Background
The UK's Subsidy Control regime came into force in January 2023 and is primarily based upon the requirements set out in the Subsidy Control Act 2022. This includes the definition of what is a subsidy and the routes under which subsidies may be lawfully awarded. Section 79(6) of the Subsidy Control Act 2022 states that public authorities are legally obliged to "have regard to" the 'Statutory Guidance for the United Kingdom Subsidy Control Regime' (the "Statutory Guidance") when making awards of financial assistance.
The impact of this is that public bodies not only need to properly understand the requirements set out in the 69 pages of the Subsidy Control Act 2022, but also need to be aware of how this is shaped, interpreted and clarified through 264 pages of the Statutory Guidance. The impact of Section 79(6) and the duty to take account of the Statutory Guidance has yet to be the subject of a formal Court judgement but it is not impossible that this could have a significant bearing on the defence of a subsidy award at some point in the future.
The main changes made to the Subsidy Control Statutory Guidance on 29 January 2025
1) Further clarity on when an organisation may undertake economic activity whilst not being considered an enterprise
The Statutory Guidance has been updated to help clarify the situations where "no subsidy" arises because the recipient is not considered to be an enterprise (ie. an entity engaged in economic activity, which is turn means the offering of goods or services upon a market).
Paragraph 2.18 has been updated to state that "no subsidy" shall arise when financial assistance is provided towards "activities where there is no market present". There are two situations where this may arise. The first is where there is no market because there are no competitors (for example there is exclusivity). The second is where there are other characteristics which means that the activity falls outside a market (some of these are covered in the Public Responsibilities section of the Statutory Guidance and include the delivery of State education and healthcare).
Unfortunately the guidance does not elaborate on these points. Instead it states that "the mere fact of operating with the intent of providing some benefit to the public does not automatically mean an entity is not engaged in an economic activity". This is true but most practitioners will already be aware that it will be the substance of a measure which is assessed, rather than the public authority's intent or purpose.
Perhaps the most helpful clarification on the notion of enterprise is to correct (what is now) paragraph 15.15 to remove an amendment added in December 2023 which stated that "to the extent organisations provide goods and services for free, they are not engaged in economic activity and should not be considered enterprises for the purposes of the subsidy control regime". Most practitioners had already identified that this reference was an error. After all, economic activity is defined as the "offering goods or services on a market" rather than "charging for goods or services on a market". It was an unfortunate mistake, because it is normally more distortive for a State body to offer a free service in competition with private sector operators, than to charge a sub-commercial fee. It is therefore right to correct this, but it will be interesting to see whether a future update of the Statutory Guidance seeks to explain how this update is reconciled with the position at paragraph 15.39 (which regards "cultural activities which can be accessed by the general public free of charge" not to be "an economic activity for the purposes of the Act").
2) Greater emphasis on ring-fencing arrangements
Ring-fencing involves putting in place arrangements to segregate and track funds. It has long been best practice in Subsidy Control and is now expressly recommended at paragraph 3.104.
Examples of ring-fencing are set out, which includes:
- establishing separate legal entities for different activities. This ensures that financial resources and liabilities are distinct and managed independently;
- implementing distinct accounting systems for different activities. This involves maintaining separate financial records to track income, expenses, and assets for each activity.
- creating independent operational structures, such as separate management teams and operational processes, to ensure that activities are managed independently".
This is a helpful amendment. Ring-fencing is particularly useful when a recipient of funding undertakes some activities which are economic in nature and others which are not. The point is to be able to segregate such activities and thereby to be able to demonstrate that one set of funds is reserved to a particular set of activities and there is no leakage or cross-subsidisation. As the Statutory Guidance states, ring-fencing "can help prevent funds being used to cross-subsidise other areas of the beneficiary’s business".
3) Clarity on identifying the "Public Authority" for the purposes of making the Subsidy Control assessment
The Statutory Guidance has been updated so that it is (even) clearer that a public authority which has administrative discretion over the types of award which will be made (for example, Combined Authorities delivering the Brownfield Housing Fund) will be the awarding body. The guidance now states at paragraph 1.9 that "if the central government department is making the fund available for the local authority to make decisions on how it is spent, the local authority is the public authority for these purposes". This is a helpful amendment and should assist clarity in situations where local authorities are administering funds deriving from central government departments.
4) Additional clarity on the steps to take during the cooling-off period after a SAU Report
The Statutory Guidance is now more strident about the steps a public authority should take in the five working days after a Competition and Markets Authority report stating at paragraph 11.17 that "during this time, public authorities should reflect on the SAU’s findings before deciding whether to give the subsidy or make the subsidy scheme. Public authorities are recommended to review the SAU’s findings and to make a written record of whether and how they intend to act upon them, either with respect to the principles assessment or the underlying design of the subsidy".
This would have generally been considered best practice anyway but it is helpful that the guidance now more explicitly makes plain that public authorities should not only consider the feedback provided within the report, but also create a record of the steps they have taken to respond to the points made. It is self-evident that the first questions a challenger to an award, that had been the subject of a CMA referral, would ask are how did the authority deal with each point made by the CMA before the subsidy award was entered into.
5) Update in light of changes to the National Transparency Database
Although there have yet to be significant changes to the functionality of the National Transparency Database, there has been a recent update to the information which must be uploaded. The additional requirements are now listed at paragraphs 12.30 and 12.31.
6) A clearer Polluter Pays test
One of the criticisms of the regime is that it does not go far enough to require public authorities to consider the environmental impact of proposed subsidies as part of the decision making process. One aspect of this is the "polluter pays" principle which applies to situations where public funds and resources are used to alleviate "the beneficiary from liabilities arising from its responsibilities as a polluter under the law of England and Wales, Scotland, or Northern Ireland".
The Statutory Guidance still refers to the principle applying "in relation to energy and environment" subsidies, but now includes an express referral to the UK’s Environment Act 2021, stating that this requires "the UK Government to produce an environmental principles policy statement". The duty is limited to Ministers of the Crown so will not affect the majority of public authorities.
7) Additional references to "Managing Public Money"
As we move towards greater devolution we can expect the Central Government standards around the administration of public funds to be discussed at the level of Combined Authorities and other public bodies in receipt of additional powers and funds. It is therefore unsurprising to see Managing Public Money now expressly referred to at paragraph 1.11. The guidance was already referred to in the context of clawback of subsidies, with the Statutory Guidance stating that public authorities should take account of "responsibilities, such as those set out in ‘Managing Public Money’, which may lead it to recover a subsidy even in circumstances where this would cause harm to the beneficiary".
Analysis
Public authorities are required to have regard to the Subsidy Control Statutory Guidance and the lawfulness of awards is assessed at the point the legal commitment is made by the public authority. Therefore it is perhaps unfortunate that the Statutory Guidance has been updated without informing public authorities in advance. Hopefully future updates will be published with five working days' notice of the Statutory Guidance coming into effect. This would give public authorities which are about to enter into legal commitments the opportunity to reflect on the changes.
In terms of the changes which have been made (with the exception of correcting the error at paragraph 15.15) these are not far reaching, and certainly not transformational. Rather, they seek to refine what is already known about the regime.
It is also noted that the new Statutory Guidance has been published only days after a recent consultation on the operation of the UK subsidy control regime had concluded. It is unclear whether the Statutory Guidance will therefore be updated again once that consultation has been duly considered. Further detail on that will no doubt emerge in due course but just three areas for consideration might be:
- Definition of the "month" for the challenge window to be based on working days. There was a spike in the number of subsidies placed on the National Transparency Database shortly before the Christmas holidays. Such a clarification within the Statutory Guidance would address concerns that this could be a way to play the challenge system;
- Refining the requirements for subsidy schemes. This may well involve making subsidy schemes time limited (noting that currently 5 schemes which are listed as having a duration of 7,975 years (31 December 9999) and 42 schemes which have an unlimited duration). Public procurement law historically set a time limit of four years for frameworks, unless there are extenuating circumstances, which might be a useful precedent. In addition it would seem sensible to again draw upon public procurement law and require that a scheme must clearly set out all the expected beneficiaries and the anticipated value of subsidy which will be awarded, so that an interested party is better able to assess whether their interests are likely to be affected. Removing ambiguity as to interested parties' ability to challenge individual awards relying on a scheme would also be helpful;
- Corrections to other references in the Statutory Guidance which can mislead public authorities. This includes removing the reference to "unique" at paragraph 15.111 (noting that for example Taylor Swift is a unique singer, but operates in a competitive arts and entertainment market so would be subject to the regime if UK activities benefited from public funding).
Conclusion
The latest change to the Statutory Guidance is not as far reaching as one might expect, which suggests that there may well be another in the coming months which goes materially further, perhaps once the recent consultation has been fully digested. However, given the direction in the Act that authorities must have regard to the Statutory Guidance, then it is important that all staff at public authorities involved in making decisions involving public funding properly understand the Statutory Guidance in its most up to date form at any particular time, in addition to the text of the Subsidy Control Act 2022. For awards which are committed from 29 January 2025 onwards, this involves taking account of the fourth edition and latest version of the guidance.
DWF is a global legal services provider with an exceptional reputation for advising upon public funding matters, including advising upon complex Subsidy Control matters and making referrals to the Subsidy Advice Unit. Please feel free to contact us, if it would be helpful to discuss the issues raised in this article.
