The way in which UK businesses may lawfully be awarded financial assistance from public funds is changing as the Subsidy Control Act 2022 ("SCA") provides the framework for a new, UK-wide subsidy control regime. The Subsidy Control Bill received Royal Assent on 28 April 2022 making the SCA law, although the new regime is expected to be fully in force in autumn 2022.
Post-Brexit, there are several areas where UK law is starting to diverge from that of the EU, and this the EU State Aid regime, which the UK Government has described as prescriptive and bureaucratic. The SCA paves the way for the UK to move towards its own rules to establish a subsidy regime that is intended to give UK public authorities more control over awards of financial assistance, providing the freedom to reflect the UK's strategic interests and particular national circumstances and the opportunity to be interventionist in industrial policy to help UK businesses. Driving economic growth and levelling-up across the UK are the two key aims of the regime.
The SCA will respect the UK's international commitments as set out in the EU UK Trade and Cooperation Agreement ("TCA") and its international obligations under the World Trade Organisation rules. The TCA provisions applied after the UK’s exit from the EU and will apply until the new SCA regime is fully in force in autumn 2022.
State Aid is at the heart of a nation's industrial policy and the SCA is an attempt to allow greater levels of freedom for the UK (nationally and locally) to provide public money to assist businesses where appropriate. Historically the UK has been rather more cautious about State intervention than other Member States and it remains to be seen whether the new law will actually bring about any changes in behaviour. The SCA has been drafted to favour the givers and recipients of aid rather than third parties seeking to challenge such aid. There will inevitably be legal challenges, but these may be difficult to win given the new law gives such considerable discretion to the public authorities.
The new system
What is a subsidy?
The SCA's definition of a "subsidy" largely confirms that of the TCA and EU State Aid regime. The SCA defines a subsidy as:
- Financial assistance – this covers various forms and could include, for example, a cash payment, a loan with interest below the market rate, or a guarantee.
- To an enterprise – a person or entity engaged in economic activity, e.g., a business.
- From public resources – given directly or indirectly from a public authority.
- Conferring an economic advantage – it is important to distinguish between the state providing financial assistance thus providing an economic advantage and the state engaging with entities as a purely economic actor, which is where the state is paying a fair price for services and/or goods.
- Is specific – it favours one enterprise over another.
- Has, or is capable of having, an effect on competition or investment in the UK or trade/investment between the UK and another country – this extends the TCA's definition of subsidy to catch subsidies that have domestic effects within the UK, as well as subsidies that impact international trade.
Public authorities are to self-assess
Under the SCA, devolved administrations and local authorities will have the power to decide whether to issue subsidies by following UK-wide subsidy control principles (as described below). A public law duty is imposed on authorities granting aid to only make an award if it is of the view that the subsidy is consistent with those principles. The new system represents a departure from EU State aid under which subsidies had to either comply with a block exemption or were sent to the European Commission for pre-approval and is instead premised on public authorities making their own judgements using a principles-based approach.
Given there will be an element of discretion in making awards, public authorities will take on a degree of risk as they are to ensure compliance with the principles. It will be important for them to show they have considered each principle and kept records of how they reached their decision.
Principles to make a lawful subsidy award
To award a subsidy, the public authority must assess and determine whether the subsidy is consistent with each of the seven principles, found in Schedule 1 of the SCA and set out below:
- Principle A (common interest): Subsidies should pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale (e.g., local or regional disadvantage, social difficulties or distributional concerns).
- Principle B (proportionate and necessary): Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
- Principle C (designed to change economic behaviour of beneficiary): Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change must be conducive to achieving the specific policy objective and should be something that would not happen without the subsidy.
- Principle D (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.
- Principle E (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.
- Principle F (competition and investment within the UK): Subsidies should be designed so they minimise any negative effects on competition and investment within the UK.
- Principle G (beneficial effects to outweigh negative effects): Subsidies' beneficial effects should outweigh any negative effects, including in particular those on competition or investment both within the UK and internationally.
Further, a host of energy and environment-specific principles have been included within the SCA, derived from the UK's TCA obligations. These must be considered in relation to energy and environment subsidies.
Draft guidance has been published, which is intended to explain the provisions of the SCA, help public authorities navigate the new regime and support subsidy recipients and wider stakeholders in understanding the new requirements. The Department for Business, Energy & Industrial Strategy are seeking views in a consultation on the draft guidance, which closes on 10 August 2022.
Are there any safe harbours?
There are no guaranteed safe harbours yet. However, the SCA makes provision for subsidy schemes. This is a similar concept to block exemptions under the EU State aid regime, enabling public authorities to set up a framework for awarding subsidies for specific objectives which will permit the award of a subsidy based on meeting a specified set of criteria.
In addition, the SCA provides for "Streamlined Subsidy Schemes" – a type of scheme made by the UK Government for the use of any public authority in the UK.
Are there any exemptions?
Subsidies under certain financial thresholds will be exempt. This will include:
- Minimum financial assistance – where financial assistance of below £315,000 over a 3-year period (approximately) is permitted without an assessment.
- Services of public economic interest ("SPEI") – this is where the service is provided for the benefit of the public and the service would not be provided (or would not be provided on the terms required) by an enterprise under normal market conditions, for example, a rural transport service. SPEI financial assistance of below £725,000 over a 3-year period (approximately) is permitted without an assessment.
Various other exemptions are provided for specified categories, including, for example, subsidies for natural disasters and other exceptional circumstances, national or global economic emergencies, national security and nuclear energy.
Are there any prohibitions?
The SCA confirms previous prohibitions against certain subsidies, for example in relation to rescue and restructure of an ailing or insolvent enterprise. It also goes further to include a prohibition on subsidies expressly contingent on relocation within the UK internal market (this is subject to an exception for relocation within the UK where the subsidy would reduce social or economic disadvantage).
Once a public authority has awarded a subsidy, in a drive to increase transparency, the public authority will be required to publish certain information, such as the subsidy's purpose, recipient name and subsidy amount (among other details) on the UK subsidies database. Currently, it is intended that publication will be required for all subsidy schemes and all individual awards over £100,000.
Role of the Competition and Markets Authority ("CMA")
The SCA establishes a Subsidy Advice Unit within the CMA, to act as an independent subsidy control body. In a departure from the role of the European Commission in the EU State aid regime, the CMA's role will be advisory rather than that of an authoriser.
Referrals prior to a subsidy/subsidy scheme award must be made to the CMA for Subsidies of Particular Interest ("SoPIs") and can voluntarily be made for Subsidies of Interest ("SoIs"). These categories of subsidies are meant to represent the most potentially distortive subsidies. The Government is currently consulting on definitions of these categories.
For mandatory referrals, the CMA will have 30 working days to publish a report offering non-binding recommendations. Following publication, there will be a mandatory five working day "cooling-off" period before the public authority can grant the subsidy. For voluntary referrals, the CMA can choose whether to publish a report offering non-binding recommendations. Ultimately, whether the referral was mandatory or voluntary, the public authority will be left with final decision-making responsibility as to whether to grant the subsidy or not.
As the new regime beds in and in the absence of streamlined subsidies, it may be that the CMA initially sees an influx of referrals in an attempt by public authorities to reduce the risks of litigation of subsidy decisions.
Enforcement under the SCA will be very different compared to EU State Aid. The CMA will lack the extensive enforcement powers which the European Commission previously held, as it will not be able to:
- Prohibit or approve subsidies.
- Investigate subsidy awards of its own initiative.
- Receive complaints by third parties.
The SCA adopts a system of private enforcement conferring powers on the Competition Appeal Tribunal ("CAT") to hear applications for judicial review (rather than considering the full merits of the decision). In a judicial review, the CAT will determine whether the subsidy decision made by a public authority was lawful. For example, whether it was made within the public authority's powers, was procedurally fair and rational.
The SCA excludes CMA reports from being subjected to a judicial review application. In instances where a public authority has followed a CMA report, the judicial review tests will likely be a high bar to overcome, which may incentivise public authorities to make referrals to the CMA ahead of decision-making.
A judicial review application can be made by "interested parties", which is broadly defined as anyone whose interests may be affected by the giving of the subsidy or making of the subsidy scheme. For example, it could include competitors, trade associations, or the Secretary of State.
It is important to note that the new regime only allows interested parties one calendar month from acquiring sufficient knowledge of the making of the subsidy decision (likely to be from the date of publication on the subsidies database) to bring an application, which sharply contrasts against the European Commission's power to investigate State aid up to 10 years after the aid is granted.
The CAT will have the power to grant judicial review remedies and make recovery orders against the beneficiary.
As aggrieved parties will be limited to a judicial review application and will face tight time constraints, the new enforcement regime is likely to favour public authorities and beneficiaries, rather than adversely affected parties.
Once the Government's consultation on the SCA draft guidance is complete and final guidance is published, we will see how certain issues are addressed, especially how the SoPIs and SoIs are defined, which will play a crucial role in determining the referrals made to the CMA.
It is too early to say whether the SCA will result in a more dynamic state aid regime where the state can intervene in areas it wants to develop.