Subsidy control

Answer

What’s a subsidy?

A ‘subsidy’ is where a public authority gives a business support that provides them with an economic advantage and the same support couldn’t have been received on commercial terms. ‘Subsidy control’ refers to the UK's new scheme of regulation under the Subsidy Control Act 2022 (the act). You may have heard of state aid which was a similar system under European Union rules and subsidy control replaces that.

Background to subsidy control

When the UK was part of the European Union, subsidies were controlled by state aid rules, which came from the Treaty on the Functioning of the European Union. Following the UK's exit from the European Union, the state aid rules no longer applied. An interim regime was put in place under the Trade and Cooperation Agreement from 1 January 2021. The Subsidy Control Bill received royal assent on 28 April 2022 and came into force on 4 January 2023.

The Subsidy Control Act 2022

The Subsidy Control Act 2022 introduces a number of principles to apply to subsidy control and it imposes a duty on public authorities to satisfy themselves that the subsidy has been appropriately considered. The state aid regime took a substantive approach; a subsidy was unlawful unless it had prior approval. In contrast, the subsidy control regime is more procedural. Public authorities only have to consider the principles and follow the process set out below and decide whether they feel they can award the subsidy. As long as the public authority has considered the principles and decided that the subsidy complies with these principles, it’ll have fulfilled its duty under the act. It can only be challenged for incorrectly applying the principles through judicial review proceedings in which it’s very difficult to establish that the public authority has acted so irrationally that its actions should be regarded as unlawful.

There are a number of simplified ways in which subsidies can be awarded. Streamlined schemes are broad categories that the government has determined should be exempt from large parts of the act that’ll enable public authorities to grant specific types of subsidy without a full assessment against the principles. They’ll be pre-assessed by the government as compliant and will focus on the areas of research, development and innovation. This is similar to the state aid "block exemption" regime under which over 95% of EU state aid measures are granted.  

Small amounts of subsidy can also be awarded under the minimal financial assistance (MFA) and services of public economic interest (SPEI) assistance exemptions. These are similar to 'de minimis' under state aid rules. The MFA exemption applies where the subsidy or scheme is less than £315,000 and the SPEI assistance exemption applies where the amount is less than £725,000.

Steps to awarding a subsidy or making a scheme

When a public authority wishes to award a subsidy or make a subsidy scheme, in our view, it should approach the analysis in the following ways. Any analysis by the authority must be proportionate with the size and potential impact of the subsidy.

1. “Check if a financial measure meets the definition of a subsidy” – Public authorities must first establish whether the support or financial assistance meets the definition of a subsidy. The financial assistance must be given from public resources, confer an economic advantage on a business or businesses over others and is capable of having an effect on competition or trade.

2. “Check if any prohibitions apply” – There are also a number of subsidies that are prohibited outright. These include any subsidy that provides an unlimited guarantee, that’s contingent on export performance or the use of domestic goods or services, that requires the relocation of the enterprise, and any that’s provided to an ailing or insolvent enterprise that doesn’t have an adequate recovery scheme in place.

3. “Check if any exemptions apply” – The act provides for a number of exemptions including for natural disasters, national or global economic emergencies, national security, MFA and SPEI assistance. Service of public economic interest are services that wouldn’t be supplied without public intervention and are of particular importance to society.

Legacy subsidy schemes are also exempt under the act. This includes schemes such as the levelling up fund, that were in place before the act came into force. Streamlined schemes as set out above are pre-assessed by the government as compliant with the subsidy control principles. These are currently limited to research, development and innovation; net zero; and local growth priorities.

4. “Check if a subsidy or scheme is consistent with the principles” that apply to all subsidies then if the subsidy applies to agriculture, energy and environment, consider the relevant additional principles.

5. “Check criteria and requirements for subsidies and schemes of interest and particular interest” –Consider whether you’re able to or required to seek the assistance of Competition and Markets Authority in relation to the award of the subsidy. Subsidies or Schemes of Interest (SSoIs) and Subsidies or Schemes of Particular Interest (SSoPIs) are two distinct categories that have been identified as having greater potential to lead to negative effects on competition or investment in the UK, or on international trade or investment. There’s mandatory referral for schemes that meet the definition of SSoPIs and voluntary referral for SSoIs.

Any referral to the SAU must take place before the scheme or subsidy is made. The SAU's function is advisory only, it doesn’t have the authority to prohibit a scheme being made. In the case of a mandatory referral, a public authority is only required to wait five working days after the decision of the SAU before deciding whether to follow its advice.

6. “Check transparency requirements” – Consider whether any steps need to be taken in relation to transparency. Public authorities will be required to upload details on any scheme or award that exceeds £100,000 to a database within three months of the public authority's confirmation of its decision.

What you need to know

As lawyers, it’s vitally important to stay on top of legal developments, especially ones that’ll have an impact on your clients. Subsidy control is a complex area of law and one that combines both national and international regulation. At a junior level, the most import thing is that you can recognise where subsidy control may be an issue for your client. If your client is a public authority engaging with business or is a business engaging with a public authority, there may be a subsidy. You may need to refer this to, firstly, a more senior member of your team and, potentially, externally for further guidance.

For further information, take a look at these links:

• https://www.gov.uk/government/publications/uk-subsidy-control-statutory-guidance
• https://www.youtube.com/watch?v=hpFMt6dMX1M
• https://www.gov.uk/government/publications/subsidy-control-rules-key-requirements-for-public-authorities/subsidy-control-rules-quick-guide-to-key-requirements-for-public-authorities

Rachel Miller is a fourth-seat trainee at Womble Bond Dickinson.