Subsidy Control

The Subsidy Control Act 2022 creates a statutory UK State aid regime, regulating certain awards of financial assistance made by public authorities. The Subsidy Control Act 2022 received Royal Assent on 28th April 2022. 

The objective of the Subsidy Control rules is to ensure that financial assistance provided to economic entities through public funds and resources is awarded within a framework which achieves value for money and minimises distortion within the market.  The rules are also designed to align with the UK's international commitments as set out in the EU-UK Trade and Cooperation Agreement ("TCA") and other trade agreements.

There are six core considerations that a public body must take into account in order to satisfy the Subsidy Control rules, these being:

• the Subsidy Control Act 2022;
• the EU/UK Trade And Cooperation Agreement of 24 December 2020 ("TCA");
• the Northern Ireland Protocol;
• the (EU/UK) Withdrawal Agreement;
• the WTO rules; and
• other trade agreements which the UK has entered into.

It is in the interests of both the funder and the applicant to ensure that the legal requirements are correctly satisfied.  Failure to do so may result in the funding being recovered following a legal challenge.

A subsidy is financial assistance from the public sector which falls within the definition at Section 2 of the Subsidy Control Act 2022.  Examples of subsidies include grants, loans at less than market rates of interest, tax rebates as well as the sale or lease of assets at less than market rate.   In the UK, the Subsidy Control rules regulate subsidies. In the EU, the State aid rules regulate subsidies. 

The Subsidy Control Common Principles are six criteria that can be used as a basis to lawfully award public funding under the new Subsidy Control rules.  

Also known as the 'Common Principles', the rules listed at Article 366 of the EU-UK Trade and Cooperation Agreement are a basis upon which subsidies may be justified (and provided other administrative requirements are also satisfied, lawfully awarded).  

The Subsidy Principles are that:

• subsidies should pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns (“the objective”)
• subsidies should be proportionate and limited to what is necessary to achieve the objective;
• subsidies should be designed to bring about a change of 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;
• subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
• subsidies should be an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means; and
• subsidies’ positive contributions to achieving the objective should outweigh any negative effects, in particular the negative effects on trade or investment between the Parties.

Many organisations have difficulty in preparing a clear and robust case justifying why the subsidy is lawful.  Subsidy Control legal challenges are likely to focus upon the Common Principles having not been met, therefore expert advice is often required to ensure that the public funding is not at risk of clawback. 

Article 367 of the EU – UK Trade and Cooperation Agreement prohibits:

• subsidies in the form of unlimited guarantees;
• subsidies in the form of a guarantee of debts or liabilities of an economic actor without any limitation as to the amount of those debts and liabilities or the duration of that guarantee;
• subsidies for restructuring an "ailing or insolvent economic actor" without the economic actor having prepared a credible restructuring plan;
• other than in exceptional circumstances, subsidies for the rescue and restructuring of insolvent or ailing economic actors should only be allowed if they contribute to an objective of public interest by avoiding social hardship or preventing a severe market failure;
• subsidies to restructure banks, credit institutions and insurance companies without a credible restructuring plan that restores long-term viability;
• subsidies that are contingent upon export performance relating to goods or services (with exceptions); and
• subsidies contingent upon the use of domestic over imported goods or services.

Checks need to be taken against each of the requirements prior to public funding being awarded. 

The UK's new Subsidy Control rules include an obligation for the funder to publish information online.  Failure to publish the correct information online within six months of the award has potentially negative implications for both the funder and the recipient.

The information on subsidies that must be published within six months includes:

1. the legal basis and policy objective or purpose of the subsidy;
2. the name of the recipient of the subsidy, when available;
3. the date of the grant of the subsidy, the duration of the subsidy and any other time limits attached to the subsidy; and
4. the amount of the subsidy or the amount budgeted for the subsidy.

The transparency provisions are important because they start the challenge period under which an interested party may bring a judicial review action against an unlawfully awarded subsidy.

A subsidy may be challenged by the European Commission through inter-governmental mechanisms established under the TCA, or in the (UK) national court by an "interested party" through a judicial review action.  

An interested party under the TCA is defined at Article 369(6) as "any natural or legal person, economic actor or association of economic actors whose interest might be affected by the granting of a subsidy, in particular the beneficiary, economic actors competing with the beneficiary or relevant trade associations".  The purpose of the transparency obligations is to enable interested parties to make an "informed decision" as to whether to bring a challenge.  

Any subsidy granted in the UK may also be capable of being examined under other international frameworks such as the WTO and through other bilateral trade deals as the UK may enjoy with other third countries, albeit the main risk to guard against will normally be a domestic challenge in the national court.

DWF is the leading UK law firm for Subsidy Control advice, providing expert advice to over 150 public sector bodies and international businesses looking to safely secure public funding. 

DWF has offices across the UK including in Belfast, Birmingham, Bristol, Edinburgh, Glasgow, Leeds, Liverpool, London, Manchester and Newcastle. We also have a strong international network of offices including across Europe, Asia and North America.