The Subsidy Control Bill: a short summary

NOTE: the following blog is an adapted version of an earlier post on https://eurelationslaw.com/. Subscribers who have their own comments or thoughts on the Bill are invited either to comment below or to send more detailed thoughts, amounting to a blog post, to gperetz@monckton.com and I will put them up.

The Trade and Cooperation Agreement (“TCA”) left open significant issues in relation to how its subsidy control provisions would be implemented in the UK.  Published on 30 June, the Subsidy Control Bill fills in significant detail that was previously lacking.  We highlight below some of the key provisions proposed in the Bill.

Scope and definition of “subsidy”

Many of the key concepts simply carry over definitions used in the TCA, albeit in some cases with extra detail.  One important point to note is that the definition of subsidy in cl.2 includes subsidies granted by public authorities which have or are capable of having an effect on competition or investment within the UK and not just on trade and investment between the UK and third countries: that is a recognition by the government that the purpose of the new regime is not just to avoid the United Kingdom being in breach of its international treaty obligations, but also to protect domestic competition and investment against the distortive effects of ill-targeted subsidies.  That recognition is confirmed by the list of subsidy control principles in Schedule 1, which includes those listed in the TCA as well as the principle that: “[s]ubsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.”

A further point in relation to intra-UK situations is that a specific prohibition is introduced in cl.18 on subsidies granted on condition that the enterprise in question relocates all or part of its existing economic activities from one area of the UK to another in circumstances in which it would not otherwise have done so.  Subsidy induced relocations are a potentially sensitive issue, but this is a very narrow prohibition applying only where relocation is an express condition of the subsidy – a situation likely to be very rare.  The government may wish to consider whether this clause needs to include the case where relocation is a likely consequence of the subsidy, as well as where it is an express condition.

Cl.4 essentially carries over from the TCA (and ultimately from EU law) the test as to when a tax measure counts as a subsidy. In particular, it appears that – as is now well-established in EU law – over-favourable tax rulings by HMRC, as well as differences of tax treatment, can amount to a subsidy, though enforcement of the subsidy control rules in such cases is likely to be problematic given (a) the absence of a body able to investigate subsidies on its own inititative and (b) (as discussed below) that the subsidy control rules do not affect the valdity of primary UK legislation.

Public authority

Also worth noting is the definition of “public authority” in cl.6.  This includes any person who exercises function of a public nature but excludes both the UK Parliament and the devolved legislatures.  At first sight this suggests assistance by means of a primary legislative act does not fall within the definition of a subsidy.  However, that is only the case in relation to a UK Act of Parliament, because para 6 of Schedule 3 (Subsidies provided by primary legislation) applies the subsidy control principles to subsidies provided by means of devolved primary legislation as it applies to subsidies given by public authorities (although it is notable that, in contrast to subsidies granted by public authorities, the Competition Appeal Tribunal is to play no role in such cases: it was presumably felt that a subsidy control challenge to devolved legislation was too sensitive a matter to be dealt with other than in the High Court or Court of Session).

The obligations on granting authorities

The central obligations on public authorities are in cl.12 and cl.33, namely to apply the Schedule 1 subsidy control principles to all subsidies apart from exempt ones (see below), not to grant a subsidy unless they consider that those principles are complied with, and to notify subsidies to a public subsidy database. 

In cases where a subsidy is “in relation to energy or the environment” the granting authority must, under cl.13, also apply the “energy and environment principles” set out in Schedule 2 – though, interestingly, cl.51 provides that it need not do so in relation to nuclear energy (though the usual Schedule 1 principles would apply).

The role of the CMA

As far as institutions are concerned, the “independent body” required by the TCA is to be a Subsidy Control Unit under the Competition and Markets Authority (“CMA”).  Under the Bill the CMA’s role is to produce reports pursuant to mandatory or voluntary referrals by public authorities before they give a subsidy or make a subsidy scheme as well as in relation to post award referrals.  The CMA does not make the final decision: that is ultimately for the granting authority, even if the CMA produces a negative report.

Mandatory referrals (cl.52) are required where a case qualifies as one of “particular interest” – the criteria for which are to be set out in regulations – or pursuant to a call-in direction by the Secretary of State (cl.55).  Following publication of the CMA’s report the Bill imposes a cooling off period of 5 working days during which the subsidy may not be given or scheme made (cl.54).  However, the public authority can proceed, if it so wishes, against the advice of the CMA: the constraint upon its ability to do so will be whether that exposes it to the risk of judicial review – but there may in principle be cases where a public authority is behaving entirely reasonably in taking a different view to that of the CMA. In practice, though, it is likely in many cases that concerns raised by the CMA as to the terms of any subsidy will result in adjustments being made to the subsidy during the CMA’s investigation rather than in an adverse final report.

Voluntary referrals to the CMA may be made by granting authorities in a case of “interest” (cl.56 – again to be defined by regulations) – though the CMA can refuse such referrals.  It is also possible for the Secretary of State to make a “post-award referral” in cases where it appears that the requirements of the Bill have not been complied with and there is a risk of negative effects on competition or investment within the United Kingdom (cl.60) (oddly, the Secretary of State does not appear to have that power if the possible subsidy only affects foreign countries, though such subsidies could well cause difficulty at international level).

The role 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 (cl.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, and post-award referrals where grants have already been made.

Since those powers apply to authorities outside England, they raise devolution concerns, particularly as the devolved governments have no equivalent power to ask the CMA to look at subsidy decisions by the UK government or by English authorities. However, since subsidy control is, by section 52 of the UK Internal Market Act 2020, a reserved (or, in Northern Ireland, an excepted) matter, the Sewel Convention (see e.g. section 28(8) of the Scotland Act 1998) will not apply to the taking of those powers by the Secretary of State.

Finally, the Secretary of State (though, again, no devolved government) is automatically to be regarded as an “interested party” able to challenge subsidy decisions in the Competition Appeal Tribunal (“CAT”): cl.70(7)(b).

Judicial review

As for courts, as noted above, the CAT is given judicial review jurisdiction in relation to subsidy decisions (apart from decisions contained in primary legislation of the devolved or Westminster Parliaments).  It may be noted that the Tribunal would appear from the general wording in cl.70 to have power to look at all grounds that there may be to challenge such a decision, including challenges on grounds of lack of power to make the grant under the legislation under which the relevant authority is acting, or other common law grounds such as procedural irregularity or apparent bias, as well as irrational or legally erroneous application of the subsidy principles. 

In cases where the granting authority takes the view that the measure is not a subsidy at all, or is exempt, then the CAT’s role is likely to be to determine whether the measure falls within the definition of a subsidy or is exempt: since the public authority will typically not have considered the subsidy principles at all in such a case, the finding that it was mistaken in taking the view that the measure was not a subsidy or was exempt is likely to be determinative. 

In case where the challenge is to the application of the subsidy control principles, interesting questions will include: (a) the extent to which the CAT is generally inclined to scrutinise the granting authority’s reasoning somewhat more closely than it would that of a regulator on the basis that the granting authority is “marking its own homework” and may be influenced in its assessment by extraneous political considerations; and (b) the extent to which the CAT will scrutinise with particular care cases where the granting authority departs from the approach of the CMA.

Further questions will arise in relation to who, apart from the Secretary of State, is to be regarded as an “interested party” able to start proceedings in the CAT: section 70(7)(a) tells us that it is a person whose interests may be affected by the giving of a subsidy, but the CAT will have to decide if that concept is to be defined narrowly as in the General Court (extending to competitors but few others) or whether it will include, for example, trade unions representing employees in affected businesses or even taxpayers of the granting authority. It should also be noted that “public interest” bodies such as the Good Law Project, which would almost certainly not count as “interested parties” and therefore not be entitled to bring proceedings in the CAT, may well be able to seek judicial review of a subsidy decision in the Administrative Court or Court of Session on the basis that there is no alternative remedy open to them.

Rescue and restructuring subsidies, and prohibited subsidies

Subsidies to “ailing or insolvent” enterprises are provided for at clauses 19 to 26.  The definition in cl. 24 of “ailing or insolvent” is more flexible than under EU State Aid law and potentially more demanding requiring an enterprise to be almost certain to go out of business in the short/medium term, unable to pay its debts as they fall due, or the value of its assets is less than the amount of its liabilities.  However, the details of the definition will be set out in secondary legislation.

Exemptions

Cl.36 of the Bill gives effect, in sterling terms, to the general de minimis thresholds under the TCA specified in Special Drawing Rights (£315,000 and in the case of payments for services of public economic interest £725,000). 

There are further exemptions for national security, financial stability (likely to apply in any repetition of the 2007/08 crisis), and subsidies to compensate for the effect of natural disasters and economic emergencies (such as current Covid subsidies).  One interesting and potentially important exemption is for any subsidy “given in accordance with Article 10 of the Northern Ireland Protocol” (cl.48(2)(a)): that would appear to mean that any subsidy that falls under Article 10 and is permitted under that Article (either by block exemption or individual exemption granted by the Commission) is automatically exempt from UK subsidy control  – a position which is somewhat odd given that such a subsidy could have distortive effects on competition within Great Britain, which is a matter that would not be relevant to the Commission’s assessment under Article 10).

Otherwise, the Bill does not create any “safe harbours” where granting authorities can simply award a subsidy that meets certain criteria without any analysis of its effects and without having to register it on the subsidy database.  There was some demand, in responses to the government’s consultation, for there to be such “safe harbours”.  One possibility is that the government uses its power to create “streamlined subsidy schemes” (cl.10) to create what is in effect a safe harbour for subsidies that the government wishes to encourage.  Otherwise, public authorities will have to get used to the fact that grants of subsidy above de minimis level are likely to require some analysis of the subsidy control principles as part of the granting process: in reality, the extent to which that analysis is conducted thoroughly and rigorously is likely to depend on the likelihood of challenge by an interested party or call-in by the Secretary of State.

GEORGE PERETZ QC

BEN RAYMENT

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U.K. Government trails Subsidy Control Bill to be published later today

The Department of Business, Energy and Industrial Strategy today issued a press release stating that the government will introduce its promised Subsidy Control Bill to Parliament later today.

The press release trails a few details of the proposals which are worth noting (subject to the terms of the Bill itself).

(a) The “independent body” required by the Trade and Cooperation Agreement will be part of the CMA (which may give the regime more credibility with the EU and other trading partners, which know the CMA well, but which some practitioners feel may lead to an inappropriately “competition law” approach being adopted to subsidy control).

b) The Competition Appeal Tribunal will have judicial review jurisdiction across the UK in subsidy matters (allowing for a common approach across the UK by a court familiar with economic regulation).

c) It is not clear whether there will be a “safe harbour” for subsidies deemed to be unproblematic – but we will have to see the detail.

d) “Displacement” of jobs and economic activity across internal UK borders will be a self-standing ground for not proceeding with a subsidy (it is not clear whether that will be alongside a more general distortion of competition ground).

More detailed analysis will have to await publication of the Bill.

GEORGE PERETZ QC

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Subsidy Control after Brexit – a practitioner’s perspective

By Alex Kynoch and Angelica Hymers

(This article was first published in Local Government Lawyer, www.localgovernmentlawyer.co.uk.)

Back in late 2020, we waited expectantly for news of what the rules on state aid were going to be when the Brexit transition period ended on 31 December. We, like many others, hoped that the existing state aid regime would be continued on a transitional basis until a new subsidy control regime could be put in place. However, the Government made clear its intention to repeal the old regime without setting out proposals for its replacement. No further details were available until the Government announced that agreement had been reached with the EU on the EU-UK Trade and Cooperation Agreement (TCA) a free trade agreement which included the core principles of a new subsidy control regime for the UK. At this point it became clear that state aid practitioners were going to be spending their Christmas break reading through the TCA in order to understand the new rules which would apply from 1 January 2021.

We do not seek to summarise the TCA in this article, but the key point is that it is intended to be permissive rather than restrictive. A subsidy may be granted, provided it complies with six principles set out in the TCA, and it is not prohibited. There are few additional restrictions on the ability of a public body to grant a subsidy as far as the TCA is concerned. There are specific but limited rules on de-minimis subsidies (with a higher threshold than under the State aid De-Minimis Regulation) and rules on Services of Public Economic Interest (SPEI) – the replacement for Services of General Economic Interest under the State aid rules. But there are no block exemptions, regulations or decisions which place obligations or restrictions on how subsidies may be granted.

The six principles themselves are aimed at ensuring that only subsidies which will not have a ‘material effect’ on trade or investment between the UK and the EU are granted. They are somewhat esoteric, and appear to be, in effect, an approximation of the decision-making process that the EU Commission goes through when it determines whether a State aid is lawful. However, for many public authorities, interpreting them can be an onerous task. Some are straightforward enough – it is usually clear whether a subsidy is pursuing a specific public policy objective (the first principle). To know whether “the positive contribution of a subsidy will outweigh any negative effects, in particular the negative effects on trade or investment between the parties” (the sixth principle) on the other hand, is more difficult, seeming to require a high level oversight of the state of trade or investment between the UK and the EU. This is clearly something central government and the EU Commission will have but presents more of a problem for sub-central authorities.

The difficulty arises from a lack of detail within the TCA and a lack of guidance on how the TCA should be interpreted. The TCA has a single chapter on subsidy control, a mere 13 Articles replacing decades of EU instruments, decisions and cases. The only guidance on the UK’s subsidy control rules is the Technical Guidance on the UK’s International Subsidy Control Commitments, published on 31 December 2020.This document’s focus is compliance with the World Trade Organisation Agreement on Subsidies and Countervailing Measures and other Free Trade agreements – international commitments which are unlikely to impact upon the majority of subsidy measures granted by local authorities. This means that lawyers and clients seeking to interpret the subsidy control rules are heavily reliant on other sources to try to understand how the TCA applies to the measures that they are considering. In practice, the State aid rules are still being applied across the UK to fill the legal vacuum left by the repeal of the prior regime. This is a highly pragmatic solution – EU instruments such as the General Block Exemption Regulation (GBER) make provision for lawful granting of subsidies, and the specific articles along with the general provisions would seem to set out the tolerances within which the EU Commission considers that a subsidy is acceptable. A subsidy which was compliant with the State aid regime would therefore seem to be compliant with the TCA, although the requirement to consider the TCA Principles means that de facto compliance with the State aid regime is not sufficient of itself. It seems highly unlikely that this was the Government’s intention, bearing in mind the clear wish to put aside the EU’s “burdensome” State aid regime, but for many local authorities the risk that a subsidy is granted unlawfully and becomes subject to an order for clawback is too great to take any other approach. In practice, the greater freedoms available under the new regime are being restricted, simply because of a lack of guidance and the lack of certainty that results.

A Subsidy Control Bill was announced in the May 2021 Queen’s Speech. The Bill will implement a new domestic subsidy control regime, which will “reflect our strategic interests and particular national circumstances, providing a legal framework within which local authorities make subsidy decisions”. The announcement advises that amongst the main benefits of the Bill will be:

  • enabling public authorities to deliver subsidies which are tailored and bespoke for local needs to support the UK’s economic recovery and deliver Government Priorities, such as “increasing UK R&D investment and achieving net zero” – as specific GBER exemptions under the State aid rules exist to manage subsidy to these areas, we assume that the Bill will provide for increased flexibility for subsidies in these areas;
  • enabling the UK to meet its international commitments on subsidy control, including its international commitments at the World Trade Organisation and in Free Trade Agreements – these commitments generally require far less from the UK than the EU-UK TCA, and accordingly, it is likely that compliance with the TCA itself will continue to be the main focus for the UK public sector, other than in specific projects, for example those with an international angle; and
  • creating our own subsidy control system now that we are no longer bound by the EU’s burdensome State aid rules: – as set out above, our experience is that the State aid rules are still being applied by public authorities in the absence of any other guidance on how to interpret the UK’s subsidy control regime. Consequently, if the UK is to move away from the State aid rules, the Government will need to put in place a more detailed regime which gives public authorities clear guidance and, crucially, legal certainty on when a subsidy will be permissible.

The content of the Bill remains relatively unclear at this stage. The announcement advises that it will “create a consistent set of UK-wide principles that public authorities must follow when granting subsidies” and that it will “exempt certain categories of subsidies from certain obligations of the regime or leaving out of scope entirely”, but it is not clear to what extent the Bill will go beyond the provisions of the TCA. Certainly, the TCA already sets out principles which must be followed when subsidies are granted and exempts certain categories of subsidies from certain obligations (it contains less restrictive rules on de-minimis and SPEI, for example). However, if the Government wishes to move away from the State aid rules, it must ensure the Bill contains clear guidance and rules which give public authorities legal certainty about how the subsidy control regime should be applied. This might usefully be done by way of UK block exemptions setting out the conditions for subsidies in particular areas to be granted. Flexibility could be retained by allowing public authorities to decide that the TCA principles were still met even if a subsidy fell outside these safe harbours.

One important aspect of the Bill is that it will establish an “independent subsidy control body” which will oversee the UK’s subsidy control regime. This is required by the TCA. While the role of this body is not yet clear, it was mentioned in the Government’s consultation on subsidy control. The consultation sought views on the role of the independent body, including whether it should have enforcement powers and provide advice on specific subsidies – however, the consultation stated that decisions as to whether subsidies were compliant would remain with the public authority. The role of the independent body is critical to get right. A knowledgeable body which is able to provide authoritative guidance and advice on the application of the subsidy control regime would be invaluable, but too limited a role (i.e. one which does not consider specific cases in any detail) or a lack of expertise in the independent body could exacerbate the existing problems of the subsidy control regime. Several commentators have also outlined the benefits of a prior approval mechanism (akin to the EU Commission’s approach) to give certainty to public authorities and co-investors, but we understand the Government is reluctant to introduce a requirement to seek prior approval as this undermines the devolution of decision making power to individual authorities.

The consultation also considered whether a seventh principle will be added alongside the six in the TCA. This would protect the UK internal market by minimising the distortive effects on competition which arise where a subsidy might pull trade or investment from one part of the UK to another – this is something we have not had to deal with before. Although the rationale behind this principle is clear, implementing it will place a further burden upon granting authorities, who will need to consider not only the impact on trade and investment between the UK and the EU, but between the different parts of the UK. We look forward with interest to seeing whether (and how) this will be implemented.

Likewise, various issues are arising in practice which we hope will be addressed by the new Bill. Some of these (such as the treatment of existing subsidy schemes, or blended funds using new and pre-existing schemes) are causing difficulty within all levels of government so clear transitional provisions would be helpful. Other issues, such as equivalents to the Market Economy Operator Principle and public infrastructure rules could also be usefully addressed in the new regime. In the absence of this, public authorities are likely to lean heavily on the old state aid regime.

The lack of certainty caused by the withdrawal of the old regime without a full replacement, means the UK’s new subsidy control regime has made somewhat of a bumpy start. The Government now has the opportunity to remedy this by designing a new regime which finds the balance between flexibility and legal certainty – but a more permissive approach to regulating subsidies will only work if public authorities are given the tools and guidance to apply the new regime with confidence.

Legal Director, Alex Kynoch heads up Browne Jacobson’s subsidy control team which is part of the firm’s Government & Infrastructure practice. Alex specialises in subsidy control, public procurement 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.

Senior Associate, Angelica Hymers also works across Browne Jacobson’s Government & Infrastructure practice. Angelica also specialises in subsidy control, public procurement and public sector commercial projects.

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Institute for Government report on the design of a new UK subsidy control regime.

The subsidy control consultation closed two months ago. And the subsidy control bill, announced in the Queen’s speech, is expected soon. In the meantime, a report from the Institute for Government, Taking Back Control of Subsidies, published at the end of last month, looks at how the government can design an effective subsidy control regime to prevent harmful subsidies and encourage beneficial ones while minimising legal uncertainty and bureaucracy.

The report argues that a system that relies solely on public bodies self-assessing their subsidies for compliance with broad principles, without a prominent role for a regulator, will not be effective. The new subsidy control system is also a source of potential tension between the UK and devolved governments, and a system without the devolved administrations’ support could be undermined from the start.

To make the new system a success, the new IfG report recommends that:

  • The system includes clear and detailed guidance to help governments and public bodies comply with the rules and to direct subsidies towards UK priorities.
  • A ‘safe harbours’ route for smaller subsidies. These are tightly defined rules which, if complied with, guarantee that the subsidy is legal. This is crucial if smaller subsidies are to proceed as or more smoothly than under the EU system.
  • The Competition and Markets Authority (CMA) be appointed as the system’s regulator to provide advice before subsidies have been offered and to challenge subsidies that are harmful or waste taxpayer money.
  • The CMA’s governance should be reformed to ensure formal board representation to the devolved administrations.
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Review of “E.U. State Aids” by L. Hancher, T.R. Ottervanger and P.J. Slot, 6th edition, 2021

By Aidan Robertson QC, Brick Court Chambers

This excellent textbook is now in its sixth edition, having first been published in 1993. This edition is edited by Professor Leigh Hancher, Yvo de Vries and Francesco Maria Salerno, supported by a team of some 35 contributors drawn from private practice and academia in the EU and the UK as well as officials from the European Commission writing in their personal capacity.

This edition has been published five years after its predecessor. It continues to expand in scope and depth, as well as responding to the challenges posed, first, by the post-Brexit legal order in the form of the subsidy control provisions contained in the UK/EU Trade and Cooperation Agreement and, second, by the massive amount of State support which has had to be approved in response to the COVID-19 pandemic.

The structure of the book is helpfully described in the opening chapter. There are five parts. Part I sets out the general framework of EU state aid law. Part II then addresses six specific issues: services of general economic interest, social services of general interest, guarantees, risk finance investments, aid in the area of taxation and infrastructure These are singled out for individual treatment because both of their importance as separate topics and the fact that an in-depth discussion of them does not neatly fit in with the remaining parts. Part III covers sectoral aid, i.e. agriculture, the financial sector, transport, aviation, broadcasting, broadband deployment, shipbuilding, sports transport, energy and environment protection. Part IV addresses horizontal aid in the fields of regional aid, research and development, and rescuing and restructuring aid. The final Part V looks at procedure and remedies, devoting a final chapter to the challenges posed by COVID-19.

The breadth of scope of this subject is evident from this summary of contents. The number of contributors gives this book the impression of being the Bellamy & Child of State Aid law. It also shares the same approach of seeking to state and explain the law, while not engaging in detailed critique. This authoritative tone is a real strength as it enables one to rely upon it as an authority in court proceedings as well as in administrative procedures without the need for further citation.The exception to this Halsbury style approach is the second chapter in which Professor Nicolaides sets this work in context with a succinct and illuminating account of the economics of granting and controlling state aid.

Hancher, Ottervanger and Slot is destined to be with us for editions to come, so this review concludes with a couple of small suggestions for the future. First, it would be useful to have references to domestic case law applying the State aid rules. For example, the possibility of bringing a Francovich claims for damages against a Member State for granting unlawful aid is explained in the section on actions before national courts, without referring to the English cases exploring this issue, most notably the judgment of Falk J in Credit Suisse v HMRC [2019] EWHC 1922 (Ch) rejecting such a claim on the facts of that case. If there are national decisions meriting citation, they should be referred to in the text and all national decisions should have their own table at the beginning, separate from European Commission and Court references. This would add yet further value to this already invaluable work. Second, it is clear that the UK will continue to operate a form of State aid regime pursuant to domestic legislation announced in the 2021 Queen’s Speech giving effect to the UK/EU Trade and Cooperation Agreement, It would be useful to have an overview analysis as to the extent to which that regime replicates or differs from the EU State aid regime (while recognizing that could be a topic for a book in its own right). Perhaps that could replace the final chapter in this edition on COVID-19 and State aid which one would hope would only be of historical interest by the time of the next edition.

AIDAN ROBERTSON QC

Full publication details: E.U. State Aids” by L. Hancher, T.R. Ottervanger and P.J. Slot, pub Sweet & Maxwell, London, U.K., 2021, 6th edition, pp 1298 (inc. index, + xcv tables), £325, ISBN-0780414080553, hardback

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Further response to BEIS consultation on subsidy control

We publish here a further response to the BEIS consultation on a new U.K. subsidy control regime, prepared by a distinguished group of experts in the field (Professor Andrea Biondi, Anneli Howard QC, Dr Totis Kotsonis, Professor Stephanie Rickard, Dr Luca Rubini, Dr Oana Stefan, and Kelly Stricklin-Coutinho).

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Joint Working Party of the UK Bars and Law Societies on Competition Law responds to the BEIS Consultation on the new UK subsidy control regime

The Joint Working Party of the UK Bars and Law Societies on Competition Law responded to the BEIS consultation on the new UK subsidy control regime. A copy of its response is here.

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How the United Kingdom can create a better Subsidy Control system: by Jonathan Branton and Alexander Rose, DWF Law LLP

At a time when the UK is faced by the worst economic slump for 300 years[1]  it needs strong and clear Subsidy Control rules.  A lot of time and energy was expended disassociating from the sphere of EU State aid and much was achieved in negotiating the subsidies chapter of the EU-UK Trade & Cooperation Agreement (“TCA”).  Now the UK needs to deliver a strong and clear system to maximise returns from public funding, coordinate investment towards national priorities and protect the competitive landscape from the harm that can arise from the award of excessive and poorly targeted subsidies. In this article, we advocate for some pragmatic changes that can be quickly implemented by the UK Government.  If enacted, we are optimistic that these can facilitate the economic recovery through which the UK economy is re-built.

An opportunity to create a better system

The UK is currently running a consultation on whether to improve the interim Subsidy Control regime that was brought into force at 11pm 31 December 2020[2].  The UK’s interim regime was quickly created after the TCA was agreed on Christmas Eve.

Whereas the EU State aid rules were deemed too bureaucratic and rigid, the interim regime is vague and in places dis-proportionate.  This is because for most subsidies awarded there are no guarantees of legitimacy, and the new regime places a requirement on to every public body to consider all the UK’s international commitments relating to subsidies when awarding public funding.  So for example when a District Council awards a grant to a local business it is currently instructed by government guidance to create an audit trail that details how it has considered the effects of the EU-UK TCA and whether there is an “appreciable risk” of creating a dispute under the WTO’s Agreement on Subsidies and Countervailing Measures and all the other Free Trade Agreements that the UK is party to, such as those entered into with the Ukraine and Japan.  In practice, this creates significant confusion for the Public Sector at a time when we most want them to act quickly and to be able to provide legal certainty.  Furthermore, for the vast majority of the subsidies that are awarded there should be little to no controversy or risk arising anyway.

It is also noteworthy that the new rules don’t incentivise funding towards particular outcomes.  The Government states that levelling up, economic protection and R&D are important, yet the new regime has done away with any sort of preferential treatment for these sorts of investment over others.  Now there is no notional difference in the ability to subsidise investment in a new factory in Surrey or Sunderland.  Likewise there is no higher level of intervention for R&D, nor specific preferential treatment for climate change.  Whilst none of these activities are prohibited under the new regime, they are not incentivised.  Can this be right if levelling up, the climate emergency and innovation are designated government and national priorities? 

The new Subsidy Control rules do have their benefits.  The UK did well to negotiate sufficient space in the TCA for the UK to create its own system, and this provided an opportunity to address the main problem with the old regime, which was that the EU State aid rules were far too slow at providing approvals for the largest awards.  The new Subsidy Control rules enable projects to be assessed against six Common Principles set out at Article 3.4 of the TCA.  This creates new flexibilities for such projects, which can benefit Global Britain as it builds new economic sectors.  Unfortunatley, there is little to no guidance on how to apply these Common Principles, nor no assurance that they are definitely met, even for lower risk subsidies for comparatively small amounts.

As a result, the interim Subsidy Control regime seems not yet fully formed, and currently missing an opportunity to do things better.  As a Local Government lawyer told Politico[3]the new regime is probably a bit more flexible but the lack of clarity arguably negates any benefits of that“.

What should the new regime achieve?

We agree with the Government’s consultation document that: “The UK needs a subsidy control system which minimises distortions to the normal operation of a dynamic and thriving market economy, and which facilitates strategic interventions to deliver Government priorities such as levelling up and achieving net zero“.

Furthermore, we agree with the design priorities for a new regime that were circulated to the press during the 2019 election campaign, these being that the UK’s new system of Subsidy Control should seek to be:

  • clear;
  • consistent;
  • provide the ability to make awards at speed; and
  • permissive.

In our view, when it comes to the interim rules, the absence of clear guidance on the application of the Common Principles and lack of legal certainty that the tests are met undermines the first three priorities.  The new regime can be more permissive and that is a good thing considering the range of different situations that can be encountered and the number of grey areas that can arise within them.  For example, the new regime does not contain the same prohibition on support to steel manufacturing, in the manner the EU regime had done previously.  This is inherently sensible as even though this remains a sensitive sector there may be reasons why it is strategically important for the nation to be able to support such activity.  This will depend on the circumstances and a case by case approach.  However we believe flexibility need not always be at the cost of certainty, especially for lower risk situations.  Therefore in advocating further developments to the UK regime we’ve sought to focus on these points.

Clearer and more consistent rules

We believe that four broad improvements need to be made to the new Subsidy Control rules.

These are that there should be:

  • detailed guidance so there is a consistent understanding of when a subsidy is not present;
  • safe harbours that provide legal certainty for smaller, lower risk subsidies;
  • detailed guidance of how to apply the Common Principles nd therefore when they may be deemed satisfied; and
  • an independent authority which can help guide public bodies when particularly novel or exceptional circumstances arise.
  1. Clear guidance on when a subsidy is not present

Where a measure is not considered a subsidy then it is unlikely to be subject to any of the international commitments.  Therefore, the Government should support the Public Sector by providing detailed guidance that can be used to determine whether a measure is within scope. Not only will this lead to a more consistent application of the law, but it will also result in Public Sector bodies designing interventions to minimise administration. 

  • Safe Harbours for lower risk subsidies

For smaller scale, more regularly awarded subsidies, the Government should set out in statute a list of “safe harbours” or “category exemptions” which can be presumed to be compliant.  This would provide legal certainty for the many routine and small Public Sector interventions that clearly pose no significant issues.

The advantage of this approach is that it would apply lighter touch rules for lower risk subsidies.

In terms of the legal mechanism, we would anticipate that the Government would publish conditions which are deemed in advance to satisfy each of the six Common Principles.  By placing the new safe harbours on a statutory footing, measures which properly satisfy the relevant conditions would be protected from recovery under Article 3.11.5 of the EU-UK TCA.  We would anticipate that the safe harbours would incentivise funding towards particular outcomes, including levelling up, economic protection and R&D.  

Importantly, such safe harbours do not prevent interventions proceeding under the Common Principles, just as they do today.  They simply provide a route by which the Public Sector can minimise administration for lower risk, more regularly encountered awards. We anticipate this would be a popular change with both the Public Sector and organisations seeking public funding (as they can design their applications to meet the requirements for a majority of situations).

  • Detailed guidance of how to apply the Common Principles

Much of the confusion about the new regime comes from the lack of meaningful guidance on how to apply the Common Principles.  Public bodies are unsure as to whether they need expensive expert studies and this has a chilling effect on new projects.  This may be easily rectified by the publication of detailed guidance explaining how to establish whether the level of funding is proportionate, limited to what is necessary and appropriate.  Working through each of the six Common Principles at this time is difficult, but detailed guidance will assist Public Sector bodies to take a clear and consistent approach, thereby speeding up the award process.

  • Independent Authority

As set out at Article 3.9 of the EU-UK TCA, the UK should have an independent authority which oversees the Subsidy Control rules.  Our view is to make the most of the opportunities available under a new system of Subsidy Control that this should not replicate the European Commission role.  Instead it should:

  • act as an “Amicus Curiae” for public bodies, with the ability to intervene in challenge cases of note;
  • provide guidance to public bodies in novel or exceptional circumstances[4];
  • publish templates to make the award process simpler; and
  • works with public bodies and expert practitioners to identify new safe harbours for consideration by the Government.

Our view is that the independent body should ideally be located outside of London, recognising the importance of levelling up, and to seek a greater understanding of the balance of issues and challenges facing different parts of the country, while recognising that typically it is those parts of the country that have traditionally been less affluent that most need positive subsidy intervention.

Conclusion

A vague Subsidy Control regime is not an ideal basis for economic recovery[5].  Instead the UK should put in place strong statutory Subsidy Control rules that help ensure taxpayers’ money is spent wisely and are a means to ensure the State’s finite resources are allocated productively and as effectively as possible in line with government prioirities, in order to maximise economic growth. We have set out some pragmatic steps to create what we think would facilitate a better system of Subsidy Control.

Jonathan Branton and Alexander Rose, DWF Law LLP


[1] https://www.ft.com/content/96e19afd-88b3-4e8d-bc3e-a72bd1f60d3c

[2] https://www.gov.uk/government/consultations/subsidy-control-designing-a-new-approach-for-the-uk

[3] Brexit Britain’s newfound freedom from EU State aid rules may end up countering the government’s aim to boost economically deprived parts of the country.

[4] There should be no presumption of guidance being available and nor should not be a general “free advice” bureau.

[5] https://uksala.org/the-future-of-state-aid-law-in-the-uk-should-the-uk-adopt-strong-or-weak-rules/

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UKSALA second webinar on the BEIS subsidy control consultation: recording now online

For anyone who missed the second of the two UKSALA webinars on the BEIS consultation paper on a new UK subsidy control regime (focusing on the independent body and enforcement), a recording is now available here. (I should record that the video is the property of Slaughter and May, and we are grateful to them for permission to link to it.)

Posted in Brexit issues, EU/UK Trade and Cooperation Agreement, New UK subsidy control regime | Comments Off on UKSALA second webinar on the BEIS subsidy control consultation: recording now online

UKSALA first webinar on the BEIS subsidy control consultation: recording now online

For anyone who missed the first of the two UKSALA webinars on the BEIS consultation paper on a new UK subsidy control regime, a recording is now available here.

Details of the second event, on Monday 22 March at 5pm, are here.

Posted in EU/UK Trade and Cooperation Agreement, New UK subsidy control regime, UKSALA news | Comments Off on UKSALA first webinar on the BEIS subsidy control consultation: recording now online