The ability to mastermind the UK's own State aid regime was presented as one of the best opportunities of Brexit. Well-targeted State subsidies can be used to dramatically improve economies, creating new jobs and nurturing the businesses of tomorrow. Furthermore, the point of being distinct from the EU regime was that such decisions should be determined by the UK only, and for the benefit of the UK. As a result, there has been considerable hype ahead the Subsidy Control Bill, with political advisers claiming to the BBC that it represents "the most important bit of post-Brexit legislation yet".
What does the Subsidy Control Bill do and not do?
Contrary to reports, the Subsidy Control Bill does not "sweep away EU State aid rules". The EU State aid rules were already disapplied at 11pm 31 December 2020 through the State aid (Revocations and Amendments) (EU Exit) Regulations 2020, which implemented directly into UK law the provisions of the UK-EU Trade and Cooperation Agreement of 24 December 2020 ("the TCA"). The only areas under which EU State aid rules do still apply in the UK (most controversially via the Northern Ireland Protocol) are not repealed by the draft legislation.
Indeed, it should be fundamentally understood that the framework for the UK's State aid rules (now known as Subsidy Control) is set out within the TCA, which is an international treaty commitment on the part of the UK Government. What the Subsidy Control Bill does do is present further detail or rather put some "flesh on the bones" for the new regime which has been in place since 11pm 31 December 2020. The Subsidy Control Bill therefore represents an opportunity to take stock of what has worked well and not so well over the last six months, and improve upon it. The Subsidy Control Bill also provides an opportunity to specify the identity and powers of the "independent authority" required by the TCA to supervise the UK Subsidy Control Regime, and to specify the Court or Tribunal that shall consider Judicial Reviews brought against subsidies. What the Subsidy Control Bill cannot do, however, is re-write or fundamentally run counter to the TCA.
What are the current rules that apply to subsidies granted in the United Kingdom?
During the last seven months the UK has had a Subsidy Control regime that asks every public body (no matter how big or small) to work through the UK's international commitments on subsidies when awarding public funding. The primary consideration for most Subsidy Control assessments during this time has normally been the requirements set out in the TCA only. However it has also been necessary for public bodies making awards of funding to consider the application of other international commitments such as the Northern Ireland Protocol and the World Trade Organisation's Agreement on Subsidies And Countervailing Measures. For the purposes of this article we will consider the TCA only.
The Subsidy Control requirements in the TCA were put directly into domestic law through Section 29 of the Future Relationship Act. Therefore the obligations of the TCA apply to over 500 public bodies awarding subsidies in the United Kingdom. In practical terms, the new rules allow funding to proceed in a wider variety of situations than under the old EU State aid rules (for example, supporting businesses involved in manufacturing steel is significantly easier). Furthermore, the challenge period can be as short as one month, compared to the ten year window in EU State aid law. Therefore, it is fair to describe the system as faster and more permissive than EU State aid rules.
The TCA requirements at Chapter 3 include a definition of what constitutes a subsidy and different ways in which a subsidy may be lawfully awarded. In most cases this involves applying six 'Common Principles' which require that the award can be shown to:
- pursue a specific public body objective to remedy and identified market failure or to address an equity rationale such as social difficulties or distributional concerns;
- be proportionate and limited to what is necessary to achieve the objective;
- be designed to bring about a change in economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided;
- must not normally compensate for the costs the beneficiary would have funded in absence of any subsidy;
- must be an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means; and
- have positive contributions to achieving the objective that outweigh any negative effects in particular the negative effects on trade or investment between the parties.
The Common Principles are self-evidently sensible but are not precise and therefore have created some uncertainty, particularly as against the more clearly defined boundaries set out within the EU "block exemptions" that they have effectively replaced. The extra room for manoeuvre afforded has been both helpful but also of concern to the extent of any lack of certainty that the tests are definitely met. Questions have (quite rightly) arisen around the level of detail (and evidence) required for such assessments and the exact meaning of each of the terms. To assist with this the Department for Business Energy and Industrial Strategy (DBEIS) recently published FAQs, but there remains significant uncertainty as to how relevant authorities can be completely sure that the Common Principles are met.
For the largest awards (i.e.. those that went beyond the allowable limits in block exemptions), the system should be much quicker than under the EU State aid rules, because there is no obligation to seek approval for such measures through the lengthy and formulaic notification and pre-approval procedure with the European Commission. For lower value awards, in particular the 95% (or more) of measures which were able to quickly proceed under block exemptions in the EU State aid regime, there is a general view that the new Subsidy Control regime hasn't delivered discernible advantages yet. This is because such awards were generally allowed to proceed quickly anyway under the block exemptions and now they must do so with arguably more concern and reduced legal certainty.
Subsidies can be challenged through the judicial review process. In many cases the challenge period will start from the point transparency information about the subsidy is published on the national database. The challenge window is short, creating a significant contrast to the EU system in which the European Commission had up to 10 years from date of last award in which to investigate.
What changes are made under the Subsidy Control Bill?
The text of the Subsidy Control Bill can be found here. As draft legislation, of course there is the opportunity for the contents to be substantively amended during its passage through Parliament.
The first impression is that it is a long (66 pages) document which is complicated to read. This is difficult to reconcile with the Government's claim that it will create a "simple, nimble" regime through the Subsidy Control Bill.
The basic structure of the Subsidy Control Bill generally aligns with the interim regime that the UK has had in place for seven months. However there are additional considerations, in particular for the most sensitive and high profile awards.
Key changes include:
- The definition of Subsidy is expanded to expressly include measures that only affect competition within the UK. This shows that the UK clearly (and we believe quite rightly) considers it as important to protect competition within the UK as outside the UK. .
- Although there are no "safe harbours" expressly prescribed within the legislation (i.e.. conditions which if met guarantee compliance with all of the Common Principles), the ability to create these later appears available under Section 10 as "streamlined subsidy schemes". Given the importance of these provisions to the majority of subsidies we call on the Government to publish the secondary legislation setting out the types of streamlined subsidy schemes and the relevant conditions at the earliest possibility.
- The 325,000 Small Amounts of Financial Assistance provision (equivalent to £331,000 at the current conversion rate) is set at £315,000, thereby providing a consistent sterling figure to rely on.
- The six Common Principles now include a seventh additional principle that "Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom" at Schedule 1(F).
- There is no obligation to report certain awards below £500,000 on the transparency database.
- Measures that are conditional upon the relocation of economic activity from one area of the UK are prima facie prohibited, which may create extra considerations for projects seeking to attract investment into disadvantaged areas. The logic of this rule seems at first difficult to reconcile with the levelling-up agenda and so may be particularly unpopular with former "red wall" areas, but at this time appears limited to situations where an express condition is placed on the subsidy to this effect, rather than where it is a consequence of the funding.
- The definition of "ailing or insolvent enterprises" at Section 19 includes extra provisions to complicate and render more rigid that assessment beyond the simpler definition set out in the TCA which was merely one of likely to go out of business in the short to medium term absent the subsidy. The new rule will require particular solvency checks to be done for every subsidy award to root out companies for whom liabilities exceed assets. This may be a barrier in particular for tech and R&D-based start-ups in their early years of trading. It is unclear why a further rule is required and we anticipate this may cause problems much as the "undertaking in difficulty" rules did under EU State aid rules.
- Under Article 371 of the TCA there is an obligation to set up an "independent authority with an appropriate role in the subsidy control regime". The Subsidy Control Bill establishes that the new Subsidy Advice Unit will be set up as part of the Competition and Markets Authority (CMA), which has built an excellent reputation for its role regulating other aspects of UK Competition law.
- Under Part 4 the CMA will provide reports on proposed subsidies when in receipt of a mandatory or voluntary referral (ie. a notification). A subsidy that is subject to a requirement for a mandatory referral will be prohibited if not made following the correct procedure. The categories of subsidies for which such mandatory or voluntary referrals must or can be made will be set in future by specific separate regulation declaring the same. While it remains to be seen what the relevant categories of subsidy might be (for example by reference to sector, type of beneficiary or value or a combination of the same), this is probably the single biggest change emerging from the Bill. If the categories allowed for voluntary referrals are wide we would expect this to result in significant volume on the basis the relevant parties will be anxious and feel the need to mitigate their risk where there is a viable option to do so, even if the burden of making such a referral is onerous.
- Under Section 59 of the Bill, CMA reports will consider the effects of a subsidy, setting out its findings in a report. This may reach a conclusion for or against the award of the subsidy but may also consider how the intervention could be improved or modified. Importantly, the CMA will have no absolute powers to prohibit the granting of support.
- The CMA will have the power to look into past subsidies with a view to making a report on the same, which can include directions for future awards to the extent there are any.
- It is planned that there will be strict response times for the production of CMA reports following receipt of a referral. However this may be a false expectation because if there is a short deadline for delivering a report, then the knock-on effect would be expected to be longer lead times between making any referral and the CMA agreeing the same is complete and thereafter "starting the clock".
- The appropriate body to consider Judicial Review challenges under the Subsidy Control regime is to be the Competition Appeal Tribunal, hence the body with most experience of applying other areas of Competition Law such as merger control, cartels and abuse of a dominant position.
Does the Subsidy Bill achieve its stated objective?
The Government announced the Subsidy Control Bill with the statement that it will "create a new system for subsidies that can enable key domestic priorities, such as levelling up economic growth across the UK and driving our green industrial revolution".
We reiterate that what is envisaged under the Subsidy Control Bill is not a new system but rather a further implementation and development of the framework put in place by the TCA (already been in force since 11 pm 31 December 2020). In due course, and especially once there are declarations of categories of subsidy subject to mandatory or voluntary referrals to the CMA, then for the largest awards there will be additional considerations and procedures to take into account. Some of this may feel slightly at odds with the previous apparent desire to make everything simpler and quicker, particularly if the contrast is not with the EU State aid regime, but with the interim regime in place since the beginning of this year.
As regards the system helping to enable key government priorities, this is not obviously sign-posted, although of course only time will tell ultimately. In particular the regime doesn't specify what public policy objectives deserve to be supported, nor give preferential weight to issues such as (for example) location within more disadvantaged areas. Instead, over 500 public sector bodies must make their own assessments as to which objectives are considered appropriate. The result of this may be that different priorities emerge across the country.
The decision to remove the EU-driven notion of "assisted areas" means that there is no preferential system for extra support to disadvantaged regions. Previously a manufacturing business considering whether to locate to Middlesbrough or Mayfair could be incentivised to choose Middlesbrough through established previous EU Regional Investment Aid Intensity Levels (30% for a small business) which would not be available to the same extent for the same project in Mayfair. Now both areas could feasibly make a case as to why their funding packages meet the Common Principles, and especially if viability gap is the key issue then this could result in larger interventions in wealthier areas where investment costs may be higher.
At the same time, an additional prohibition on relocation projects is likely to cause problems for any so-called "North-Shoring" projects (or indeed anything moving to a new freeport area). Public funding will be prima facie prohibited where the subsidy is expressly given on the condition that it aims to attract a business to move from one area of the UK to another. Therefore a funding package to incentivise a business to relocate from Mayfair to Middlesbrough could be prima facie prohibited under the new rules. This could be an impediment to the levelling-up agenda, although Parliament may develop the prohibition so it is clearly limited to situations where there is an express condition or by limiting the meaning of an 'area' for this purpose. Businesses are sometimes incentivised to relocate within a region, perhaps merely for the purposes of facilitating new transport networks or some other generally helpful purpose that is in no way distorting competition. We would suggest the rules are designed to allow public funding to proceed in such situations.
The Subsidy Control Bill does require measures already directed towards energy and environment to take into account additional considerations (clarifying an issue emanating from the TCA) but not other projects such as grants to build offices. Given the UK Government recognises environmental protection is a national priority, we would not be surprised if the Bill was amended to ensure public bodies consider the environmental impact of public funding in all instances.
How to improve the Subsidy Control regime?
The starting point for creating a highly effective new regime is to recognise that most public sector interventions and subsidies awarded will not be problematic, and to make life easy for those awards, while retaining the higher levels of scrutiny for the larger and more potentially distortive awards.
The Government might also offer further clarity to situations where there will be no subsidy at all, eg. general public realm, or market economy investments by public bodies. This might also include, for example, clarifying situations where culture and heritage funding may reasonably be considered outside of the regime as non-economic in nature. Given the similarity between the definition of 'subsidy' under the TCA and the definition of State aid under Article 107(1) of the TFEU, many public bodies will continue to refer to the European Commission's Notion of State aid, as the best guidance for what is a State aid and looking at this as the nearest equivalent to what is (and therefore what is not) a subsidy.
At the same time the Government might already consider specific safe harbours and/or streamlined subsidy schemes whereby the majority of awards of acknowledged subsidies can avoid having to apply the Common Principles (because they have been applied at a higher level already to give certainty to certain designated funding situations). These might focus on the Government's Plan for Growth objectives. The Bill does appear to afford the possibility of doing this in future. However given the importance of the streamlined subsidy schemes to the majority of awards, we would urge the Government to clarify this as soon as possible.
The Subsidy Control Bill might also be simplified to assist public sector bodies to work through the requirements. The situations in which mandatory or voluntary CMA reports are either required or enabled must be limited, because if this becomes standard practice then the system will clog up significantly, creating significant new cost burdens.
We would also recommend looking again at the the requirements around 'relocation' and 'ailing and insolvent actors', recognising that these may become problematic in practice and the latter in particular seems unnecessary.
Lastly, we note there isn't an apparent legal basis in the TCA for the proposed £500,000 reporting threshold at Section 33(2)(c). However the European Commission also applies a €500,000 reporting threshold in the General Block Exemption Regulation, hence the approach would seem pragmatic. Therefore the UK and EU should look to vary sections of Chapter 3 where both parties see merit in greater relaxations being written into the TCA.
The long awaited Subsidy Control Bill is undoubtedly a critical step forward in the evolution of a new UK Subsidy Control regime. Well-targeted State subsidies can deliver significant benefits, including accelerating the growth and development of new sectors. Therefore the Government is right to want to create a domestic subsidy control regime in the UK that reflects the UK’s strategic interests and takes account of its national circumstances.
Our view is that the Subsidy Control Bill is a step in the right direction. Ministers and Civil Servants have developed some clever new mechanisms in the Subsidy Control Bill which will help enable targeted awards, but care should be taken to ensure this delivers a regime that works well for all. The Bill must be capable of being clearly understood by all public bodies which must follow the new rules. At the same time, the UK must be careful not to put in place any more barriers in the way of effective controls than are necessary and proportionate, and/or obliged by reference to international treaty commitments. In this regard, we believe that the Government should provide more information on how it anticipates the "streamlined subsidy schemes" will deliver an easier means of providing subsidies to specifically targeted types of investment, and publish its proposed secondary legislation at the earliest opportunity.
DWF Law LLP has exceptional experience in public funding issues, including the Subsidy Control rules. Members of our Public Sector team have expertise and experience developed from working within Central Government, Local Government, the European Commission and alongside international companies securing public funding. As a result, we are a 'safe pair of hands' when it comes to awarding and receiving public funding. Please free to get in touch with our Subsidy Control lawyers if it would be useful to discuss any of the issues raised in this article or other matters related to public funding.