Government Publishes UK Subsidy Control Bill

The UK's departure from the EU brought an end to the application of EU State Aid rules in the UK. [1]

On 30 June 2021, the Government published a draft Bill and Explanatory Notes on the UK's new domestic subsidy control regime.

Despite the Government's assurances that the CMA will have a key role, its powers are quite limited and there will be no ability for businesses to challenge awards before a regulator, with the government relying on private enforcement to bridge the gap. In the past, private enforcement has not been an effective way of testing or challenging the lawfulness of subsidies. It remains to be seen whether the Bill will do enough to address this.

KEY MESSAGES

many of the provisions enforce, on a domestic basis, the UK's international obligations, particularly those under the EU-UK Trade and Co-operation Agreement (TCA);
the new regime aims to be quicker and more flexible than the previous regime; [2]
a new Subsidy Advice Unit will be set up within the CMA to oversee the regime as a whole and to provide advice on specific subsidies and schemes;
there will be categories of subsidy/ subsidy schemes including 'Subsidies of Interest' 'Subsidies of Particular Interest' and 'Streamlined Subsidy Schemes'. The criteria for identifying these have yet to be set out but the intention is for the greatest scrutiny to go to those subsidies most at risk of distorting competition; and
in addition to subsidies which are prohibited by the UK's international obligations, [3] subsidies will not be permitted if they will result in the relocation of economic activity from one part of the UK to another (to prevent 'subsidy races' within the UK).

WHAT DOES THE BILL COVER?

The definition of 'subsidy' is similar to 'State aid' [4] and any form of public assistance that would have been considered 'State aid' prior to 31st December 2020, is likely to be considered as a 'subsidy' under the new domestic regime. A very important difference is the need to consider any potential impact on trade within the UK internal market.

Small subsidies (under £315,000 over a three year period or for Services of Public Economic Interest (SPEI [5]) of less than £725,000 over a three year period) will be exempt from the regime.

Subsidies required for safeguarding national security and subsidies granted temporarily to address emergencies such as flooding and economic emergencies are excluded from the regime. Further exclusions apply to subsidies relating to national security, pursuit of the Bank of England's monetary policy and for large cross-border or international projects.

Categories of Subsidy

A key provision relates to 'streamlined subsidy schemes' to be made by the UK Government. Details are not available yet but these are intended to allow lower-risk subsidies to be given by public authorities more quickly and easily, without their needing to assess compliance with the subsidy control principles. Streamlined subsidies may turn out to be similar to the old 'block exemptions' which were a key method for subsidy providers and recipients to quickly self-assess compliance with the rules.

The Bill introduces two categories of subsidy:

Subsidies/Schemes of Interest (SOIs); and
Subsidies/Schemes of Particular Interest (SOPIs).

SOIs and SOPIs have yet to be defined but the latter category (expected to be small in number) must be referred by public authorities to the CMA Subsidy Advice Unit (see below) before they may be given.

Principles For Assessing Subsidies

UK subsidies and subsidy schemes [6] must comply with seven Subsidy Control Principles, six of which derive from the TCA. Principle F is an additional domestic test aimed at protecting competition and investment in the UK. The Explanatory Notes describe the principles as follows:

Subsidy Control Principles

Principle A - Public authorities will need to consider, explain and assess the policy objective behind the subsidy to ensure there is a benefit to wider society in providing the subsidy.
Principle B - Subsidies should be both proportionate and limited to what is necessary to achieve the policy objective.
Principle C - Subsidies must incentivise and lead to a change in the behaviour of the beneficiary. They must help to address the public policy objective being pursued.
Principle D - Subsidies should be targeted to bring about an effect that is additional to any that would occur in the absence of the subsidy. They should not normally cover everyday business expenses.
Principle E - Alternative policy levers, that are likely to cause less distortion to competition and investment in the UK, or trade and investment internationally, should be considered before turning to subsidies.
Principle F -Public authorities should design the subsidy in a way that minimises the impact on competition and investment within the UK’s internal market. This will require them to assess the effects which are likely to arise from providing the subsidy. This is a domestic test to ensure that a subsidy does not unduly favour one firm to the detriment of a competitor or new entrants to the UK market, or unduly reduce competition within the UK market.
Principle G - Public authorities should assess the material effects on competition and investment in the UK, and international trade and investment, and decide whether the benefits of the subsidy are greater than the harmful impacts of providing the subsidy.

Subsidies which relate to energy and the environment must also adhere to the additional nine Energy and Environment Principles deriving from the TCA.

The Bill sets out rules and procedures for the rescue, restructuring and liquidation of ailing or insolvent enterprises (with specific rules for banks and insurance companies).

The Assessment Process

The CMA will set up a Subsidy Advice Unit to monitor and report on the regime and report on certain subsidies and schemes before and after they are given or made. The CMA's role is to write a report: the ultimate decision will be made by the awarding authority.

Subsidies/Schemes of Particular Interest must not be awarded before the end of a cooling-off period of 5 working days (extendable) following publication of the CMA's report. When requested by the CMA, the Secretary of State may extend the reporting period. Public authorities may also voluntarily refer certain other subsidies or schemes to the CMA before they are given or made. In either case, the CMA's report will include an evaluation of the public authority’s assessment of the subsidy or scheme's compliance with the rules. The Secretary of State may also refer a subsidy or scheme to the CMA. Again, the ultimate decision will be made by the awarding authority (although it is thought that awards given in the face of CMA objections will be rare – presumably because they would be very publicly inviting private enforcement action).

Transparency

In order to ensure transparency, subsidies must be registered on a publicly available database and the Bill sets out the information to be included on the register. As under the old regime, only awarding bodies may register a subsidy. There will be exemptions such as those applying to SPEI assistance of less than £14.5m or for certain types of project including hospital care, social care and transport.

Challenging a Subsidy

Judicial reviews on the award of subsidies will be heard by the Competition Appeals Tribunal (the CAT). Interested parties will be able to apply to the CAT to review a decision to give/make a subsidy/scheme. The CAT will apply the same principles when hearing an application for review as would be applied by the High Court on application for judicial review and will be able to grant the same types of relief as are available in such proceedings (mandatory orders, quashing orders, declarations and injunctions). [7]

In addition, the CAT will be able to make a recovery order if a subsidy control decision is found to have breached the subsidy control requirements. Public authorities will have a right to recover subsidies that are misused by a beneficiary of the subsidy (e.g. used for a different purpose than that for which they were given): this right will be enforceable as if it were a contractual right, making recovery easier for public authorities.

Our Comment

There is a lot to be welcomed in the Bill, although we should remember that the basic framework for this legislation was already set by the UK's commitments in the TCA. The introduction of a principles-based system, combined with CMA oversight, is sensible but further detail on some fundamental points and guidance on how the regime should work in practice is needed.

The transparency obligations are a key part of the enforcement mechanism of the Bill, as the intention appears to be to encourage private enforcement. The CMA will not have the power to prohibit a subsidy although authorities will have to pay heed to what it says in its reports. Only parties whose interests may be affected by a subsidy will be able to bring a challenge in the courts (the CAT) to have the authority's decision overturned. Their ability to do so will be underpinned by the obligations on authorities to publish information about subsidies and subsidy schemes on the transparency database, and to provide (pre-action) information to interested parties on request. It is unclear whether this approach will materially increase the (relatively low) number of private challenges from the numbers seen under the EU State aid rules.

The definitions of SOI and SOPI, which will be set out in future regulations, will be key, as they will determine which subsidies must, and which subsidies may voluntarily, be referred to the CMA. To avoid over-notification, the definitions need to be straightforward to apply. We would expect the SOPI category to include the largest subsidies but other criteria may also be used to catch subsidies likely to have the greatest impacts, for example subsidies to sensitive sectors, or to particular categories of recipient.

How authorities carry out (and document) any necessary balancing exercise between the subsidy control principles is also going to be important. It may involve complex and detailed assessments. Authorities are already expected to follow BEIS guidance [8] on applying the TCA principles, where relevant to a subsidy. While the principles in the Bill largely derive from the TCA, their wording is not identical and the Bill sets a further (domestic) test in Principle F. A streamlined set of guidance covering purely domestic scenarios and those that engage the UK's obligations under international trade agreements is desirable, to help simplify the process. Awarding authorities should, in any event, record their assessment process, analysis and conclusions, in case their subsidy decision is challenged.

Principles F and G, insofar as they require authorities to take account of the impact of proposed subsidies on competition and investment within the UK, are aimed at protecting the UK internal market. These principles are reinforced by the prohibition on subsidies that are conditional on the business relocating all or part of its activities to another area of the UK. Taken together, the principles and the prohibition reflect a clear desire to avoid subsidy races that attract investment to one part of the UK at the expense of another. The most obvious concern is that the different nations of the UK may compete with one another for investment. But we do not yet have any detail on what is meant by an "area of the UK"; it has the potential to apply at a regional or more local level. Awarding authorities should tread carefully while the scope of the prohibition remains unclear.

The Bill throws the Northern Ireland Protocol (NIP) into sharper focus, as the Bill's requirements do not apply where the NIP does. Where the NIP applies, authorities must follow EU state aid rules and this may necessitate pre-notification to the European Commission. Authorities will want clarity on whether the NIP applies to a planned subsidy, if they are to avoid defaulting to a precautionary approach of following both regimes, with potentially inconsistent outcomes. In terms of UK-EU relations, any uncertainties or disputes over which rules apply may lead to frictions in the future.

Footnotes

[1] EU state aid law has been disapplied in the UK by the State Aid (Revocations and Amendments) (EU Exit) Regulations 2020, This does not affect the application of EU state aid rules under the EU-UK Withdrawal Agreement, that is to funding that i) falls within Article 10 of the Northern Ireland Protocol; or ii) is paid out from EU structural funds 2014-20 programmes in which the UK continues to participate.

[2] Which required all state aid to be notified to, and cleared by, the European Commission unless it fell within the ambit of rules-based block exemptions.

[3] i.e. unlimited guarantees, support for ailing businesses, subsidies contingent on export performance/ use of domestic goods/services.

[4] i.e. a subsidy is support (through a grant, loan or guarantee) which is (i) provided by a public authority; (ii) confers an economic advantage; (iii) is specific i.e. benefits certain businesses over others; and (iv) which may distort or harm competition, trade or investment within the UK or between the UK and other countries.

[5] SPEI assistance is that provided for services that are important to society but would not be supplied without public assistance e.g. social housing or rural public transport. SPEI subsidies require a higher level of transparency, including review to ensure that they are not funded to a greater extent than is necessary (similar to the old 'viability gap' calculations).

[6] A subsidy scheme provides a means for public authorities to award a number of subsidies to enterprises on a discretionary basis rather than on a case-by-case basis to individual enterprises e.g. awards to housing developers to build social housing in a particular region.

[7] The Bill does not expressly refer to awards of damages, although they are included in the TCA as one of the remedies to be made available and the Government's Consultation document on the design of the new regime acknowledged that damages may be awarded in limited circumstances in judicial review proceedings.

[8] Department for Business, Enterprise and Industry, Guidance on the UK’s international subsidy control commitments, last updated 24 June 2021