Liz Truss has announced a raft of new policies intended to rapidly deliver economic growth, including the creation of new 'Investment Zones'. Businesses which relocate to or set up within these designated areas will benefit from time limited tax incentives and lighter regulation. Such bespoke benefits (which are not yet fully defined) do not normally sit easily with Competition Law.
What are Investment Zones?
The Government describes Investment Zones as "designated sites where businesses will benefit from time-limited tax incentives and streamlined planning rules to deliver investment, create jobs and build the homes that communities need".
Mayoral Combined Authorities, Upper Tier Local Authorities and designated Freeports have all been invited to submit expressions of interest to the Government by the end of Friday 14th October 2022, to establish Investment Zones in England. In Scotland, Wales and Northern Ireland discussions are underway about how Devolved Administrations may establish Investment Zones.
How many areas will benefit from Investment Zones?
According to reports in the Financial Times, a decision has been made not to cap the number of Investment Zones. The Chancellor of the Exchequer was reportedly keen for the number to be limited to around 40, noting that this could cost the Treasury around £12bn in lost revenue. However Prime Minister Liz Truss is keen to delay the decision making process about the number of Investment Zones until all Expressions of Interest have been received.
What kinds of benefits will be on offer within Investment Zones?
Eligible businesses within Investment Zones are expected to benefit from 100% business rates relief on newly occupied and expanded premises for a specified period, which is expected to be set at 10 years.Local authorities hosting Investment Zones will receive 100% of the business rates growth, above an agreed baseline, for a period of 25 years as well as receiving financial assistance to cover revenue lost during the initial tax holiday.
In addition, businesses will receive full stamp duty land tax relief on land bought for commercial or residential development and a zero rate for Employer National Insurance contributions on new employee earnings up to £50,270 per year. There will also be a 100% first year enhanced capital allowance relief for plant and machinery used within designated sites and accelerated Enhanced Structures and Buildings Allowance relief of 20% per year.
The Government is also looking to substantially reduce planning rules in order to encourage rapid development and business investment. Further detail about the Government's plans in this area is expected to be announced in the coming weeks as part of a wider reform of the planning rules.
Are Investment Zones likely to give rise to subsidy control issues?
Yes, Investment Zones provide businesses within the designated area with specific benefits which are not made available to those outside. As a result, there is a direct competitive advantage to being within an Investment Zone that is selective, ie. available to some but not others within the same territory based on a criterion of physical location only.
Under EU law, benefits such as stamp duty land tax relief and business rates relief provided to those within Investment Zones would amount to a 'selective advantage' and be considered to constitute a State aid (as with historic Enterprise Zones in the UK). As such, to be lawful the public sector financial assistance would need to be delivered under a notified scheme or through one of the European Commission's block exemptions. For example, Enterprise Zones were often administered on the basis of the De Minimis block exemption, with support to individual businesses limited to €200,000 of State aid. Whilst this simplified the administration, it limited the benefits available to a comparatively low sum.
The definition of Subsidy at Section 2 of the Subsidy Control Act 2022 is similar to that of State aid, a subsidy will arise whenever financial assistance is:
"(a) given, directly or indirectly, from public resources by a public authority,
(b) confers an economic advantage on one or more enterprises,
(c) is specific, that is, is such that it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services, and
(d) has, or is capable of having, an effect on—
(i) competition or investment within the United Kingdom,
(ii) trade between the United Kingdom and a country or territory outside the United Kingdom, or
(iii) investment as between the United Kingdom and a country or territory outside the United Kingdom".
The key difference with State aid is the ability to find a subsidy to be present when the measure merely affects competition on a local level. The issue of selectivity (or not) as in the third limb above is the same as for State aid. Therefore bespoke financial assistance provided through Investment Zones to businesses is likely to amount to a subsidy. The value of each subsidy will need to be calculated before it can be awarded.
How can Investment Zone subsidies be lawfully awarded?
Officials working on the Investment Zone policy will be considering different structures under which Investment Zone subsidies may be awarded in compliance with the Subsidy Control rules. In doing so, they'll be keenly aware that the remaining sections of the Subsidy Control Act 2022 are expected to come into force in Autumn 2022.
The guidance implies that responsibility for Subsidy Control compliance will rest with the local public bodies applying to establish Investment Zones. Although applicants are invited to "seek guidance from BEIS and DLUHC on how to ensure subsidies granted in Investment Zones take into account subsidy control requirements", it is telling that support for Investment Zones is also stated to be "conditional on complying with Subsidy Control" requirements.
There are numerous ways which the Investment Zone policy might be designed to meet the relevant rules. Lower value subsidies might be delivered under the Minimal Financial Assistance route, which allows up to £315,000 of subsidy to be awarded in a three year period, subject to certain conditions. This works in similar ways to the De Minimis block exemption route under EU law, even though it allows nearly double the value. The problem with this route is that businesses within Investment Zones are likely to quickly reach this threshold or be denied further funding because of other subsidies received on the same basis. It is particularly burdensome for large multinationals.
Larger, more ambitious, subsidies might be awarded by building up a case to demonstrate that each of the Subsidy Control Principles at Schedule 1 of the Subsidy Control Act 2022 has been satisfied. Whilst it is possible to make such a case, it's important to recognise that there are various potential pitfalls with this route. Firstly, where funding is conditional upon relocation into the Investment Zone, Section 18 of the Subsidy Control Act 2022 applies, meaning that there might be an additional obligation to demonstrate the subsidy "results in an overall reduction in the social or economic disadvantages in the United Kingdom generally" before any financial assistance may be awarded. The concern will be that this requires the public authority to collect detailed evidence demonstrating that the measure does not merely displace economic activity.
Other pitfalls arise from applying the Subsidy Control Principles at Schedule 1 of the Act, for example:
- Principle A requires there to be a specific public policy objective to address an equity rationale such as regional disadvantage or a market failure. In this context it will be important to show what is the objective being fulfilled by using subsidies to support a company locating within an Investment Zone. This will be more challenging if the company is merely relocating from elsewhere in the UK, particularly if that area suffers from regional disadvantage or market failure itself.
- Principle B requires the subsidy to be proportionate and the minimum necessary to achieve the objective. In this context there will need to be consideration of how the amount of subsidy is matched to the need of the subsidy recipient. This is more difficult in a tax based incentive which is not personalised to the beneficiary.
- Principle C requires the subsidy to demonstrate a behaviour changing effect. In this case we would expect there to be a need for the beneficiary to demonstrate behaviour that would be different in the Investment Zone that would not necessarily happen elsewhere (assuming they are currently located elsewhere in the UK).
- Principle D addresses another side of the so-called incentive effect which is to ensure that the subsidy is not supporting costs which are already committed. To this extent it may be important to show the subsidy will go towards new investment costs that have not yet been legally committed nor been contracted.
- Principle E requires the authority to show that the subsidy has been considered against other non-subsidy measures which might have achieved the same original objective. This would normally require an authority to show that other interventions (eg. improved public infrastructure) would not have been likely to deliver the same results.
- Principle F requires the authority to show that it has taken steps to minimise any negative effects on competition or investment within the UK internal market. This is often linked to Principle B in terms of keeping the subsidy to the minimum, but the competition element also requires an assessment of the relevant market(s) affected. This is difficult to do on a blanket basis when beneficiaries may be in different sectors, unless an approach is taken that the amounts of subsidy will be kept so low as to necessarily minimise negative effects. The need to demonstrate steps have been taken to minimise negative effects on investment requires consideration as to whether the measure is merely displacing economic activity from other parts of the country or, alternatively, only filling gaps in demand and thus a genuine incremental benefit only.
- Principle G finally requires an authority to have made a balancing judgment that the positives from achieving the specific public policy objective in each case outweighs the negative effects on competition or investment. The law does not set relative store on particular benefits or negatives (hence providing significant room for maneouvre) but this Principle does nevertheless require evidence of a judgment having been properly made on the basis of appropriate information, and in a case of mere relocation it might be expected that more searching questions would be asked of what are the benefits that are really being achieved. We note that officials are inviting applicants to provide information around agglomeration benefits, but clearly any such arguments must be specific to the local situation and need to be substantiated in order to see off any subsidy control challenge.
Having noted all the above, there are a couple of ways by which the Government might be able to "sidestep" some of the above. One route is to make the awards of financial assistance through primary legislation, and another is to create Streamlined Routes to make such awards. In both cases, these routes are only available to Central Government, and they would both reduce flexibility on the basis they would necessarily require the terms and conditions to be precisely codified in advance. As such Government might make it the responsibility of the local public bodies to find their own Subsidy Control solutions.
Whilst similar considerations apply in both Wales and Scotland, Northern Ireland's Investment Zones will need to take into account State aid law in situations where Article 10 of the Northern Ireland Protocol applies.
Are there any other Subsidy Control issues which might affect Investment Zones?
The draft guidance on the Subsidy Control regime explicitly states that economic activity arises when an entity offers goods or services on a market, but also that it is "not relevant whether the persons in question are privately or publicly financed". As such, a public body which invests in building or refurbishing commercial units within an Investment Zone, which it plans to rent out, will also need to ensure that such funding complies with Subsidy Control law.
As with Freeports, there's likely to be significant interest in applying for Investment Zones. Ultimately time will tell as to whether these will displace existing economic activities or create new clusters, but in the short term it will be necessary to ensure that the financial assistance provided meets the requirements of Subsidy Control law and is therefore safe from challenge.
DWF Law LLP has exceptional experience in competition law issues including State aid and Subsidy Control. 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. Please free to get in touch, if it would be useful to discuss any of the issues raised in this article or other matters related to public funding. Our UK offices include Belfast, Birmingham, Bristol, Edinburgh, Glasgow, Leeds, Liverpool, London, Manchester and Newcastle