by the CMA before they are made. A subsidy of particular interest will be defined by regulations, but the policy note says that these will be subsidies concerning a ‘sensitive sector’ in excess of a particular value threshold, all subsidies (regardless of sector) over a certain value threshold, and all subsidies for restructuring ailing or insolvent enterprises, which are subject to additional requirements in the Bill. These subsidies are subject to mandatory referral to the CMA because they are more likely to pose a substantial risk of negative effects on domestic competition and investment or international trade.

The approach taken in the Bill and the regulations made under it may have a significant impact on the way that the subsidy regime works. If a risk-averse approach is taken, then a significant number of subsidies may require prior consideration by the CMA before they can be granted. On one hand, this may diminish the perceived flexibilities gained by allowing public bodies to take their own decision as to whether a subsidy complies with the new regime and slow down the granting of subsidies, but conversely, it may offer authorities the certainty they are looking for when granting higher risk subsidies.

Final comments

A recurring theme for subsidy control is balancing flexibility with certainty. Given the Government’s stated desire to maintain a level playing field and the need to comply with international subsidy commitments, subsidies must be justifiable and balanced against any negative consequences. Government will need to ensure its expectations for the level of analysis required by public authorities are proportionate and realistic, otherwise it may find many authorities relying on streamlined subsidy schemes rather than taking advantage of the flexibility offered under the new regime. The extent to which this is a problem will depend on the breadth and depth of the streamlined subsidy schemes of course.

The illustrative documents published by the Government are still in very early form, and in many cases will require significant development before they can be used by granting authorities. It is clear that the Government is seeking to provide clarity, but much of the essential detail is still missing from the published documents, and it remains to be seen whether the right balance is struck between giving much desired legal certainty, and ensuring that authorities have the confidence and flexibility to take full advantage of the new regime.

While the early publication of draft indicative guidance and regulations is welcomed, there is still a lot of work to be done in ensuring that these provide the clarity and certainty needed for public authorities to confidently provide subsidies in accordance with the new regime.

Authors

Angelica Hymers | angelica.hymers@brownejacobson.com

Senior Associate, Angelica works across Browne Jacobson’s Government & Infrastructure practice. Angelica specialises in subsidy control, state aid and public procurements.

Alex Kynoch | alex.kynoch@brownejacobson.com

Legal Director, Alex heads up the subsidy control team which is part of the firm’s Government & Infrastructure practice. Alex specialises in public procurement, subsidy control and complex public sector commercial projects, with a particular interest in regeneration and energy projects. He regularly provides training sessions to local and central government departments and speaks at seminars on subsidy control and public procurement.

This was first published on Local Gov on 8th March 2022.

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Sweet failure: British Sugar fails to persuade the High Court that the sugar advance tariff quota breaches Article 10 of the Protocol or the subsidy control provisions of the TCA

The judgment of Foxton J in R(British Sugar) v Secretary of State for International Trade[2022] EWHC 393 (Admin) is the first judicial consideration of

  • the impact of Article 10 of the Ireland/Northern Ireland Protocol, which (as discussed here) applies EU State aid law to all UK measures that affect trade in goods or electricity between Northern Ireland and the EU; and
  • the post-Brexit UK subsidy control regime (at least in its transitional phase pending enactment of the Subsidy Control Bill, which consists of applying the subsidy control principles of the UK/EU Trade and Cooperation Agreement (“TCA”) as domestic law by virtue of section 29 of the EU (Future Relationship) Act 2020).

Being the first judgment does not necessarily make it interesting: but in this case not only does the judgment throw light on how the UK courts may approach future litigation under those regimes, but it also contributes to the wider issue of selectivity (or “specificity” in TCA jargon), namely the controlling principle of both the EU State aid and the TCA subsidy control regimes that ensures that those regimes apply only to measures that in effect target particular businesses or classes of businesses for favourable treatment and do not apply to general measures such as low general corporation tax rates. 

The measure complained of was an autonomous tariff quota (ATQ) applicable to imports of raw cane sugar into the UK after the end of the transition period.  The effect of the ATQ was to allow 260,000 tonnes of raw cane sugar to be imported duty free into the UK (in addition to duty-free imports from certain African, Caribbean and Pacific countries and from the EU) on a first-come first-served basis: tariffs after exhaustion of the quota were £28/100kg, save where free trade agreements applied (so tariffs were zero on imports with EU origin). 

An ATQ open to anyone might not look at first blush like a promising candidate to be counted as a State aid or a subsidy: it looks like a general tax measure.  Indeed, there is no EU case in which an ATQ has been said to involve State aid – though, as the judgment points out, that could also stem from the fact that in the EU such decisions are for the EU, and EU measures do not fall under the State aid rules.

The argument that this ATQ was selective/specific turned on the fact that the UK market for refined white sugar (the stuff that you put in your tea or sponge cakes) has certain peculiarities.  That market has two main players: British Sugar (which uses UK-grown sugar beet) (“BS”) and Tate & Lyle (“T&L”) (which uses raw cane sugar imported from countries with warmer climates than the UK’s).  (Some other refined white sugar is imported from the EU.)  That fundamental difference between BS’s and T&L’s business models explains the very different views those businesses have historically taken on such issues as sugar tariffs and subsidies for domestic raw sugar production – differences of view that have frequently profited lawyers and generated a certain amount of case-law before the EU courts.  It also helps explain T&L’s public position as one of the few large UK businesses to support Brexit.

The essence of BS’s complaint was that the ATQ would – as a matter of undisputed economic reality – benefit T&L almost exclusively.  There just are no other significant UK importers of raw cane sugar, and nor are there likely to be.  Moreover, BS was able to point to a volume of evidence that showed that the UK government was well aware of that fact, had extensively engaged with T&L, and had T&L’s position very much in mind when formulating the ATQ.  Those familiar with the current UK government’s attitude to business will not be astonished to read in the judgment accounts of internal civil service e-mails expressing the need to protect a “national icon” that was “pro-Brexit” and concerns about a “Ministerial backlash” if T&L was not protected, due to its “lobbying reach”.  However, subsequent e-mails noted that it was “best to put [those concerns] to one side”, and other e-mails recorded concerns about the impact of not having an ATQ for jobs at T&L and on competition in the UK refined sugar market, and that the effect of not allowing an ATQ would be to increase sugar imports from the EU.

State aid and Article 10 of the Protocol

Selectivity

The problem with BS’s argument in relation to State aid (as applicable under Article 10 of the Protocol) was, however, that it was unable to say that a zero tariff on all sugar imports would have been selective.  That led it into a logical quagmire, since it followed that an ATQ set way above T&L’s possible imports would also not have been selective (as the effect would have been precisely the same as a zero-tariff regime).  In the end, BS was driven to rely on the intention of the measure (referring to the material discussed above) rather than on any aspect of its design as such.  But at that point its case crashed against the principle that the selectivity of a measure is to be ascertained by objective features (such as its design) and not by reference to underlying intent: thus, the court rejected its attempt to rely on the principle on Joined Cases C-106/09P and C-107/09P Commission v Gibraltar and UKthat a measure whose design reveals it to be selective (in that case by introducing a corporation tax based in part on size of premises so as to produce the result that offshore companies with no premises were exempt – a result that could be deduced from the objective facts of the scheme) on the basis that, here, there was nothing in the objective structure of the scheme that led to the conclusion of selectivity.  Further, applying the well-known three stage test set out in Joined Cases C-20/15P and C-21/15P World Duty Free, BS was unable to show that there was a difference in treatment of undertakings in a comparable legal and factual position: BS was not in a comparable position to T&L because it did not import raw sugar, and any other importer of raw sugar would face the same regime as did T&L. 

The court therefore held that Article 10 did not apply to the ATQ because there was no selectivity and it was not State aid. 

Effect on trade

That conclusion makes the next part of its judgment – on the application of the “affect trade” test in Article 10 – obiter.  There, the court held that that test had to be applied differently to the “effect on trade” test in Article 107(1) TFEU. It based itself on the point that the EU unilateral declaration referred to the need for there to be a “genuine and direct” link between the measure at issue and an effect on trade in goods or electricity between Northern Ireland and the EU did represent a meaningful qualification of the Article 107(1) approach when applied to Article 10. 

Its reasoning is, however, highly questionable. 

  • First, as I argued in detail here, it is doubtful that the words “genuine and direct” amounted to any meaningful qualification to the Article 107(1) approach: a qualification is not meaningful if the contrary proposition would never be relied on, and since no Commission decision or court judgment applying Article 107(1) would ever expressly rely on an effect that was “pretend” or “indirect”, it is hard to see what the qualification adds. 
  • Second, the court was wrong to regard the statement by the Commission (in its notice to stakeholders, which I discussed here) to the effect that the EU declaration added nothing to the established Article 107(1) test as inadmissible: that approach ignores the fact that (as I also discussed) Article 12 of the Protocol gives the Commission (and the Court of Justice of the EU: “CJEU”) the same position in relation to Article 10 as they have in EU Member States under EU law – and given the Commission’s role in the enforcement of the State aid rules, it is simply wrong to regard its official statements on matters of interpretation of the law as inadmissible (which is not to say that they are binding). 
  • Finally – precisely because its judgment on the point was obiter – the court was able to avoid putting any flesh on the bones of what a qualified approach to the test meant in practice: and it specifically refused to rule on the UK government’s attempt to get it to endorse the UK government’s theory that Article 10 applies only where the measure has a “first order” effect in Northern Ireland or where its “secondary effects” are likely to be “channeled” towards identifiable undertakings in Northern Ireland.  The fact that the court appears to have realised that articulating and applying, in the context of Article 10, any meaningfully different “affect trade” trade test to that used in Article 107(1) is likely to be treacherous ground is itself a warning against any attempting to build on its obiter holding on the point, not least because the ultimate authority on the interpretation of Article 10 is (under Article 12) the CJEU (a point the High Court, interestingly, fails to refer to). 

Subsidy control provisions of the TCA

In relation to the subsidy control provisions of the TCA, BS suffered similarly difficulties in relation to “specificity” as it did in relation to “selectivity” under State aid rules – though, notably, the High Court looked only at WTO, and not EU, authority in discussing that issue.  The court noted that different treatment between comparable importers could be a subsidy but also that a general system of preferences would not (see the Panel report in Canada – measures affecting the Automotive Industry at §10.162) and that tariff quotas are an established feature of the WTO framework.  In the end, however, as with its discussion of selectivity, the decisive points against specificity were that BS, as a non-importer, was not in any comparable position to T&L, and T&L was not treated any differently to any actual importer (see §146 of the judgment). 

Conclusion

The facts in British Sugar are unusual and the case is unlikely (whichever way any appeal might go) to generate many further challenges to tariff quotas (particularly not in the EU system, where tariffs are an EU competence not subject to the State aid rules).    However, the court’s robust approach to the question of intent and insistence on looking at the question of “design” and hence selectivity/specificity in an objective way and without focus on detailed internal evidence of exactly what ministers intended to achieve is likely to point against too great a reliance on internal evidence of intent as opposed to a more objective analysis of the scheme at issue in its context.  The judgment is also a sign of the willingness of the UK courts to engage with WTO authority in the subsidy context.  As for the court’s analysis of “affect trade” in Article 10 of the Protocol, for the reasons above its judgment should, in my view, be approached with caution, and with the awareness that (as I pointed out here) any serious dispute about the application of that test in a case where it was the decisive issue would be likely to end up, one way of another, in the CJEU.

GEORGE PERETZ QC

22 March 2022

Posted in Brexit issues, EU/UK Trade and Cooperation Agreement, Free Trade Agreements, Ireland/Northern Ireland Protocol, New UK subsidy control regime, UK case, WTO anti-subsidy rules | Comments Off on Sweet failure: British Sugar fails to persuade the High Court that the sugar advance tariff quota breaches Article 10 of the Protocol or the subsidy control provisions of the TCA

The Subsidy Control Bill and levelling up: a complex and murky picture

                                                                                                                                                                                                                                                              

One concern that has been widely expressed during the passage of the Subsidy Control Bill through Parliament is its relationship with the current government’s “levelling-up” agenda.  Although that agenda is somewhat inchoate (although it may become a bit clearer after the White Paper is published), and is likely to involve spending that does not raise any subsidy control issues (such as spending on public services and general infrastructure), subsidies to private business conditional on locating activity in particular areas and justified by the need to address relative disadvantage or deprivation in those areas is likely to play a key part.  How does the Bill address subsidies of that kind (which I will refer to as “regional development subsidies”), and does it do so in a satisfactory way?

The ancien regime

Before Brexit, the EU State aid regime dealt with regional development subsidies in two main ways.  First, and most importantly in practice, the General Block Exemption Regulation (“GBER”) created a “safe harbour” for regional development subsidies if they (a) provided for investment in particular areas set out in a “regional aid map” approved at EU level and (b) ticked various boxes in terms of the proportion of investment supported by the aid (“aid intensity”) and other criteria, the strictness of which varied as between different areas as set out in the regional aid map.  That meant that local authorities could confidently grant regional development subsidies, without fear of objection or challenge under State aid rules, as long as (a) the area concerned was in the right part of the regional aid map and (b) the subsidies ticked the necessary boxes. 

The other way in which the EU regime dealt with regional development subsidies was that, where the proposal fell outside GBER, it had to be notified to the Commission for clearance – and in deciding whether to approve it the Commission would take a view as to whether the regional development justification  was a good one (viewing the matter from an EU-wide perspective) and whether the subsidy was proportionate, limited to what was necessary, and justified overall in the EU public interest.  That analysis could be challenged by an interested party before the EU courts, but only on narrow, judicial review, grounds (manifest error of fact, irrationality, error of law), and few such challenges succeeded given the wide margin of discretion given to the Commission in this area.

The Bill

The structure of subsidy control under the Bill will be very different.  The starting point is that it will be for the granting authority itself, under clause 12, to assess any proposed regional development subsidy against the subsidy control principles in Schedule 1 and to be satisfied that the subsidy complies.  Where the subsidy is one that would have been covered by the “regional aid” provisions of GBER, that requirement to assess imposes a new obligation on the granting authority: it is no longer enough to tick the GBER boxes.  On the other hand, where the subsidy is one that would not have fallen under GBER, there is no longer any need to wait for the subsidy to be notified and cleared by the Commission: subject to the provisions in Part 4 requiring large grants (“subsidies of particular interest”, the scope of which is yet to be defined but may well be confined to subsidies of over £5 million) to be referred to the CMA for it to advise – advice that the granting authority is not bound to take – the granting authority can proceed to make the assessment itself and, if the proposal passes that assessment, to proceed.  The only prohibitions of likely relevance to most regional development subsidies will be on rescue and restructuring aid without a credible path back to viability (clauses 19-20) and a narrow provision in clause 18 that prohibits subsidies that are conditional on relocation of activity from one part of the UK to another (a provision that does not, as the Minister confirmed in the public bill committee debates, page 128, apply to cases where the subsidy is not conditional as a matter of contractual obligation on cessation of activity elsewhere but merely has the effect of causing that cessation as an economic  consequence of starting activity in the subsidised location). It remains to be seen whether the clause 18 prohibition on express relocation conditions is included in the final Bill.

What all that means is that (in contrast to the regional aid provisions in EU law) there is nothing in the Bill that expressly favours regional development subsidies to promote development in Hartlepool rather than in Hertford, making the former acceptable in cases where the same subsidy in the latter would be prohibited, or at least subject to more stringent controls.  Rather, the arena in which the boundary between acceptable and unacceptable regional development subsidies will be drawn is the assessment by granting authorities of proposed regional development subsidies against the subsidy control principles..  That gives rise to two critical questions: what the subsidy control principles have to say about regional development, and how that boundary is to be defined and policed.  That second question is particularly important in the context of regional development, because (a) territorial granting authorities (devolved governments, the UK government when it acts for England, and local authorities) will have every reason to find that the subsidy control principles are consistent with a subsidy that promotes investment in their area rather than elsewhere and (b) granting authorities elsewhere will have every reason to be concerned by subsidies that displace activity from their area or cause it not to be located there in the first place.

The principles

First, then, what do the subsidy control principles have to say about regional development?  Principle A deals with the objective of a subsidy: they should have a policy objective of either remedying an identified market failure or of “addressing an equity rationale (such as social difficulties or distributional concerns)”.  Though the former phrase might apply in some cases to regional development aid, it is the latter phrase that seems particularly apt.  But that phrase is not free from difficulty: as the former Lord Chief Justice Lord Thomas of Cwmgiedd asked during the Bill’s second reading in the House of Lords, “what does that actually mean?”  In particular, what does “distributional concerns” mean in the context of regional development?  Would it cover a concern by a local authority for a relatively prosperous county (say, Surrey) about an area that was (on various measures) disadvantaged compared to the rest of Surrey but rather more advantaged than most areas of the United Kingdom?  How free is a local authority able to be in choosing measures that tend to point to the area at issue being disadvantaged as opposed to other measures that do not?

Principle B requires subsidies to be proportionate and limited to what is necessary to achieve it.  That principle is likely to be particularly important in the context of “subsidy races” (contests between different territorial authorities for particular investment): the effect of principle B should be to stop an authority winning such a race by offering more than what is needed to meet the policy objective of addressing the regional development rationale. 

Principles F and G both require territorial authorities to consider the effects of the proposed subsidy across the United Kingdom: principle F requires that the subsidy minimise negative effects on competition or investment within the United Kingdom and principle G requires that the benefits of the subsidy exceed its negative effects on (among other matters) competition and investment in the United Kingdom.  In the case – very likely in the case of regional development subsidies – where the counterfactual is investment in another part of the United Kingdom, those principles require a territorial granting authority to carry out the task of evaluating and giving weight to the harm caused by the proposed subsidy outside its territory: a task which is somewhat awkward given that any territorial authority in a democracy is properly accountable to, and serves the needs of, its own voters.

The subsidy control principles are therefore capable of permitting regional development subsidies, but their application is likely to be deeply contestable.  As pointed out above, given the potential for real conflict between different territorial authorities, that makes the question of who defines and polices the boundaries of proper application of the principles rather critical.

Enforcement of the principles

The first candidate for policeman is the Secretary of State, as having the power, under clause 79, to issue guidance to which all granting authorities must pay regard when applying the principles.  Draft guidance has already been issued.  That guidance confirms that an equity rationale may include “Levelling up a deprived or disadvantaged area”.  It does not, though, do much to address the question of how deprivation or disadvantage are to be established, noting only that the analysis “should include measures or statistical indicators set against appropriate comparators (such as regional or national averages)” (thus rather dodging the questions of whether the poorest corner of Surrey is to be regarded as a “deprived or disadvantaged area” and how free territorial authorities are to choose particular comparators that suit the case for regional development aid in their area).  The draft guidance does not yet address the questions of how to apply principles F and G: but it does have a section that would urge granting authorities to be “cautious about subsidy races occurring as these may lead to a displacement of investment away from locations where the public benefits are the greatest and it may incentivise firms to use their leverage to secure larger subsidies than would have been possible had public authorities not been bidding against each other to secure the investment”, going on to refer to principle B (proportionality and necessity) and suggesting a “more extensive” analysis of the counterfactual, including a comparison of disadvantage between the area sought to be assisted and the area where the investment would otherwise have occurred.   

Although the guidance has yet to be finalised, it does not look as if it will resolve the difficulties identified above: and, in any event, it is not binding (though granting authorities must have regard to it and the CMA and Competition Appeal Tribunal (“CAT”) probably will have regard to it).

The second candidate for policeman of the boundary is the CMA.  The CMA has the advantage of being a UK-wide body, though the government has so far rejected attempts to give the devolved governments any right to appoint, or to have a formal say in appointing, the members of the subsidy advice unit who will be charged with this work (those appointments being for the Secretary of State, who is also, of course, a Minister with territorial responsibilities for England).  It would appear to be open to the CMA to take a prescriptive approach to the way in which granting authorities should assess how the equity rationale applies to proposals for investment in particular areas.  However, the CMA’s function is only advisory: a granting authority can, if it wishes, ignore any such advice.  Moreover, the CMA is only required to be involved in the case of “subsidies of particular interest”: in the case of other subsidies, the CMA either has no role at all or (in the case of “subsidies of interest”) has a role only if called in by the granting authority or by the Secretary of State.  Quite how much that matters will depend on how the Secretary of State defines the categories of “subsidies of [particular] interest”: a policy statement suggests that in the usual case the subsidy will need to be over £5-10 million to be a “subsidy of particular interest”.

The third candidate for policeman is the CAT.  Judicial review in the CAT can be started by the Secretary of State or by any “interested person”: though that term does not obviously include a territorial authority concerned by the impact of another authority’s subsidy on its territory (it could indicate a narrower financial interest), the Minister confirmed in the Commons that it was intended to do so (see pages 308-309).   However, it is unclear to what extent the CAT will give – or to what extent it would be appropriate for it to give, bearing in mind the economic and policy questions involved – any firm steer on the difficulties identified above: or to what extent it would be prepared to say (or would be appropriate for it to say) that failure to follow the CMA’s position on those issues (if it takes one) would of itself be irrational or an error of law. 

The technical route for the CMA to take a prescriptive line would be to read the principles as having a hard-edged legal meaning, despite their open texture.  However, such an outcome would create a regime that – in determining the key question of what subsidies are justified and which are not – was more prescriptive and court-oriented than the EU system (which leaves the Commission with a huge margin of discretion).  That would seem a somewhat paradoxical consequence of Brexit.

On the other hand, for the CAT to take relatively hands-off approach would allow territorial authorities to interpret and apply the principles in a way that permits regional development subsidies even where there is a strong case that those subsidies are (from a UK perspective) not directed at areas of most need and create more harm than good in terms of levelling-up.

Policy consequences

What does all that mean from a policy perspective?

One possible result is that the uncertainties, need to analyse measures within a particular framework, and risk of challenge will deter authorities from granting regional development subsidies in cases where they are clearly the right policy response.  The obvious route to avoid that result will be for the government to created streamlined subsidy schemes under clause 10 that provide a safe harbour for large categories of regional development subsidies: and such schemes could sensibly define areas where less strict conditions applied for a subsidy to fall under the scheme, recreating some of the advantages of the State aid system: moreover, the risk of distorting the terms of subsidies so as to fit under the scheme (a real problem in the EU system) is less pronounced because it would always be open to a granting authority to take the, fairly secure, view that a subsidy that fell just outside the terms of a scheme would nonetheless be safe given that it was only just outside the safe harbour.

The other possible result of the problem that the boundaries between acceptable and unacceptable regional development subsidies are neither clear or firmly policed – particularly when combined with the absence of any provisions in the Bill to police cases where a granting authority wrongly decides that what it is doing is not a subsidy at all (for example by taking an implausible view of what a private investor would do and relying on clause 3(2)) – is a real danger that regional development subsidies that are likely to harm the UK economy as a whole and which have a weak distributional justification will be let through.  That risk is partly addressed by the role of the CMA – but it remains to be seen how willing the CMA is to put down boundaries in this area or to what extent its boundaries are respected by authorities or enforced by the CAT. 

Either way, the overall effect of the Bill on “levelling up” subsidies is both complex and murky. 

GEORGE PERETZ QC

(With thanks to Alex Rose for comments on an earlier draft of this post: any errors are, of course, mine.)

Posted in Legislation, New UK subsidy control regime | 1 Comment

UK State Aid Law Association – Seminars on the Subsidy Control Bill

The UK State Aid Law Association invites you to attend two seminars on the Subsidy Control Bill currently before Parliament.

The first seminar will be hosted at Shearman & Sterling offices in London on Wednesday, 24 November between 6:30–7:30 pm and will cover definition/scope, the principles, public services, and schemes/streamlined schemes.

The second seminar will be hosted at Pinsent Masons offices in London on Wednesday, 1 December 2021 between 6:30–7:30 pm and will consider transparency obligations, the CMA role/ministerial referrals, CAT enforcement/remedies and issues relating to devolution.

Each of the seminars will be limited to a maximum of 40 in-person attendees and will also be streamed online. More details to follow.

Seminar 1 | Panelists

Chair: James Webber – Partner, Shearman & Sterling, London

Alexander Rose – Director, DWF, Newcastle

Isabel Taylor – Partner, Slaughter and May, London

Mohammed Khalil – Principal, Oxera, London

Date

Wednesday, 24 November

6:30–7:30 pm GMT

RSVP FOR SEMINAR 1

Seminar 2 | Panelists

Chair: Christopher Vajda QC, UK judge at the CJEU (2012-2020), Monckton Chambers

Aidan Robertson QC, Brick Court Chambers

George Peretz QC, Monckton Chambers

Kelly Stricklin-Coutinho, 39 Essex Chambers

Dr. Totis Kotsonis, Partner, Pinsent Masons

Date

Wednesday, 1 December

6:30–7:30 pm GMT

RSVP FOR SEMINAR 2

We hope that you will be able to join us, either virtually or in person.

For more information, please contact Sophie Lovegrove for Seminar 1 (24 Nov) and Rohan Wilde for Seminar 2 (1 Dec).

Posted in Legislation, New UK subsidy control regime, UKSALA news | Comments Off on UK State Aid Law Association – Seminars on the Subsidy Control Bill

Resources on the Subsidy Control Bill

As the Subsidy Control Bill is now before Parliament, I thought it would be useful to collect together resources on the Bill, debates on it, and articles being written about it. I will also try to summarise key issues that are debated and pick up any statements likely to be useful in interpretation of the legislation under Pepper v Hart principles.

Please let me know (gperetz@monckton.com) if there is anything that I have missed – in particular any further articles and comment that I could usefully link to. I will try to keep this post updated.

Bill texts

Text of Bill as introduced to the House of Commons

Explanatory Notes to Bill as introduced

Text of Bill as introduced to the House of Lords

Other material published by the Government in relation to the Bill

On the definition of “Subsidies/Schemes of Interest/Particular Interest

These definitions will control what subsidies/schemes must be, or may be, considered by the CMA

Statement of Policy Intent

Draft regulations

Draft Guidance

Clause 79 of the Bill permits the Secretary of State to issue guidance to which granting authorities must have regard. Illustrative guidance has been published

Streamlined routes

Clause 10 of the Bill provides for “streamlined subsidy schemes” made by the Secretary of State and laid before Parliament. The CMA does not consider those schemes (clause 64(1)(a)). The government has published a statement of policy intent, and two examples (clean heat and R&D).

Debates and evidence

Commons

Second Reading debate (Commons)

Evidence given to, and debates of, the Public Bill Committee (Commons)

Witnesses were: Professor Fothergill of the Industrial Communities Allieance and Dr Pazos-Vidal of the Convention of Scottish Local Authorites; Thomas Pope of the Institute for Government and Dr Stephanie Rickard of the LSE; Dr Roger Barker of the Institute of Directors; George Peretz QC of Monckton Chambers; Alex Rose and Jonathan Branton of DWF, and Richard Warren of UK Steel; Daniel Greenberg, Counsel for Domestic Legislation at the House of Commons; Rachel Merelie, senior director for the Office for the Internal Market at the Competition and Markets Authority; Ivan McKee, Scottish Government Minister for Business, Trade, Tourism and Enterprise.

Various points on interpretation of the legislation arising from the debates so far (rewferring to pages of the consolidated evidence and debates above):

On the subsidy principles, the Committee rejected an amendment to principle G that that would have required all granters of subsidies to consider as negative effects any adverse effects on the UK meeting its net zero climate commitments. The Minister stated that “it is unnecessary explicitly to require public authorities on the face of the Bill to consider the negative effects of subsidies on the UK’s net zero commitment as part of their compliance with principle G. Public authorities will clearly need to consider the effects of subsidies in the round before awarding them, but the amendment would give undue prominence to net zero considerations with respect to subsidies that may have entirely unrelated objectives, such as high street regeneration or providing training opportunities for young people.” [97]

The Committee rejected an amendment that would have enabled devolved administrations to make streamlined subsidy schemes (subsidy schemes that are not liable to be referred to the CMA). The Minister stated that “The Government intend that streamlined subsidy schemes
will be a pragmatic means of establishing schemes for commonly awarded subsidies, including in areas of UK strategic priority, that all public authorities in the UK would able to use if they wish. They will therefore function best when they apply across the entire UK.” [108] It also rejected an amendment that would have required the Secretary of State to consult with the devolved governments before making regulatations that define the categories of subsidy “of particular interest” that must be referred to the CMA: the Minister stated that the UK government was committed to engagement with the devolved administrations but that the amendment would lead to delay

The Minister confirmed that clause 18 applies only to “subsidies that explicitly require enterprises to relocate economic activities from one area of the UK to another, where this relocation would not have occurred without the subsidy” [128]. Since subsidies that explicitly require relocation are going to be rare (at least when legal advice is taken) clause 18 is unlikely to have much application.

The Committee rejected amendments that would have required granting authorities to furnish compete and accurate information to the database and for there to be an audit of the database. The Minister stated that as a matter of general public law, the obligation to put information on the database included an obligation for that information to be complete and accurate, and that if the public authority did not properly fulfil its obligation to upload the required information, the clock for the end of the limitation period would not start, so the subsidy or scheme could be challenged indefinitely [151].

There was a discussion of the reason for the 6 month/1 year (tax) time limit for plaing subsidies on the database. The Minister argued that those periods were necessqary to ensure accurate information. He also stated that guidance would be given on the meaning of “tax declaration” [168].

On standing to challenge a subsidy control decision in the CAT, the Minister said, on the key concept of “interested party” that “an interested party is any person whose interests may be affected by the decision in question. We are setting out a new UK-specific subsidy regime with unique rules. In that context, we have set out an intentionally broad definition of whatc onstitutes an interested party. That said, the Competition Appeal Tribunal can exercise its discretion. We want to ensure that in each case the right people are determined to be interested parties. By exercising that discretion, the Competition Appeal Tribunal
can build up a jurisprudence that is specific to and optimally used for the subsidy control context. The Competition Appeal Tribunal is an expert body in competition matters and has the right knowledge to make appropriate decisions on these questions of standing.” He went on to suggest that the clause 70 test was not necessarily narrower than the general test of standing in judicial review in England and Wales. [300] He also stated that a devolved administration or local authority could be an interested party if it was concerned about negative effects of the subsidy on businesses in its area [308-309]

The Minister also confirmed that where tranparency obligations have not been complied with, a subsidy could be challenged at any time [311]: this will be important in cases where granting authorities incorrectly take the view that a measure is not a subsidy and so do not place it on the transparency register.

Written evidence to the Bill Committee by Alex Rose and Jonathan Branton, by Rolls Royce plc, by Antony Collins Solicitors, by the Centre for Public Data, by Ardtornish Hydro, and by the Minister for Business, Trade, Tourism and Enterprise, Scottish Government.

The Rose/Branton paper discusses the absence of any express preference for aid to disadvantaged areas, and argues for a streamlined subsidy scheme to facilitate subsidies in disadvantaged areas vis-a-vis richer ones; for improvements to the transparnecy database; and for it to be possible to challenge subsidy schemes at the point when a subsidy under them is granted (NB as explained here I think the better view is that the CAT would, by analogy with cases such as Boddington, allow challenges to the lawfulness of a scheme at the point of challenge to a subsidy under it, but agree that it would be better to be clear about that).

The Rolls Royce paper seeks clarity about the definition of “ailing and insolvent enterprise”, urges caution about defining subidies of interest and particular interest solely by reference to amounts granted and sector, and welcomes the fact that “national security” is (as is standard) left undefined.

The Antony Collins paper opposes the extension of the definition of “subsidy” to include measures with an impact on competition in the UK but no sufficient effect on international trade or investment.

The Centre for Public Data propose removing the exemptions from the requirement to register for subsidies that fall within the definition of minimal financial assistance and for subsidies that fall under schemes and are for less than £500,000.

Ardtornish Hydro seeks to exclude relief from non-domestic rates for hydroelectric power from the scope of the Bill.

The Scottish Minister sets out in detail the Scottish Government’s concerns on the impact of the Bill on the devolution settlement and the role of the devolved governments under the Bill, and also on the includion of agricultural subsidies.

Report stage and Third reading in the Commons

Will write” letters

These are letters that set out answers to questions that arose in debate and where the Minister promised to write with an answer to the concerns raised. The foillowing issues are covered

Clause 8: “common control” for the purposes of defining an enterprise

Clause 16 (mechanics for directions on marketable risk countries for the purposes of export credit insurance)

Clause 37: procedural requirements for minimal financial assistance

Clause 60(2): test applied by the Secretary of State in making post-award referrals to the CMA

Clause 68 (subsidy advice unit)

Clauses 70 and 76(2) (appeals to the CAT against subsidies made under a scheme; disputes about whether sufficient pre-action information has been provided) [NB that though the analysis of appeals against subsidies granted under schemes correctly points out that the CAT can review whether the subsidy does actually fit under the scheme, it does not grapple with the question of whether a challenger to a subsidy granted under a scheme can challenge the scheme itself (even where the time for challenge to the scheme itself has passed)]

Lords

Second reading debate on 19 January 2022

Devolution texts

Statement by the Welsh Government on the Bill, and draft Senedd Legislative Consent Memorandum (recommending refusal of consent)

Scottish Government Legislative Consent Memorandum (recommending refusal of legislative consent)

Trade and Cooperation Agreement Subsidy Control Provisions

See Part One, Heading One, Title XI, Chapter 3, Articles 363-375.

Articles and comment

See the list of blog posts on this site.

In addition, see my summary of the Bill, and my articles on the tax implications, devolution implications, and on the public law and constitutional implications of the Bill.

Gordon Downie has written a summary of the Bill’s provisions.

The Institute for Government has commented on the Bill.

Alex Rose’s Twitter thread sums up his concerns about the Bill as it passed the Commons.

Seminars on the Bill

Institute for Government, 21 January 2022

Pinsent Mason/UKSALA 1 December 2021 (dealing with enforcement, CMA, appeals and devolution)

Shearman & Sterling/UKSALA 24 November 2021 (dealing with subsidy definition and scope, schemes, the subsidy control principles)

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The Subsidy Control Bill 2021: key questions for Parliament to consider (by Jonathan Branton and Alexander Rose, DWF)

Note: this article by Jonathan and Alex is particularly timely as the Subsidy Control Bill is getting its Second Reading in the House of Commons today (22 September).

  The Subsidy Control Bill will have its second reading in Parliament on Wednesday and is set to establish a UK wide statutory framework for awarding grants and other forms of subsidy that over 500 public bodies across the UK will need to follow in future. The main objective of the Subsidy Control Bill is to create a regime that ensures the UK meets its international commitments in respect of subsidies, whilst avoiding the rigidity and unnecessary bureaucracy of the EU State aid rules.  The Bill is likely to be controversial because it will raise issues as to when public funding should be used and what safeguards ought to be in place to avoid taxpayer money being wasted, but also it has wider implications for devolution and the ‘levelling up’ agenda.  
     Ultimately the prize for legislators is the creation of a new national regime that enables public bodies to be able to make awards of public funding that create new jobs and nurture the business sectors of tomorrow, whilst avoiding wasting public funds, stifling the free market or breaching the UK’s international trade agreements.  As the Subsidy Control Bill begins its passage through Parliament we have set out some key questions legislators will need to consider.  In doing so, we note that Parliament does not have an entirely free hand in deciding the shape of the new regime, its fundamental boundaries are already set by the Subsidies Chapter of the EU/UK Trade & Cooperation Agreement of 24 December 2020 (“TCA”).  This established high-level obligations between the UK and EU and formed the basis for an interim regime that the UK currently has in place.  That said, legislators still have significant discretion to create a system which meets the needs of the UK.  

Is the strategy of having looser rules for the award of subsidies in the UK’s interests?

At a time when taxes are rising and the country is emerging from the worst economic slump in over 300 years, legislators need to decide whether they want a lighter set of controls to apply to the award of subsidies.  Whilst greater discretion is naturally attractive to Ministers, it is important to appreciate that these rules will also apply to hundreds of public bodies and most likely to future administrations too.    Our view is that the UK was right to choose not to ‘copy and paste’ EU State aid rules, which were of course written to regulate the entirety of the EU, thus embracing many different governments, traditions and different styles of economy, rather than for just the UK.  The UK now only needs to develop a regime to suit the UK, albeit in saying that of course it does need to cover the whole of the UK and all its constituent parts. However, we were surprised that the UK Government did not include within its core objectives of the new regime an express commitment to avoid wasteful and unnecessary subsidies.  Very few types of subsidy are ruled out under the new regime.  Most subsidies can proceed provided they fall within six broad principles (the Bill also proposes to add a seventh).  Legislators will need to decide whether they are satisfied with such a system.  

How can the Subsidy Control Principles be improved?

The Subsidy Control Bill envisages that many awards of subsidy will be made on the basis that they satisfy the broad Subsidy Control principles set out at Schedule 1.  These general principles are (with the exception of Subsidy Principle F) based on the text agreed with the EU in the TCA. We agree with the objective of the principles, which aim to ensure that subsidies show certain characteristics, including that they are directed towards common interest activities, limited to what is necessary and represent the least distortive means to achieve the identified policy objective.    The problem is that these principles are very broadly drafted.  As a result there is a lack of clarity as to what they mean and how they may be deemed satisfied, which in turn leads to inconsistent application.  We believe that legislators should scrutinise the wording to ensure that funding may only be awarded where there is a strong case for intervention.  In particular, awards should only be considered to be consistent with the Subsidy Control Principles where there is tangible and measurable evidence in place.  This will improve the Subsidy Control regime by providing greater certainty and helping awarding authorities and businesses alike know where they stand. The new Subsidy Control Principle proposed is that ‘subsidies should be designed to achieve their specific policy objective whilst minimising any negative effects on competition or investment within the United Kingdom”.  This is designed to clarify that the regime is as concerned with domestic competition as with trade with the EU, but also to avoid different parts of the country competing against each other to secure investment.  However this suffers from the same problems as the other Subsidy Control Principles in that it is currently a vague and uncertain statement. We would recommend that the wording is removed and subsidies which are classed as being part of a “Subsidy Race” should be referred to the Competition and Markets Authority (“CMA”) before being awarded (see Question 4).   

What rights should businesses have to challenge unlawful subsidies?

The main form of remedy or challenge under the new regime is Judicial Review in the national courts.  The Subsidy Control Bill proposes that the Competition Appeal Tribunal will hear such Judicial Review cases, determining whether the Subsidy Control Act has been followed and therefore the subsidy is lawful.  The period in which a competitor may bring a case under the Subsidy Control Bill is capable of being as little as one month provided a correct transparency notice has been posted online.  Legislators need to consider whether there are sound reasons why the Judicial Review period for subsidies is potentially shorter than for any other decision that is subject to public law.  It may be that legislators decide to make the challenge period consistent with the wider Judicial Review process.    Legislators should also be mindful that in most cases the Competition Appeal Tribunal will be assessing whether the public sector body has followed the correct process under the Subsidy Control Bill and thereafter whether it has made a sound decision or not.  Where an adverse finding is made, this may indicate that the process has been incorrectly applied in other instances.  

What kind of subsidies will be subject to the referral process?

Section 52 of the Subsidy Control Bill envisages that subsidies of “particular interest” must be directed to the CMA for review prior to award, the outcome of which will be a formal report including a recommendation as to whether the award should proceed.  However what types of subsidy will be of “particular interest” is not yet known at this time.  We believe that it would be helpful for the secondary legislation setting out these categories to be published at the earliest opportunity given the potential impact on the functioning of the new Subsidy Control regime.  It is self-evident that if almost all subsidies must go through the referral process, then the funding landscape will be radically different.    The Bill also envisages creating a system whereby it will be possible to seek the CMA’s view prior to award of a subsidy.  While it can of course be helpful to discuss a matter with a competent authority there needs to be very clear parameters and boundaries to a procedure like this, and clarity as to the value of the procedure, and any inferences to be drawn from seeking such views or failing to seek such views.  If this is not done then seeking a CMA view may become almost standard which will not only tie up significant resources and be costly (and therefore may become more a luxury for wealthier authorities as against others) but it will also be time consuming and run counter to any desire to keep the overall process nimble and effective.  

How will the Streamlined Subsidies be drafted?

The mechanism for Streamlined Subsidies is an ability for the UK Government in future to declare categories of subsidy which may proceed quickly without complicated individual assessments against the Common Principles.  This is to be welcomed as a pragmatic step to facilitate the easy delivery (with maximum legal certainty) of low level subsidies in supposedly uncontroversial situations.    According to the European Commission statistics over 95% of EU State aid is awarded on the basis of block exemptions, which achieve this same effect.  This means that funding can be lawfully awarded without further checks provided it meets certain conditions. The Government is right to include a mechanism under which it can set up Streamlined Subsidy Schemes in order to create simple exemptions where merited, but at the moment it has not published what these might look like.  Given how fundamental the Streamlined Subsidy Schemes are likely to be for the majority of awards, we recommend that this process is accelerated and the headings of the categories of scheme are published for legislators to consider. It should be noted that in drafting its block exemptions, the European Commission ran a consultation and sought the views of practitioners from both the public and private sector, and the existing suite of block exemptions in the EU now has evolved over nearly 20 years. We recommend that alongside the legislation some sort of similar process takes place.  

How can the Subsidy Control Bill better support Levelling Up?

However imperfect the EU systems may have been, one principle the State aid regime has at its core has been preferential treatment for disadvantaged regions, recognising that they need assistance to deliver new investments and thereby progressively even up disparities between regions.  This seems to be a very similar rationale as for the Levelling Up agenda.  Under these circumstances it seems strange that the UK Subsidy Control regime does not place levelling up somewhere at its heart.  Can it be right that the rules do nothing to facilitate a subsidy in Grimsby over one in Guildford?  Even though the Subsidy Control Principles consider such notions as proportionality and minimum necessary, this relates to issues such as investment costs and if these would be higher in wealthier areas then a subsidy could be based on that.  There is nothing built into the assessment system necessarily to compare investment in one area with another. One might say that levelling up has more to do with the allocation of funds (eg. future UK Shared Prosperity Fund and/or the Levelling Up Fund) rather than the legitimacy of spending those funds on subsidies in particular areas, but it still seems a possible missed opportunity that the Subsidy Control rules do not factor this in somehow.   

Hampering R&D start-ups by over-regulating the prohibition on subsidy to ailing or insolvent enterprises?

One of the consistent complaints against the EU’s block exemptions was its rigid prohibition of aid to so-called “undertakings in difficulty“.  This was an overly prescriptive test which meant many early stage companies were prohibited from accessing support. The interim regime based upon the TCA provided a welcome release on this point.  It contained a comparable provision only prohibiting subsidy to “ailing or insolvent enterprises”.  This term was not defined and was understood as those likely to go out of business in the short to medium term absent the subsidy under consideration.  Therefore, provided some sort of basic “going concern” demonstration could be provided, then a subsidy was able to proceed. In practical terms, this removed an obstacle that had affected public funding to help early start-ups in the tech and R&D sectors for whom there can be years of trading prior to income being generated.  Such companies arguably need subsidy the most.    The Subsidy Control Bill at Section 24 contains a prescriptive test for “ailing and insolvent” which threatens to dilute the benefits realised.  It is not clear to us that this extra rule is required on the basis that in any event the relevant funders are already considering the long term viability prospects of the applicants concerned.  

Conclusion  

The ability to mastermind its own State aid regime was put forward as one of the best opportunities for the UK post-Brexit, and with good reason.  Cleverly targeted State subsidies can dramatically improve economies and provided due care is taken this should not fracture a strikingly pro-competitive free market.  At the same time wasteful subsidies make poor use of scarce public resource, can undermine the functioning of markets and breach the UK’s international agreements.  With a Parliamentary majority of 80, the Subsidy Control Bill is almost certain to pass quickly through Parliament, but it is sufficiently important to the prospects of the UK to merit careful scrutiny.   Ultimately the new Subsidy Control regime must strike a difficult balance: it needs to take full advantage of new opportunities, whilst not opening the floodgates to wasteful and damaging subsidies.  For many decades, the UK has prided itself on being fiercely pro-competition and non-interventionist.  Although public spending has increased, the high standards that the UK has developed around managing public money should not be diluted. Ultimately the new regime must only allow subsidy to be awarded where there is a clear and demonstrable rationale for intervention, but should also contain sufficient checks and balances to ensure public funding is always applied proportionately.    

Jonathan Branton and Alexander Rose, DWF  
Posted in EU/UK Trade and Cooperation Agreement, Legislation, New UK subsidy control regime | Comments Off on The Subsidy Control Bill 2021: key questions for Parliament to consider (by Jonathan Branton and Alexander Rose, DWF)

The UK’s Proposed Revisions to Article 10 of the Northern Ireland Protocol: a Sensible Basis for Negotiation

This post, written by George Peretz Q.C. of Monckton Chambers and James Webber of Shearman & Sterling, assesses the UK’s proposed revisions to Article 10 of the NI Protocol.

Introduction

Subject to the qualification that it applies only to “measures which affect that trade between Northern Ireland and the Union which is subject to this Protocol“, Article 10 of the Protocol on Ireland/Northern Ireland (“the Protocol“) applies EU State aid law in its entirety to UK subsidy measures. Measures caught by Article 10 are subject to the suspension obligation, prior approval by the European Commission and supervision by the Court of Justice of the European Union (“CJEU“) – as if the United Kingdom had remained a Member State.

The meaning of the “affect that trade” qualification is obviously critical.  However, its meaning is wholly unclear. Since services are not “subject to the Protocol“, subsidies affecting only services are unlikely to be caught (unless they have an indirect effect of helping goods suppliers): but the concept nonetheless creates the potential for aid to beneficiaries elsewhere in the UK to be caught by the requirements of the Protocol, given the low threshold the equivalent “effect on trade” concept is usually regarded as imposing in EU law (and the low standard of evidence traditionally accepted as sufficient to overcome that threshold). The significant legal uncertainty this “reach back” creates has been extensively commented on by State aid experts and has now reached the High Court in the British Sugar case (See R v Secretary of State for International Trade ex p British Sugar, not yet reported filed under Claim No: CO/1034/2021, which alleges that aid supposedly paid to Tate & Lyle Sugars Ltd (who only refine sugar in in London) engages the Protocol). That uncertainty has been made worse by substantial disagreements as to the extent of “reach back” as between guidance issued by the UK government and by the Commission (discussed here).

While one can see, given that the Protocol for many purposes has the effect of placing Northern Ireland within the customs union and the single market for goods, that the EU would be concerned to ensure that there was no possibility of subsidised Northern Ireland goods flooding into the EU, it is nonetheless unprecedented, and raises significant democratic issues, for decisions in areas as politically important and sensitive as tax and spending to be subject to prior supervision by a foreign power and oversight by a foreign court. Those problems are aggravated by the fact that the “affect that trade” concept is likely to extend that authority to at least some fiscal decisions that principally concern Great Britain – notwithstanding that GB is on the other side of a customs border and has agreed with the EU, in the Trade and Cooperation Agreement (“TCA“), the most extensive (albeit reciprocal) subsidy control measures ever contained in a free trade agreement. This aspect of Article 10 is often referred to as “reach back”.

The UK Government published a command paper, entitled “Northern Ireland Protocol: the way forward” on 21 July 2021 (“the Command Paper“).  The Command Paper contained brief suggestions for replacing Article 10.

The suggestions are brief and still need to be worked up.  However, as explained below, in our view they are capable of providing a fairer, more reasonable and sustainable basis for dealing with subsidy competition between Northern Ireland and the EU than Article 10.  In particular, it is important to recall that Article 10 was negotiated in October 2019, at a time when it was entirely unclear what, if anything, would be agreed between the EU and the UK in relation to subsidies in their future relationship agreement and what subsidy control policy (if any) the UK would be likely to adopt after Brexit.  As the UK government points out, that uncertainty has now been replaced by extensive UK commitments on subsidy control in the TCA and by detailed legislative proposals by the UK government in the Subsidy Control Bill, likely to be enacted later this year.

Command Paper

The suggestions for replacing Article 10 are contained in three paragraphs, short enough to be fully quoted here:

“63. The Protocol at present means that Northern Ireland remains part of the EU’s subsidy control framework in certain areas. This is in part a result of the fact that the Protocol was negotiated in 2019 when neither the UK nor the EU knew the nature of commitments to be made on subsidy control in the future Trade and Cooperation Agreement or indeed whether it would be agreed at all.

64. We now know that there are comprehensive and robust commitments in place on subsidy control, based around shared principles underpinning both the UK and EU regimes agreed in the Trade and Cooperation Agreement. These are being further strengthened through the UK’s Subsidy Control Bill which is currently before Parliament. These arrangements provide a more than sufficient basis to guarantee that there will be no significant distortion to goods trade between the UK and EU, whether from Great Britain or Northern Ireland, thus making the existing provisions in Article 10 redundant in their current form.

65. Nevertheless, given that Northern Ireland producers would continue to have some privileged access to the Single Market in this model, we would be prepared to establish enhanced processes for any subsidies on a significant scale relating directly to Northern Ireland – for example enhanced referral powers or consultation procedures for subsidies within scope, to enable EU concerns to be properly and swiftly addressed.”

The proposal has two basic parts:

1.To replace Article 10 with the subsidy control provisions in the TCA

Title XI, Chapter 3, TCA contains the subsidy control provisions.  These have been analysed in detail elsewhere (see here and here). However, the key points are:

  • The TCA has a common definition of subsidy.  This is essentially the same as the definition of State aid in EU law, except with respect to effects on competition and trade.
  • Subsidies must be assessed using a common framework of principles, encompassing concepts of good subsidy policy.  Subsidies must be proportionate, must pursue a defined public policy objective, must balance that objective against adverse effects on competition etc.
  • Each of the UK and EU must offer remedies in their domestic courts to affected third parties, including aid recovery when subsidies have been granted in breach of the requirements of the TCA.
  • Each of the UK and EU commit to transparency of subsidies paid, to permit scrutiny and allow private parties to seek judicial protection. 
  • At a state to state level, there are novel and extensive “rebalancing” measures, including rapid tariff retaliation if either party considers that subsidisation will cause a significant negative effect on trade.

Each side has procedural autonomy.  The EU retains its State aid system of block exemptions and prior notification, the UK is free to design a new system, as recently set out in the Subsidy Control Bill.   That system anticipates that the Competition and Markets Authority (“CMA“) will play a significant role offering advice on compatibility with the subsidy control principles, with subsidy decisions of public bodies overseen by the Competition Appeal Tribunal (“CAT“).  Both are highly respected institutions that no neutral observer could plausibly argue lack capacity or independence for their anticipated roles.

The subsidy control provisions of the TCA, as implemented by the Subsidy Control Bill, are sufficient to provide each party with comfort that the other will not use subsidies to compete unfairly. That fact makes it much harder to justify the need for EU law and EU institutions to retain State aid jurisdiction over Northern Ireland in order to achieve that objective. 

Removing Article 10 would also resolve the “reach back” issue, whereby EU law and jurisdiction could apply to subsidy measures in GB, overlapping with the provisions of the TCA.  The interaction between the two schemes is not discussed at all in the TCA and is creating damaging uncertainty that needs to be urgently removed.  Clause 48(2)(a) of the Bill effectively disapplies UK subsidy control rules to any measure that has been given “in accordance with” Art.10, but, given the imprecision of the “affect that trade” concept, the dividing line remains highly uncertain in many cases. 

2.In respect of aid of “significant scale” to Northern Ireland producers, a new procedure that appears to be aimed at allowing the EU greater involvement in the UK subsidy control decision making process.

While the logic of replacing Article 10 with the subsidy control provisions in the TCA is compelling, the Command Paper implicitly anticipates the principal difficulty – convincing the EU that its interests are sufficiently protected – particularly in relation to subsidies that could significantly benefit goods suppliers in Northern Ireland, who are free to export to the EU without any possibility of tariffs.  Article 10 provides the EU with full control by imposing EU law, procedure and courts on the UK. As such, any revision will involve the EU relinquishing some of that control and a strong case will have to be made that the replacement is an acceptable alternative. That case needs to have two elements. First reassuring the EU that its concerns can be met in a different way; second convincing the EU that the problems thrown up already (and likely to be thrown up in future) by Article 10 make an alternative desirable.

The Command Paper’s strategy for this is to offer the EU “enhanced referral powers or consultation procedures for subsidies within scope, to enable EU concerns to be properly and swiftly addressed.

Consultation could mean that the Commission has a formal consultation or advisory role for aid with a genuinely significant effect in Northern Ireland – similar to the CMA under the Subsidy Control Bill.  This would be very helpful in building trust and allowing the Commission to input on subsidy decisions before they become disputes under the TCA. It would also respect UK independence as the final subsidy decision would not be subject to prior notification and approval but would be for the UK authorities (albeit, in cases where the Commission raised serious objections, in the knowledge that action could well be taken under the TCA).  We also see no reason why the Commission could not be given standing to challenge such decisions before the CAT, if it so wished: that would give the Commission a way of bringing a subsidy that it felt was prohibited or failed to take proper account of the agreed subsidy principles before an independent court.

It is less clear what the Command Paper means by “referral powers”.  It is very unlikely that the Paper is envisaging that approval of certain subsidy/aid decisions could be referred to the Commission. Another possibility, more likely to be acceptable on the UK side, is that EU State aid law could be retained in Northern Ireland but applied by UK authorities and courts (something like the model in the EU/Ukraine Association Agreement), possibly with referral mechanisms to the CJEU in the event that questions of law arise –  though much would turn on governance arrangements.  Further possibilities, within the proposed UK subsidy control regime, might be to provide for wider mandatory referral to the CMA of subsidy measures in Northern Ireland than is generally contemplated under the Subsidy Control Bill, or to even provide for referrals to the CMA at the request of the Commission. 

In any case, the Command Paper suggests that these enhanced procedures should apply to aid granted to “Northern Ireland producers.  This is narrower than in Article 10, since it removes the effect on trade concept and focuses on undertakings in Northern Ireland. The EU may also wish to extend this to deal with GB producers who make substantial supplies in Northern Ireland of goods that are likely to flow into the EU. However, one obvious difficulty here is that the UK would presumably need reciprocity – i.e. similar protection in respect of EU producers making substantial supplies in Northern Ireland at risk of flowing into GB.  This would be difficult to dovetail with existing EU State aid law and procedure. It is also notable that it refers to “producers” – presumably of goods rather than applying more widely as Article 10 does to banks or other service providers that may impact goods markets. 

Both limitations make sense in the context of the TCA and the Northern Ireland Protocol together.  The Protocol only applies to goods trade (and electricity) and the TCA covers subsidies in the economy as a whole.  Put together, that suggests that it would be possible to develop balanced proposals along the lines set out in the Command Paper, with an enhanced role for the EU in respect of goods producers genuinely active on the market in Northern Ireland, but otherwise relying on the level playing field provisions of the TCA.

Conclusion

It is fair to say that the Command Paper was, as a whole, not greeted with any great enthusiasm by the EU, though notably it was not rejected out of hand either. It is also well-known that there are considerable disagreements between the UK and the EU as to the future operation of the Protocol.  However, whatever view may be taken by the EU of the UK government’s general stance towards the Protocol either in the Command Paper or more widely, its specific proposals on Article 10 should, in our view, be considered seriously.

The sequencing of the negotiations between the UK and EU meant that Article 10 was agreed before the subsidy control provisions of the TCA (just as the trade and customs provisions were agreed before the zero-tariff provisions of the TCA). The EU considered that it needed to insist on the application of EU State aid law in Northern Ireland as a necessary protection for its internal market given the open north/south border: there was no alternative way at that time for the EU to ensure that it was protected from distortion to competition and trade via subsidisation of goods flowing south over that border. 

Now that the TCA is in place and the Subsidy Control Bill before Parliament, there clearly is an alternative way to regulate such subsidies. Moreover, this has been accepted as sufficient for the EU to agree a free trade agreement with the UK.

It is therefore quite reasonable for the UK to seek to replace Article 10 with something more proportionate based on the provisions of the TCA – indeed it is a shame that this was not done as part of the TCA negotiations, as the present authors both suggested at the time.  This would have been a more natural point for these revisions to occur. 

Since Article 10 is favourable to the EU, it is also realistic that the Command Paper anticipates replacing it with more than just the TCA provisions.  Although the precise proposals need to be worked up, enhanced consultation for the Commission – especially if prior to aid granted in Northern Ireland – would provide the EU with significant additional comfort that aid decisions were consistent with the TCA and therefore not distortive of competition and trade between the EU and UK.

In respect of State aid / subsidy control at least, the Command Paper is a helpful contribution and, we would argue, should be taken seriously by the EU, whatever its views of the Command Paper as a whole.

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THE SUBSIDY CONTROL BILL AND DEVOLUTION: A BALANCED REGIME?

The Subsidy Control Bill introduced to Parliament at the end of June applies across the United Kingdom.  It has significant implications for the devolved administrations.

The provisions of the Bill are summarised here.  But, in essence, the scheme of the Bill is to require all public authorities (including the devolved governments and public bodies in Scotland, Wales, and Northern Ireland) to satisfy themselves that any subsidy is compatible with a set of “subsidy control principles” (to be found in Schedule 1 to the Bill).  Public authorities are also prohibited from granting certain kinds of subsidy that fall within classes set out in Chapter 2 of Part 2 of the Bill.  Those duties are enforceable by way of judicial review before the Competition Appeal Tribunal (“CAT”), though the CAT will consider such challenges only on a judicial review, and not a merits, basis.  Certain kinds of subsidy (to be defined in secondary legislation) will have to be referred to the Competition and Markets Authority (“CMA”) for a report on their compatibility with the principles and prohibitions in the Bill before they are implemented – although the granting authority is not bound by the CMA’s conclusions.  Other kinds of subsidy (again to be defined) may be referred by the granting authority or called-in by the Secretary of State to the CMA for a report before they are granted, or can be called-in by the Secretary of State for a report after they are granted.

The Bill raises a number of issues for the devolution settlement.  Before turning to those, it should be noted that – because section 52 of the Internal Market Act 2020 (“IMA20”) made the regulation of distortive and harmful subsidies a reserved (or, in Northern Ireland, an excepted) matter – the Sewel Convention does not apply and so legislative consent of the devolved parliaments is not required by that convention.  (IMA20 was enacted despite the refusal of legislative consent by all the devolved parliaments, the Sewel convention being a political convention that is unenforceable before the courts.)

The subsidy control principles and prohibitions

The subsidy control principles largely reflect the principles and prohibitions set out in Chapter 3 of Title XI of the Trade and Cooperation Agreement.  However, there are some additions with implications for the devolved governments.

First, principle F in Schedule 1 will require all granting authorities to ensure that their subsidies are consistent with the principle that “subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom”.  That will require granting authorities in, say, Wales, to consider the effect of the subsidy on competition and investment across the United Kingdom – so that, for example, a grant to a Welsh widget manufacturer would need to consider the impact on competition with English widget manufacturers. 

Second, clause 18 contains a specific prohibition on subsidies that are “given to an enterprise subject to a condition that the enterprise relocates all or part of its existing economic activities” and where “the relocation of those activities would not occur but for the giving of the subsidy”.  That clause would catch a grant of a subsidy by a Scottish authority to a widget-maker with a factory in Newcastle that required it to move its production to Glasgow.  But its practical application, as currently drafted, is likely to be limited, as few subsidies will make relocation an express condition (in my example, the Scottish authority is far more likely simply to insist on production being carried on in Glasgow rather than expressly to require relocation from Newcastle, even though relocation from Newcastle is the inevitable consequence).  That is in contrast to comparable provisions in EU State aid law that refer to the effect of a grant or which withdraw exemption from regional aid measures where relocation has recently taken place or will take place within two years (see Article 14(16) of the General Block Exemption Regulation).

The Bill does not, as such, create a framework for “regional aid” as that terms is understood in EU State aid law.  But principle A refers to the need for a subsidy to meet “a specific policy objective in order to … address an equity rationale (such as social difficulties or distributional concerns” – a phrase which covers subsidies designed to deal with disparities in wealth and opportunity between different regions.  It is also important in that context to note the joint declaration on subsidy control attached to the Trade and Cooperation Agreement, which notes the joint view of the EU and United Kingdom that:

1. Subsidies may be granted for the development of disadvantaged or deprived areas or regions. When determining the amount of subsidy, the following may be taken into account:

● the socio-economic situation of the disadvantaged area concerned;

● the size of the beneficiary; and

● the size of the investment project.

2. The beneficiary should provide its own substantial contribution to the investment costs. The subsidy should not have as its main purpose or effect to incentivise the beneficiary to transfer the same or a similar activity from the territory of one Party to the territory of the other Party.

Though that declaration is non-binding and is not written into the text of the Bill, it is nonetheless likely to be read into the principles, given that a large part of the purpose of the Bill is to implement the subsidy control provisions of the TCA.

However, neither the joint declaration not the Bill provide much guidance as to what is meant by “disadvantaged or deprived” (or by “distributional concerns”): and one question which may well arise is whether the question of whether a particular area is disadvantaged or deprived, or in relation to which there are legitimate distributional concerns, has to be looked at on a UK-wide basis or more narrowly.  For example, a region may be, on various measures, disadvantaged by English standards, but not (on those same measures) by Welsh standards.  It is not at all clear on what basis such questions will be resolved.

The powers of the Secretary of State

The Secretary of State has a number of important powers.  By regulation, he defines the category of “subsidies of particular interest” that must be referred to the CMA.  He may issue guidance on the practical application of the subsidy principles and other matters, to which granting authorities must have regard (clause 79) – guidance to which the CAT is also likely to have regard, though will not be bound by.  And as noted above he can issue call-in directions that require granting authorities to refer subsidies to the CMA.  Finally, under clause 70(7)(b) the Secretary of State has automatic standing to challenge any subsidy decision before the CAT (standing otherwise being reserved to “interested parties”, defined as persons “whose interests may be affected by the giving of the subsidy” – a phrase that does not obviously extend to devolved government concerned about the impact of a proposed subsidy on its own economy).

The devolved governments have no matching powers.  Indeed, there is no requirement in the Bill for the devolved governments to be consulted before the exercise of any of those powers (though the Secretary of State has a general duty to consult all interested parties before issuing guidance). 

The result looks distinctly unbalanced.  For example, if the Welsh Government decides to grant a subsidy to which the Secretary of State objects (perhaps on the basis of its impact on England), the Secretary of State may be able to refer it to the CMA, and will have standing to challenge it before the CAT.  The Secretary of State may also be able to issue guidance that recommends against types of subsidy that the Welsh Government might have in mind – guidance to which the CMA and the Welsh Government have to have regard.  On the other hand, if the Secretary of State grants subsidies to businesses in England – or, using his powers under section 50 of IMA20, to businesses in Wales – to which the Welsh Government has objections, none of those possibilities are open to the Welsh Government.

The CMA

As far as the CMA is concerned, it is worth noting that nothing in the Bill provides for the devolved governments to have any say in the appointment of CMA panel members who will, as part of the Subsidy Advice Unit, exercise the CMA’s powers under the Bill: there is no equivalent to the provisions of Schedule 3 to IMA20 that require the Secretary of State to seek the consent of the devolved governments before making appointments to the Office for the Internal Market (the part of the CMA that deals with IMA20 issues).

The devolved parliaments

The definition of “public authority” excludes the UK and devolved parliaments, with the effect that primary legislation is excluded from the main part of the Bill. 

However, a provision of primary legislation that provides for the grant of money to particular enterprises, or which imposes tax on some enterprises but not others, may well amount to a “subsidy” under the Bill.  That point is dealt with in Schedule 3 to the Bill (“Subsidies provided by primary legislation”), which applies a modified regime to acts of the UK and devolved parliaments. 

In relation to the UK parliament – and unsurprisingly, given the doctrine of Parliamentary supremacy – the Bill makes no provision for Acts of Parliament to be affected in any way by the Bill, save that paragraph 9 (which also applies to the devolved legislatures) allows the promoter of a Bill before the UK Parliament (typically the relevant departmental minister) to refer provisions in it that involve a subsidy to the CMA, the CMA’s report being purely advisory. 

However, paragraphs 6 and 7 of Schedule 3 make it clear that the subsidy control principles and prohibitions apply to devolved primary legislation as they do to any other measures, so that such legislation may be challenged on the basis of inconsistency with the prohibitions or inadequate application of the subsidy control principles.  Perhaps because it was considered unacceptable for such politically charged challenges to be brought before the CAT, in this case the challenge must be brought before the general administrative courts (the High Court in Wales and Northern Ireland, and the Court of Session in Scotland).  The court than has available to it all the usual set of public law remedies, including quashing the legislation: it may also order recovery of any subsidy granted.

Conclusion

The current UK government often makes the point that the removal of EU State aid law lifts what was often a considerable constraint upon the decisions of devolved governments.  That point is undeniable – the new regime under the Bill will be considerably more permissive, as it will have no equivalent to the need to obtain prior approval from the Commission before subsidies are granted, or to adapt proposed subsidies so that they fit into particular rigid categories of exemption.   However, the Bill gives the UK government considerable power to set the subsidy control agenda, and gives it an ability to subject subsidies by devolved governments to scrutiny which is not reciprocal.  The Bill also creates a constraint on the law-making power of the devolved Parliaments that does not apply to the UK Parliament (which is also the Parliament that legislates for England). 

The old EU regime bore down equally severely on both UK and devolved governments, whereas the new regime, though more liberal, is also more unequal.  Time will tell whether that inequality generates more political friction than did the previous severity. 

GEORGE PERETZ QC

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