Subsidy Control: the next chapter

What’s next for public bodies and their grantees in the UK?

Lindsay Draffan and Suhan Rajkumar explain what’s next for public bodies and their grantees in the UK. This briefing is relevant for public authorities and any beneficiaries of public subsidies (e.g. direct grants, loans and guarantees) such as charities, social enterprises and SMEs.

After a period of speculation, it is welcome that the Government has introduced to Parliament the Subsidy Control Bill (the Bill) , which sets out the proposed new UK subsidy control regime. It has also published the responses to its earlier public consultation on the shape the new regime should take. The Bill will bolster and amend our national subsidy control law, which, following Brexit, has effectively replaced in the UK the EU state aid framework which applied pre-Brexit (although the application of state aid will still be relevant to trade between Northern Ireland and the EU).

The Bill sets out the principles which public authorities must consider when deciding to award subsidies such as direct grants, loans and guarantees and only make them available if consistent with these principles. In essence, the Bill replicates the six principles already established by the Trade and Cooperation Agreement between the UK and the EU (the TCA) and which controls subsidies which could affect international trade between the two. These principles are well known to those who have worked through state aid assessments in the past and cover the principles of common interest, proportionality and necessity, changing economic behaviours, avoiding costs that would be funded otherwise, least distortion of policy objectives, and benefits to outweigh negative effects. The Bill however now covers the all-important domestic angle of minimising any negative effects on competition or investment within the UK. The Bill also introduces a new prohibition against subsidies conditional upon relocation of economic activities – which may well be the subject of political debate – in the context of the Government’s ‘Levelling Up’ agenda.

As anticipated, the Bill confirms that the Competition and Markets Authority (CMA), the UK’s competition authority, will assume the role of a national subsidy control authority (as required by the TCA). This will be known as the Subsidy Advice Unit (SAU) and will oversee the new regime and advise public authorities in areas which are more likely to distort UK competition and international trade (see further below). This new function will complement one of the CMA’s other post-Brexit functions in overseeing the effective operation of the UK internal market (the Office for the Internal Market).

Under the Bill as currently drafted, the Secretary of State for Business, Energy and Industry Strategy (the SoS) will be able to issue guidance to assist public authorities in making their assessments. The SoS will also be empowered to issue regulations regarding types and features of particular ‘subsidy schemes’ such as their value and the sector of the economy or persons they are intended to benefit. These schemes are to be separate from other subsidies awarded by public authorities and some will require mandatory referral to SAU for an evaluation of the public authority’s assessment of the proposed subsidy. (It should be noted however that the Secretary can ‘call in’ any subsidy if there is a risk of non-compliance with the law or of harmful effects on trade or investment in the UK.) Once an evaluation is in progress, a subsidy may not be awarded by a public authority for 35 days provided the SoS does not require an extension.

The Bill prohibits certain subsidies from the outset which are considered harmful or distortive such as unlimited state guarantees and making subsidies contingent upon using domestic over imported goods and services or upon relocating activities to other parts of the UK. Rescue and restructuring subsidies for ailing or insolvent companies will only be permitted under certain conditions. There are familiar exemptions too such as subsidies for services of public economic interest, financial stability and national security as well as subsidies for natural disasters and national or global emergencies. And last but by no means least, the Bill sets the amount of ‘minimal financial assistance’ (effectively de minimis aid under the EU state aid regime) which can be awarded at £315,000 per beneficiary over a 3 year period.

As yet, the Bill does not contain exemptions reflecting the General Block Exemption Regulation (or GBER) available under EU state aid law, which many public authorities and grantees are used to relying upon. Until we have further legislation or guidance, public authorities will instead need to apply the subsidy control principles in the TCA to subsidies they intend to make available. (The Bill proposes that subsidy control decisions by public authorities will be subject to challenge on judicial review grounds before the Competition Appeal Tribunal by ‘interested’ parties (or the SoS) who could be harmed by the giving of a subsidy.)

Transparency will be a key feature of the new regime and a searchable Government database of awarded subsidies is already up and running. To date, there have been many subsidies awarded for familiar purposes such as research and development, culture and heritage, environmental protection and services of public economic interest in a range of sectors across the UK economy.

So what’s next? The Bill is not expected to become law until early 2022 and so there are likely to be changes made to it as it passes through Parliament. In the interim, public authorities are proceeding to award subsidies taking into account the subsidy control principles in the TCA. The key risks to public authorities (and to beneficiaries) during this period are potentially breaching the UK’s legal commitments under the TCA – although this will likely only be relevant to significant subsidies in sectors active across both the UK and EU – and the potential clawback of subsidies once the Bill is enacted. Government guidance on the UK’s international subsidy law commitments, including in relation to the TCA and WTO rules, is being continually updated but it’s still an uncertain landscape and we await its re-mapping with interest.

In the meantime, we are here to help you to navigate the subsidy control regime under the TCA and the proposals in the draft Bill. Please contact Lindsay Draffan or Suhan Rajkumar if you would like our assistance.