The UK Subsidy Control Regime: Familiar But Different

7th July 2021

Although hyped as “the most important bit of post-Brexit legislation yet”[1], the Subsidy Control Bill published by the UK Government on 30 June 2021 (the Subsidy Control Bill) largely builds on commitments made by the UK under the EU-UK Trade and Cooperation Agreement (TCA), which have had effect since the end of the Brexit transition period. The draft legislation nevertheless provides some useful clarity on key aspects of the proposed regime that is expected to come into force in 2022.

The Current Position

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 affects trade in goods (and/or wholesale electricity) between Northern Ireland and the EU. Since then, the subsidy control provisions of the TCA have applied, having been incorporated into domestic law by the European Union (Future Relationship) Act 2020.

The framework for subsidy control agreed under the TCA largely replicates the EU state aid regime in substance. The definition of what constitutes a “subsidy” broadly mirrors the EU definition of “aid”. In common with the state aid regime, the TCA prohibits certain types of subsidy (e.g. subsidies for restructuring an ailing or insolvent business without a credible restructuring plan) and exempts certain others (e.g. “de minimis” subsidies and subsidies to compensate for natural disasters or other exceptional non-economic occurrences such as Covid-19).

However, a key difference between the TCA and the state aid regimes is that, while state aid has to be notified to the European Commission for pre-approval, the TCA simply requires subsidies to be granted in accordance with six principles. The state aid regime also benefits from a General Block Exemption Regulation (the GBER) which exempts around 95% of state aid measures from the notification regime. With no domestic equivalent to the GBER and very little guidance available on how the six principles should be applied, a common complaint since the TCA provisions came into effect has been the legal uncertainty they have created for public authorities and the potential recipients of subsidies.

The New UK Subsidy Control Regime – what we know so far

The key elements of the proposed new regime are as follows:

• The overall scope of the new regime is broadly as prescribed under the TCA, save that the definition of a “subsidy” includes measures 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. This introduces a new dimension to the regime, namely a desire to protect the UK internal market and, for example, avoid “subsidy races” between different areas.
• In a similar vein, a new prohibition has been added which covers 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 where it would not otherwise have done so.
• The “de minimis” threshold below which subsidies to a single enterprise will be exempt from the rules is set at £315,000 over a three-year period or £725,000 where the subsidies are for the provision of so-called Services of Public Economic Interest. In addition to the exemptions agreed under the TCA, exemptions are proposed for subsidies given to safeguard national security or to ensure the stability of the UK’s financial system.
• A seventh principle has been added to the six principles set out in the TCA with which a subsidy must generally comply. This provides that subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition on investment within the UK. Details of the seven principles (the Seven Principles) are as set out below.
• The assessment to which a subsidy must be subjected will depend on how it is categorised. The great majority of subsidies are expected to fall under the so-called “streamlined” or “baseline” routes; subsidies which are more likely to cause negative effects may be categorised as “subsidies of interest” or “subsidies of particular interest”.
• “Streamlined subsidy schemes” appear to be safe harbours similar to a block exemption which the Government says will be created for subsidies deemed to be low risk of distorting competition, trade and investment; that promote the Government’s strategic objectives; and which are seen as being compliant with the Seven Principles. Where a public authority can demonstrate that a subsidy meets the compliance criteria for a streamlined route, it will not have to carry out a separate assessment of its compliance with the Seven Principles.
• A public authority will have to assess “baseline” subsidies (either individual awards or schemes) against the Seven Principles. Guidance on the application of the Seven Principles will be issued in due course and public authorities will have a statutory duty to have regard to it.
• A public authority will have to seek approval from the new UK Subsidy Advice Unit within the Competition and Markets Authority in relation to the granting of “subsidies of particular interest” or where otherwise required by the Secretary of State. Further details of what constitutes a subsidy of particular interest are expected to be set out in regulations in due course and may make reference to the value of the subsidy and the sector in which the intended beneficiary operates. A short “cooling-off period” of five working days will apply once the Subsidy Advice Unit has provided its report, following which the public authority will be able to proceed to grant the subsidy (without necessarily following the Subsidy Advice Unit’s advice).
• Public authorities awarding subsidies of interest will be encouraged to undertake more extensive analysis as part of their assessment of compliance with the Seven Principles. There will also be an option for the public authority to request that the UK Subsidy Advice Unit reviews its assessment of compliance and provides non-binding advice on how that assessment and the design of the subsidy might be improved.
• It is intended that jurisdiction to judicially review the award of subsidies will be given to the Competition Appeal Tribunal. The time period within which an application for review must be made is short.

The Subsidy Control Principles

The Seven Principles are as follows:

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 social difficulties or distributional concerns).
2. Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
3. 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. Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
5. 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. Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.
7. 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.

The Energy and Environment Principles

In addition to the Seven Principles, the Subsidy Control Bill sets out an additional set of principles which are specific to the energy and environment sectors. The first of these principles is that subsidies must be aimed at and incentivise the beneficiary in “delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market”, or “increasing the level of environmental protection compared to the level that would be achieved in the absence of the subsidy”.

The remaining energy and environment principles deal with a number of related factors including decarbonisation, liabilities for pollution and the UK meeting its obligations under the TCA.

Conclusion

Public authorities and businesses who receive, or are looking to receive, public support will welcome the fact that the proposed new subsidy control regime looks set to offer some greater certainty than they currently face when trying to comply with the provisions of the TCA. However, the scope of the streamlined subsidy schemes and the definitions of subsidies of particular interest and subsidies of interest will be critical to how the regime works in practice.

Walker Morris will continue to provide key updates on the Subsidy Control Bill as it passes through Parliament and as details of the supporting secondary legislation and guidance become available.

Further Information

For more information please contact a member of  our team.

[1] ‘New UK laws to sweep away EU state aid rules’, 30 June 2021: https://www.bbc.co.uk/news/business-57656812