The Subsidy Control Bill introduced to Parliament on 30 June 2021, has been hailed by the UK Government as a major departure from the EU State aid rules. But just how radical a departure is it and what are the key implications for business?
- What's the significance of the Subsidy Control Bill and when will it apply?
- What is a subsidy?
- What are public authorities required to do when granting subsidies?
- What is the role of the Competition and Markets Authority?
- Are there any safe harbours or exemptions?
- How will the subsidy regime be enforced?
1. What's the significance of the Subsidy Control Bill and when will it apply?
Following the end of the Brexit transition period on 31 December 2020, the UK ceased to be subject to the EU's state aid regime. Instead, the UK has been subject to the subsidy control commitments set out in the UK-EU Trade and Cooperation Agreement (TCA), Northern Ireland Protocol, international free trade agreements with third countries and the WTO subsidy rules. Our briefing from earlier this year explains the current position on state aid in the UK in more detail. What difference will the Bill make to state aid in the UK?
The Subsidy Control Bill sets out the framework for implementing the UK's international commitments on subsidy control. However it also goes further by covering subsidies that have, or are capable of having, an effect on competition or investment within the UK. This is an important safeguard for private sector businesses based in the UK which may be concerned about competitors based elsewhere in the UK benefitting from subsidies (see section 6). It reflects the Government's aim to not only comply with its international subsidy obligations, but also to protect UK domestic competition and investment from distortive effects.
Is it a radical departure from EU state aid rules?
Subsidy control was a key battleground in Brexit negotiations, with the UK promising a new state aid system to protect British industry and free up the ability to help struggling companies. The EU, meanwhile, was keen to ensure that a regime similar to its own state aid rules would continue to apply. The TCA state aid provisions represent something of a compromise, allowing the UK some freedom to design its own system but obliging it to go considerably further than would have been required under WTO rules. The UK Government has heralded the Bill as a "clear departure" from the EU regime, enabling "key domestic priorities, such as levelling up economic growth across the UK and driving our green industrial revolution" but "without facing burdensome red tape".
As explained below, there are indeed some significant differences compared with the EU regime. However, it is important to remember that:
- Many of the proposed principles are similar to those applicable under the EU state aid rules;
- It will remain possible for private parties to challenge subsidies in court;
- EU state aid rules will still apply to subsidies covered by the Northern Ireland Protocol ; and
- Historically, the UK has provided substantially lower levels of state aid than many EU Member States
When is the Bill expected to come into force?
The regime is expected to come into force in 2022, subject to Parliamentary approval, and will not apply to subsidies granted before that date. Further details on implementation and guidance will be set out in due course.
2. What is a subsidy?
The Bill sets out the framework for assessing the grant of financial assistance by public authorities, or using public resources, where that assistance confers a benefit on an enterprise. "Subsidy" is broadly defined and appears unlikely to differ substantially from the EU concept of state aid. As such, it is likely to include a variety of different forms of financial assistance provided from public resources, ranging from grants or loans through to guarantees, certain tax breaks and, potentially, disposals of publicly owned assets at below market value. However, importantly, a benefit is only conferred where the financial assistance is provided on terms that are more favourable than those that might reasonably be expected to have been available on the market to the recipient. For example, a loan provided at a market rate of interest would not fall within the definition of subsidy. In line with the EU state aid regime, financial assistance will only amount to a subsidy where it favours one enterprise over another (i.e. it is "specific"). Therefore, financial assistance would not amount to a subsidy where all market players benefit from the same favourable terms.
3. What are public authorities required to do when granting subsidies?
Public authorities must apply the Subsidy Control Principles to all subsidies before granting them (unless the subsidy is exempt – see section 5). A subsidy must not be granted unless it is consistent with those principles. There are also certain categories of subsidy which are prohibited in all cases (see textbox below). As explained in section 4, certain subsidies must be referred to the Competition and Markets Authority (CMA) for assessment, whilst in certain other cases public authorities will have the option to involve the CMA (but will not be obliged to do so). However, the CMA's assessment will not be binding. This is a significant departure from the EU state aid regime, where (unless exempt), all subsidies required prior approval by the European Commission (without which the subsidy would be illegal). For reasons of transparency, details of granted subsidies must be included on a central subsidy database. The Subsidy Control Principles The Subsidy Control Principles largely reflect those that the UK was previously subject to under the EU state aid regime. The first seven are general principles which apply to all subsidies. A further nine principles are specific to energy and environmental subsidies: this is one of the areas in which the Bill goes further than the TCA requires (although these further principles do not apply to subsidies in relation to nuclear energy). The Bill envisages that public authorities will also be able to refer to detailed guidance on how the Government sees these principles being applied in practice.
General Subsidy Control Principles
The seven general principles are:
- Principle A (common interest): Subsidies should pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale such as social difficulties or distributional concerns.
- Principle B (proportionality): 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): Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. They must be conducive to achieving the specific policy objective and the change 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 in a way to minimise any negative effects on competition and investment within the UK.
- Principle G (beneficial effects outweigh negative effects): Subsidies' beneficial effects should outweigh any negative effects, in particular those on competition or investment both within the UK and internationally.
Energy and environmental principles
The nine energy and environmental principles include:
- Principle A (aims): Subsidies in relation to energy and environment shall be aimed at, and incentivise the beneficiary, in (a) delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market; or (b) increasing the level of environmental protection compared to the level that would be achieved in the absence of the subsidy.
- Principle F (taxes and levies): Subsidies in the form of partial exemptions from energy-related taxes and levies in favour of energy-intensive users shall not exceed the total amount of the lax of levy concerned. (NB levy does not include network charges).]
The Bill also prohibits awards of particular categories of subsidy, including:
- Unlimited guarantees to businesses;
- Subsidies that are contingent on export performance or the use of domestic goods and services;
- Subsidies given on the condition that the enterprise relocates all or part of its economic activities from one part of the UK to another (although there is a potential gap in relation to subsidies that have the consequence, rather than the requirement, of relocation); and
- Subsidies granted to “ailing or insolvent” enterprises where there is no credible restructuring plan.
4. What is the role of the Competition and Markets Authority?
The Bill introduces two specific categories of subsidies - Subsidies of Interest and Subsidies of Particular Interest – for which granting authorities may need to undertake more extensive analysis to assess their compliance with the Subsidy Control Principles. The Bill provides for referral to an independent body (either mandatory or voluntary) for Subsidies of Interest and Subsidies of Particular Interest. That independent body will be a new Subsidy Advice Unit to be set up within the UK Competition & Markets Authority (CMA). The CMA's role will be to produce reports on the subsidies referred, however those reports will not be binding on the public authority. It is ultimately for the public authority to decide whether to grant the subsidy in question, even if the CMA has produced a negative report. However, the public authority will need to factor in the risk of challenge if that were to be the case (see Section 6). Mandatory and voluntary referrals Referral by the public authority to the CMA is mandatory for Subsidies of Particular Interest. A referral is voluntary for Subsidies of Interest. However the scope of what will fall within those categories is to be defined by the Secretary of State by Regulation, and is yet to be set out. The Secretary of State may also direct a public authority to request a report from the CMA where the subsidy is of 'Interest' or where it is concerned about a risk of negative effects on competition or investment within the UK. The CMA will ordinarily need to provide its report within 30 working days (extendable by agreement or by the Secretary of State if requested by the CMA). In the case of mandatory referrals, the subsidy must not be granted until five working days after the CMA has reported. The Secretary of State may also make a post-award referral to the CMA after a subsidy has been granted where there has either been a failure to comply with the requirements of the regime or there is a risk of negative effects on competition or investment within the UK.
How is this different from the EU state aid regime?
- A somewhat more permissive approach: Under the EU regime, all subsidies – unless exempt – require prior approval by the European Commission. The Bill, by contrast, envisages that the CMA will only assess a subset of non-exempt subsidies – and as noted above, the CMA's view will not be binding.
- No investigative role for CMA: Under the EU regime, the European Commission can also investigate alleged illegal subsidies in response to complaints or on its own initiative; the CMA has no such powers under the Bill.
5. Are there any safe harbours or exemptions?
To streamline the regime, a limited set of subsidies will be exempt, including:
- Minimal financial assistance, where the total amount of minimal and SPEI financial assistance received over a three financial year period is less than £315,000. (Note: Services of Public Economic Interest (SPEI) are public services that would not be supplied (or would not be supplied under the required conditions) without public intervention, and which are of particular importance to society. Examples of an SPEI could include social housing or rural public transport services).
- SPEI assistance, where total amount of minimal and SPEI financial assistance received over a three financial year period is less than £725,000.
Further exemptions are provided for, including subsidies for natural disasters, national or global economic emergencies and national security.
Streamlined Subsidy Schemes
Whilst the Bill does not contain any categories of safe harbour, it does introduce a new concept of Streamlined Subsidy Schemes. Although there is as yet little detail on the specifics, this provides the UK Government with the ability to set out classes of subsidy that it considers to be compliant. Any Streamlined Subsidy Scheme will be permitted without a full assessment against the Subsidy Control Principles. It is yet to be seen how this provision will be used in practice, but it could operate in a manner similar to the EU's state "block exemption" regime, which (among other things) covers certain types of aid for SMEs, research and development, training and infrastructure as well as regional aid; according to the European Commission, over 95% of EU state aid measures are granted on the basis of this exemption regime.
6. How will the subsidy regime be enforced?
The enforcement regime envisaged by the Bill is somewhat different from the position under the EU state aid rules. Under the latter, a business which is unhappy about an alleged subsidy to one of its competitors essentially has two options:
- Complain to the European Commission; or
- Initiate court proceedings in the Member State where the aid was granted.
In practice, most have tended to opt for making a complaint. Under the Bill, by contrast, the CMA will have no power to investigate complaints and in most cases, the only option available to aggrieved parties will be to initiate court proceedings. In England, these will normally be heard by the UK Competition Appeal Tribunal (CAT), whilst for the devolved nations, the relevant High Court or Court of Session will have jurisdiction. A possible alternative in some cases might be to lobby the Secretary of State to refer the subsidy to the CMA (see section 4) in the hope that a negative report from the latter will deter the public authority from making the award or persuade it to make changes. However, this is unlikely to be successful where the Government has a political interest in the subsidy going ahead.
Review and remedies
The CAT, or relevant court, will have jurisdiction to review subsidy decisions on a judicial review standard. Challenges can be brought by "interested parties" (i.e. a person who is aggrieved by the making of a subsidy decision) with relatively short deadlines (broadly speaking, one month from the details of the subsidy decision being made public). The short appeal deadline will be welcomed by both public authorities and recipients of aid as it means they will quickly have certainty as to whether or not the grant of a subsidy will be challenged. This contrasts with the position under the EU state aid regime, where it is possible for the European Commission to investigate alleged unlawful subsidies for a period of up to 10 years after the aid was granted (as noted above, under the Bill, the CMA will not have a similar investigatory role). That said, the CAT will have the power to annul subsidy decisions and to make orders requiring the recovery of subsidies by public authorities. The threat of the courts exercising such powers is likely to make public authorities wary of paying insufficient attention to the principles set out in the Bill – and may mean that, where possible, they will prefer to obtain a favourable assessment from the CMA before proceeding (which is also likely to provide a higher degree of comfort to proposed recipients of aid).