UK subsidy control: New rules from 4 January 2023

What rules currently apply?

From 1 January 2021, the EU state aid rules ceased to apply to funding and support measures granted to businesses by UK public authorities, save where a measure affected trade in goods (and/or wholesale electricity) between Northern Ireland and the EU. Since then, the subsidy control provisions of the EU-UK Trade and Cooperation Agreement (the TCA) have applied. For further details of the relevant provisions of the TCA, see our previous article.

What types of measure will be caught by the UK’s new subsidy control regime?

The Subsidy Control Act 2022 (the Act) will apply to subsidies where a public authority makes a binding commitment to grant the subsidy on or after 4 January 2023. It will apply to subsidy schemes where the scheme’s rules are formally confirmed and put into operation by the public authority on or after that date.

A “subsidy” is defined as financial assistance which is given directly or indirectly from public resources by a public authority, and which:

• Confers an economic advantage on one or more enterprises;
• Is specific insofar as it benefits one or more enterprises over other enterprises in respect of the production of goods or the provision of services; and
• Has, or is capable of having, an effect on:
• competition or investment within the UK;
• trade between the UK and a country or territory outside the UK; or
• investment as between the UK and a country or territory outside the UK.

This definition is essentially the same as under the current regime.  The only difference is the final element, which captures measures which have, or are capable of having, an effect on competition or investment within the UK (rather than solely measures which are capable of having an effect on trade and investment between the UK and third countries). This introduces a new dimension to the subsidy control regime, namely a desire to protect the UK internal market and, for example, to avoid ‘subsidy races’ between different areas. It is likely to be a relatively easy threshold to satisfy (particularly compared to the state aid rules, which require an effect on trade between Member States).

The Act will not apply to subsidies granted by the Houses of Parliament, the Scottish Parliament, the Welsh Assembly or the Northern Irish Assembly. It will only apply where the assistance in question is conferred on an enterprise – i.e. a person engaged in an economic activity that entails offering goods or services on a market.

What exemptions will apply as part of the subsidy control regime?

Most of the subsidy control requirements will not apply to so-called Minimal Financial Assistance (MFA) if the total amount of MFA and Services of Public Economic Interest Assistance (SPEIA) (explained below) given to the receiving enterprise within the applicable period (i.e. the elapsed part of the current financial year and the two financial years previously) does not exceed £315,000. This threshold is higher than the de minimis threshold of €200,000 under the EU state aid rules.

Most of the subsidy control requirements also will not apply to SPEIA if the total amount of SPEIA and MFA given to the enterprise within the applicable period does not exceed £725,000. SPEIA is assistance granted for the provision of Services of Public Economic Interest (SPEI) – i.e. services which are provided for the benefit of the public and which would not be provided, or would not be provided on the terms required, by an enterprise under normal market conditions. The concept is similar to Services of General Economic Interest under the EU state aid rules, and may include services such as social housing or public transport services in rural areas. SPEIA must be limited to what is necessary to deliver the SPEI, taking into account a reasonable profit, and must meet certain procedural requirements so that it is deemed to have been given “in a transparent manner”.

Where a subsidy falls under either of the exemptions above, it will not have to be assessed against the seven subsidy control principles outlined below (or, where appropriate, the energy and environment principles).  Details of the subsidy will only have to be uploaded to the UK subsidy database (explained below) if it is worth £100,000 or more. However, public authorities must exchange certain paperwork with the intended recipient in order to benefit from either exemption. An enterprise must also keep records, for at least three years, of any MFA or SPEIA it receives.

Exemptions from most of the subsidy control requirements will also exist for other types of subsidy or scheme such as, for example, those granted to compensate damage caused by a natural disaster.

How will non-exempt subsidies be assessed under the subsidy control regime?

In common with both the EU state aid regime and the current TCA regime, the Act will prohibit certain types of subsidy or subsidy scheme (including, for example, unlimited guarantees, subsidies dependent on export performance or those contingent on the use of domestically produced goods or services).  It will allow certain others only when particular conditions are met (for example, subsidies which are conditional on the recipient relocating and subsidies for restructuring an ailing or insolvent business).

For other types of subsidy or subsidy scheme, there will be two assessment routes: a ‘baseline route’ and a ‘streamlined route’.

Baseline route

Under the ‘baseline route’, a public authority will have to consider the subsidy control principles set out in Schedule 1 to the Act before deciding to give a subsidy or make a subsidy scheme. The seven principles (the Seven Principles) are:

1. Common interest: Subsidies should pursue a specific policy objective to: (a) remedy an identified market failure; or (b) address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns).
2. Proportionate and necessary: Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
3. Design to change economic behaviour of beneficiary: Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. 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.
4. 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.
5. 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.
6. Competition and investment within the UK: Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the UK.
7. 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 UK; (b) international trade or investment.

The last of the Seven Principles has been added to the six principles set out in the TCA. Again reflecting a desire to protect the UK internal market, this provides that subsidies/schemes should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the UK.

Guidance published by BEIS on 11 November 2022 (available here) (the BEIS Guidance) sets out a four-part framework to help public authorities ensure that a subsidy or scheme is consistent with the Seven Principles:

1. Identify the policy objective and determine whether a subsidy is the right tool to use;
2. Ensure that the subsidy or scheme is designed to create the right incentives for the beneficiary and bring about a change;
3. Consider the distortive impacts that the subsidy or scheme may have and keep them as low as possible; and
4. Carry out a balancing exercise to establish whether the benefits of the subsidy or scheme (in relation to the specific policy objective) outweigh the negative effects.

Where a subsidy or scheme has a specific policy objective relating to energy or the environment, it must also be assessed against a set of energy and environment principles. According to the BEIS Guidance, this would include subsidies to:

• encourage innovation in renewable energy production,
• improve energy efficiency of an energy-intensive industry,
• increase plant diversity on agricultural land, and
• improve recycling among small businesses.

Where a subsidy is granted for the provision of SPEI, it must be consistent with the Seven Principles, save to the extent that the principles would obstruct the performance of the SPEI.

BEIS has published a template (available here) which it recommends public authorities use to document their evidence, analysis and conclusions for their assessment of a subsidy’s or a scheme’s compliance with the relevant principles.

Streamlined Route

Streamlined routes are a type of subsidy scheme that public authorities will be able to use for low-risk subsidies that align with the Government’s strategic priorities. They will offer pre-assessed routes for public authorities to award subsidies more quickly. For subsidies falling under a ‘streamlined route’, authorities will only need to demonstrate that they meet the compliance criteria and maximum thresholds for the route.

The Government has suggested that three streamlined routes will be available from 4 January 2023, relating to:

• research, development and innovation,
• net zero, and
• local growth.

BEIS has published draft documents and guidance relating to each of these streamlined routes, so that public authorities and other stakeholders may familiarise themselves with them prior to final publication in January.

Will subsidies have to be notified to the CMA under the new subsidy control regime?

Public authorities will be required to refer “Subsidies and schemes of particular interest” (SSOPIs) to the Competition and Markets Authority (the CMA) for advice before they can be granted. SSOPIs include:

• subsidies of over £1 million that, together with related subsidies, result in a cumulative total of more than £10 million in subsidies being granted to the recipient enterprise during the applicable period (explained above);
• subsidies of over £1 million in a “sensitive sector” (including the production of iron, steel, aluminium and copper; the manufacture of motor vehicles, ships, aircraft and spacecraft; and the production of electricity) that, together with related subsidies, result in a cumulative total of more than £5 million in subsidies being granted to the recipient during the applicable period;
• restructuring subsidies; and
• relocation subsidies exceeding £1 million.

After the CMA’s Subsidy Advice Unit (the SAU) publishes its report into the SSOPI, the public authority will have to wait for a mandatory ‘cooling-off’ period of five working days before granting the subsidy. However, the advice provided by the SAU is non-binding and the SAU will have no powers to investigate suspected breaches of the Act, nor to prohibit or approve the grant of subsidies.

The granting authority or the Secretary of State will also have the option to refer “subsidies and schemes of interest” (SSOIs) to the CMA. SSOIs will include subsidies which are not SSOPIs but which are:

• subsidies that, together with related subsidies, result in a cumulative total of more than £5 million in subsidies being granted to the recipient enterprise during the applicable period;
• relocation subsidies;
• subsidies for rescuing an ailing or insolvent business; or
• subsidies given under a subsidy scheme made in the form of a tax measure.

Again, the SAU’s report will be non-binding and, in the case of a SSOI, no ‘cooling-off’ period will apply. In fact, the public authority will be able to grant the SSOI before it receives the SAU’s report, if it so chooses.

When will details of a subsidy have to be published?

For transparency purposes, a public authority will have to post certain details about the following types of subsidy and subsidy scheme on the Government’s subsidy database:

• any individual subsidy which is not MFA or SPEIA and is not awarded under a scheme
• any individual subsidy of more than £100,000 which constitutes MFA or SPEIA
• any subsidy scheme
• any subsidy of more £100,000 awarded under a scheme.

The BEIS Guidance sets out the information that has to be provided. This will generally have to be uploaded within three months of the decision to give the subsidy or make the subsidy scheme, and maintained for at least six years (or the duration of the subsidy scheme, if longer).

How can a subsidy be challenged?

Interested parties will be able to challenge a standalone subsidy or subsidy scheme before the Competition Appeal Tribunal (the CAT). Interested parties may include:

• competitors of the recipient (or trade associations representing its competitors);
• local or devolved administrations responsible for areas which may be adversely affected by the subsidy; or
• the Secretary of State.

The challenge must be made within one month of the subsidy being uploaded to the subsidy database; further information can also be requested.

In determining an application for review, the CAT will apply judicial review principles. If the CAT finds that the decision to award the subsidy or make the scheme was unlawful, it will be able to make various orders including:

• an order quashing the public authority’s decision; and
• a recovery order requiring the public authority to recover the subsidy (plus interest) from the beneficiary.

How Walker Morris can help with the new subsidy control regime

Public authorities and businesses who receive, or are looking to receive, public support should welcome the fact that the subsidy control regime looks set to offer greater certainty than the rules currently in effect under the TCA. However, the new regime is wide-ranging and, in parts, multi-faceted.  Walker Morris’ Competition and Infrastructure & Energy specialists have been closely monitoring the development of the UK’s new approach to subsidy control.  We are expertly acquainted with the provisions of the Act, and well equipped to provide public authorities, or businesses looking for public support, with tailored advice and assistance on its legal and practical application, including ways to mitigate the risk of challenge.

For more information or advice on any aspect of subsidy control, please contact Sarah Ward, Adam Bertram or any member of Walker Morris’ Competition or Infrastructure & Energy teams.