Article Summary

• The Subsidy Control Act in the UK covers financial assistance given by public authorities that confers an economic advantage on one or more enterprises and affects competition or investment.
• The Act introduces subsidy control principles that require subsidies to pursue specific policy objectives, be proportionate and necessary, and have beneficial effects that outweigh negative effects.
• Public authorities are required to self-assess proposed subsidies for compliance with these principles.
• While the concept of a subsidy is at first sight similar to EU State aid law, some differences are already becoming apparent, and the procedures are very different.  In particular, there is no requirement to obtain a clearance decision before granting a subsidy – only, in some circumstances, to obtain an advisory report from the CMA’s Subsidy Advice Unit.
• There are exemptions for certain types of subsidies, and streamlined routes are provided for research, development, innovation, energy usage and local growth. Interested parties can apply for a review of subsidy decisions, and subsidies made in devolved primary legislation may be reviewed by the relevant higher courts.

Introduction

The UK subsidy control regime has now been in force for nearly a year.  It entered into force in January 2023, in place of the EU State aid rules, which ceased to apply to Great Britain (but not Northern Ireland) from 31 December 2020. 

The UK regime has numerous features that will be very familiar to those with experience of the EU regime – for example in the definition of a subsidy.  However, the intention in enacting the Subsidy Control Act 2022 was to establish a regime that is less onerous and more flexible than the EU State aid regime (while still retaining protections for UK competition and investment).  The procedure therefore displays significant differences to the EU procedure.  In particular, there is no requirement to obtain prior clearance for awards as there is under the EU State aid regime.  Instead, public authorities may be required, or may choose, depending on the circumstances, to obtain a report on a proposed award from the Subsidy Advice Unit within the Competition and Markets Authority.  The SAU has issued 14 reports as at the date of writing (28 October 2023), and the Competition Appeal Tribunal, which hears challenges to subsidy awards, has issued one judgment.  Both highlight the very different approach under the UK regime.

Subsidies given within the UK must also comply with the provisions of the subsidy control provisions of the Trade and Cooperation Agreement (TCA) between the EU and the UK, and with WTO rules and the subsidy control provisions of other international trade agreements between the UK and other countries.  These regimes are not considered further here.

Scope of the Act

A review of the UK regime starts on familiar ground, as the definition of a “subsidy” appears very similar to the definition of State aid under the EU regime (although, as will be seen from the one subsidy control judgment of the CAT to date, appearances can be deceptive).

It covers financial assistance which meets all of the following conditions:

• it is given, directly or indirectly, from public resources by a public authority.  It may take various forms, including grants, loans, guarantees, foregoing of revenue (eg. tax relief) etc.  It may also be provided indirectly, via an intermediary that is not a public authority;
• it confers an economic advantage on one or more enterprises.  To confer an advantage, the relevant financial assistance must be provided on more favourable terms than those that might reasonably be expected to be available on the market to the enterprise receiving the financial assistance.  Where the financial assistance has been provided on terms similar to those available on the market, then the financial assistance is unlikely to confer an economic advantage and therefore will not meet the definition of a “subsidy”.  This is known as the Commercial Market Operator (“CMO”) Principle;
• it is specific, that is, is such that it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services; and 
• it has, or is capable of having, an effect on competition or investment within the UK, or trade or investment as between the UK and a country or territory outside the UK.

Subsidy control principles

However, from here, the differences between the UK and EU regimes start to become apparent.  There is no requirement for public authorities to obtain approval prior to awarding a subsidy, as is the case under the EU State aid regime.  Instead, public authorities are in most cases required to self-assess proposed subsidies or subsidy schemes for compliance with the subsidy control principles set out in the Act.

The subsidy control principles require that subsidies should:

Principle A: pursue a specific policy objective (eg. market failure);

Principle B: be proportionate and necessary to the objective;

Principle C: be designed to change the economic behaviour of the beneficiary;

Principle D: not compensate for costs that the beneficiary would have funded in any event;

Principle E: be the least distortive means of achieving the objective;

Principle F: minimise distortive effects; and

Principle G: have beneficial effects that outweigh their negative effects.

In addition, public authorities intending to give subsidies in the field of energy or the environment must comply with 9 additional principles.  These include 2 general principles, namely that subsidies:

Principle A: should aim at and incentivise a secure, affordable and sustainable energy system, and increase the level of environmental protection; and

Principle B: should not relieve the beneficiary from liability for pollution.

The remaining energy and environment principles relate to specific purposes: for example, Principle E provides that subsidies for renewable electricity and cogeneration must not affect beneficiaries’ participation in the electricity market.  These principles are considerably less detailed than the EU guidelines on State aid for climate, environmental aid and energy that are the starting point for the assessment of similar aid under the EU regime.

Both sets of principles are derived from the UK’s international obligations, particularly those set out in the TCA.

The Subsidy Control Act specifically prohibits a number of types of subsidy.  These are:

• unlimited guarantees;
• subsidies conditional on export performance (eg. to cover the difference between domestic and international prices);
• subsidies conditional on the use of domestic goods or services;
• subsidies conditional on relocation;
• subsidies to provide export credit insurance; and
• subsidies to air carriers for the operation of routes, with certain exceptions.

Subsidies for the rescue and restructuring of ailing or insolvent companies are prohibited, unless certain conditions are met.

The Subsidy Control Act provides exemptions for minimum financial assistance (MFA) of less than GBP 315,000 over the current and two preceding financial years.  It also exempts aid for services of public economic interest. The rules on SPEIs are very similar to the EU rules on State aid for services of general economic interest. There are also a number of other exemptions, including for subsidies for the purposes of safeguarding national security.

The Act is accompanied by a 243-page guidance document published by the Government, which explains the concepts set out in the Act.  Public authorities must have regard to the guidance when granting a subsidy.

Assessing compliance with the UK subsidy control regime 

The guidance sets out a four-step approach to assessing compliance with the subsidy control principles:

Step 1: identify the policy objective – the market failure or other equity concern – and assess whether a subsidy is the right tool;

Step 2: ensure that the subsidy is designed to create the right incentives for the beneficiary and to bring about a change;

Step 3: consider the distortive effects of the subsidy and keep them as low as possible; and

Step 4: carry out the balancing exercise – ensuring that they benefits of the subsidy outweigh its negative effects.

Subsidies and schemes

A subsidy scheme is a set of rules defining the terms on which a number of individual subsidies may be given. A public authority intending to establish a scheme must assess compliance with the subsidy control principles for all subsidies that might be awarded under the scheme.  Individual subsidies that comply with the scheme rules do not then need to be assessed individually for compliance with the subsidy control principles.

Streamlined Routes

Under EU State aid rules, the very great majority of aid measures do not require individual notification to the European Commission, because they fall within the scope of the General Block Exemption Regulation which, subject to certain conditions, exempts aid for a wide range of purposes, such as training and broadband infrastructure.  The architects of the UK regime decided to provide fewer exemptions, and instead to require public authorities to assess subsidies and schemes directly against the subsidy control principles to a much greater extent.  However, the Government has created 3 “Streamlined Routes,”, also known as “Streamlined Subsidy Schemes”.  Provided that a public authority complies with the conditions for the Route concerned, it does not need to assess the subsidy against the subsidy control principles. Nor does it need to seek a report from the Subsidy Advice Unit (explained below).  The Government has established Streamlined Routes for research, development and innovation, energy usage and local growth.  Each of them is accompanied by detailed guidance explaining the operation of the Route, with worked examples.

The Subsidy Advice Unit

As indicated above, there is no requirement to seek prior clearance for subsidies, as there is under the EU State aid regime.  Instead, the Subsidy Control Act provides for the creation of a Subsidy Advice Unit (SAU) within the Competition and Markets Authority, with the role, as its name suggests, of advising and supporting public authorities in the award of subsidies. 

The SAU provides advice in respect of certain subsidies or subsidy schemes, assessing their compliance with the requirements of the Subsidy Control Act, as follows:

• subsidies or subsidy schemes of particular interest (SSoPI).  These are subsidies and schemes providing for subsidies with a value, taken together with related subsidies to the same enterprise over the 3 most recent financial years, of more than £10m (or £5m in sensitive sectors), and certain other subsidies and schemes.  A public authority intending to give or create a SSoPI must refer it to the SAU, and may not proceed with the SSoPI until 5 working days after receiving the report of the SAU.  The SAU will accept the referral only after receiving complete information; and
• subsidies or schemes of interest (SSoI).  These are subsidies and schemes providing for subsidies with a value, taken together with related subsidies to the same enterprise over the 3 most recent financial years, of between £5m and £10m.  A public authority intending to give or create a SSoI may refer it to the SAU. The SAU is not required to report.

The Secretary of State may also refer a subsidy to the SAU under certain circumstances. 

The SAU has a 30-working day period in which to report, following its acceptance of the referral.  This is rather shorter than the European Commission’s 2-month period to decide whether to open an in-depth investigation – and there is no provision for an in-depth investigation by the SAU.  And also, in contrast to the EU regime, the SAU’s advice to public authorities is non-binding.  As the SAU stresses in its reports, public authorities are responsible for deciding whether to award a subsidy or make a scheme after receiving the report of the SAU.  

The reports of the SAU issued to date cover a wide range of cases, from a proposed £24.5m subsidy by Highlands and Islands Enterprise to Sumitomo Electric Industries to build a cable manufacturing facility to a proposed subsidy of at least £8.8m by Warrington Borough Council to LiveWire, a company that holds a contract to manage leisure services (eg, sports centres), libraries and health and wellbeing services in the Borough. 

Reports follow a consistent pattern: they emphasise that they are advisory and that it is the responsibility of the public authority to decide whether to proceed.  They follow the 4-step analytical process outlined above, and comment on the extent to which the public authority has properly assessed the compliance of the proposed subsidy with the subsidy control principles. In every case to date, the SAU has pointed to areas where the public authority could have improved its assessment, in most cases by providing better evidence of how the subsidy control principles are met.  The proposed subsidy by Warrington Borough Council came in for particular criticism for a lack of clarity as to key elements of the subsidy, including its value and the extent to which elements of the subsidy relate to SPEI.  The SAU’s report on a proposed subsidy for conversion of a former factory into studio and office space for the BBC and retail space was particularly critical of the fact that the public authority concerned had largely relied on information provided by the proposed beneficiary in its funding application.  The SAU expressed the view that public authorities should consider the weight placed on evidence from the beneficiary, with steps ranging from basic sense-checking to independent verification or obtaining further evidence, depending on the value of the subsidy.

The SAU also monitors and reports on the effectiveness of the operation of the Act, and its impact on competition and investment within the UK.  

Enforcement of the UK subsidy control regime 

Any interested party who is aggrieved by the making of a subsidy decision (a decision to give a subsidy not under a scheme or a Streamlined Route, or to make a scheme or Streamlined Route) may apply to the Competition Appeal Tribunal for a review of the decision. 

The CAT can review whether the public authority carried out its duties that are specific to the subsidy control regime (the substantive subsidy control requirements) and can consider whether the subsidy was consistent with the subsidy control principles before deciding to give the subsidy.

The CAT can also determine whether the subsidy contravened any of the listed prohibitions.  Other decisions (for example to make a subsidy that falls within a scheme) may be liable to judicial review by the High Court.

There has been one application to the CAT.  This was an application by a waste services company, alleging that Durham County Council had subsidised its own commercial waste operations by using the vehicles and staff used for its residential waste collection services.  Consistent with the intention of the CAT to ensure that subsidy control proceedings are quick and light touch, the proceedings were very short – the notice of appeal was submitted on 3 February 2023 and the CAT gave judgment on 27 July 2023.  The CAT held that the Council was not engaged in economic activity when carrying out commercial waste collection services in accordance with is statutory duties.  It also held that the essence of a subsidy under the Act was that there was a movement of a subsidy from one person (the public authority) to another (an enterprise).  In this case, there was no separate person within the Council acting as an enterprise.  Because the Council was a public authority, it could not also be an enterprise.  The CAT expressly highlighted the differences between UK law and EU law.  Article 107 TFEU refers to aid “favouring certain undertakings”.  The CAT accepted that it was necessary to adopt a functional approach to the term “undertaking” under EU law, so that the Council might be acting as a public authority for one purpose and as an undertaking for another. But that was not the case under the Act. There was therefore no subsidy. 

The CAT also concluded there was a “decision” in 2023, ie. after the entry into force of the Act, that was capable of review, namely the decision to continue with the funding approach that had been decided previously.  This was not a scheme that had been put in place before the Act entered into force (which would have meant that a decision under that scheme would not have been liable to judicial review).

Subsidies and schemes made in devolved primary legislation (ie. Acts of the Scottish, Welsh or Northern Ireland assemblies) may be reviewed by the relevant higher courts.  Subsidies and schemes made in legislation of the UK parliament are not subject to review by the UK courts, but only to review under relevant international arrangements.

Conclusion

It is still relatively early days for the new UK subsidy control regime.  Although the pattern of SAU reports has now become relatively clear, it has not yet considered any very controversial cases, and does not appear to have considered that any of the proposed subsidies were entirely in conflict with the subsidy control principles.  It is unclear how it would address such a situation.  With only one CAT judgment to date, there are also many legal questions still to be determined.  It is interesting to see how the UK regime differs from the EU regime on some quite fundamental issues.  One welcome aspect of the UK regime is its speed – rather than wait months if not years for a Commission decision, or a couple of years for a judgment of the General Court or Court of Justice, interested parties can expect answers from the UK institutions, the SAU and the CAT, very much more quickly.  This can only be a positive development.

VISIT OUR COMPETITION & EU HOMEPAGE