WSG Article: Subsidy Control Act 2022: What’s new for public and private sector

Subsidy Control Act 2022: What’s new for public and private sector

May, 2022 - Shoosmiths LLP

With the Royal Assent of the Subsidy Control Act 2022, Shoosmiths considers how the Act moves the UK away from the state aid regime.

Summary

The Act aims to create a less onerous regime for controlling subsidies while still preventing negative impacts on competition and investment.
Public authorities must self-assess whether their subsidies or subsidy schemes meet the subsidy control principles.
Subsidies or schemes of particular interest must be referred to the CMA for review.

With the Royal Assent of the Subsidy Control Act 2022 (the ‘Act’) on 28 April 2022¹, the UK is finally implementing its own legal framework to regulate how public authorities make decisions to grant subsidies. The Act brings together the subsidy control principles agreed with the EU with the UK’s public policy objectives to set out how public sectors must assess subsidy proposals. These principles will be familiar to you if you have been involved in any public subsidy processes since Brexit, but the Act comes with more detailed practical guidance to consider.

While the Act moves away from the EU state aid rules, it still reflects the UK’s international obligations including the principles agreed in the Trade and Cooperation Agreement (‘TCA’) and other agreements, such as the WTO Agreement on Subsidies and Countervailing Measures. The government aims for the Act to be less onerous and more flexible than the EU rules, while still preventing the negative effects on competition and investment which subsidies can create. This is a difficult balance to strike, and in most cases the power and responsibility lies in the hands of public authorities to strike it.

Scope of the Act

Where public authorities at all levels of central and local government provide financial assistance to a business (or other organisation acting in an ‘economic’ capacity) which gives them an advantage over other businesses, this is a ‘subsidy’. The grant or award of a subsidy by the public authority is subject to the Act (although there are some exceptions such as subsidies under subsidy schemes pre-approved by the UK or devolved governments²).

The Act captures any direct or indirect financial assistance from public resources which economically benefits one or more ‘enterprises’ over others, and which is capable of affecting competition, trade, or investment in the UK or internationally. This may be broader than would be expected, capturing not only financial grants but also loans or guarantees on favourable terms, tax breaks, providing goods or services, or purchasing goods or services on terms better than those available on the market³¹.

Public sector assessment

The Act obliges public authorities to assess a proposed subsidy or subsidy scheme and whether it will be classed as a subsidy. It that is the case, public authorities will need to consider whether an exemption applies or whether it will comply with the seven subsidy control principles or. These are broadly in line with the principles under the TCA regime, with the addition of a new principle that a subsidy’s beneficial effects should outweigh its negative impacts on competition or investment. Subsidies relating to energy or the environment are also subject to additional principles⁴. The principles are closely interlinked and should be considered holistically as well as individually when making an assessment.

The principles require the granting public authority to satisfy itself that the subsidy is proportionate to, and the least distortive means of achieving, a specific public policy objective. It must change the economic behaviour of the beneficiary and make something happen or provide funding for something which would not have happened or been funded otherwise. Its objective must be to remedy a market failure or address an equity concern, and it must achieve these objectives while making the minimum negative impact on competition and investment.

The government’s illustrative guidance explains the principles and their application in detail, but they will be satisfied where, for example, subsidies will contribute to levelling up disadvantaged areas, employing disadvantaged workers, and extending access to key public amenities where this was not being achieved already and where the market is not stepping in to do so without any subsidies. A successful subsidy might enable a project to be brought forward, significantly improve its output or its scope, or make the project viable to start with.

On the other hand, subsidies or schemes are unlikely to comply with the principles if they, for example, risk a ‘subsidy race’ (a bidding war between two public authorities), create unnecessary distributional impacts (such as favouring youth employment at the expense of older unemployed workers), or are available only to a single enterprise rather than a broad set of recipients. In addition, subsidies which specifically require relocation (where businesses close down in one location to move to a new location where they will benefit from the subsidy) are prohibited outright by the Act,⁵ as are subsidies designed to rescue an ailing company from insolvency unless specific conditions are met⁶, unlimited guarantees and subsidies contingent upon export performance relating to goods or services or the use of domestic over imported goods or services.

To carry out its assessment, the public authority must consider several questions, such as whether the amount/value of the subsidy should be reduced or limited in other ways (such as making it a one-off arrangement). In practice, any subsidy will be subject to terms and conditions which ensure public funds are ringfenced, timescales are agreed, and regular monitoring against the public policy objective is carried out.

While putting the assessment in the hands of public authorities gives them a great deal of responsibility, it also puts a burden on them to carry out a large amount of detailed analysis. Placing this responsibility in their hands risks inconsistency in which subsidies are deemed acceptable, and may mean poor judgements are made about what negative impacts may result from those schemes.

Exemptions are similar to those under the previous state aid regime, including a limit of £315,000 available over a rolling period which includes the elapsed part of the current financial year, and the two financial years immediately preceding the current financial year, and subsidies granted to organisations tasked with carrying out particular tasks in the public interest (including public service obligations), known as services in the public economic interest, where the amount is below £725,000 over a rolling period which includes the elapsed part of the current financial year, and the two financial years immediately preceding the current financial year.

Example cases

Subsidies are commonly used to support regional development, offering financial assistance to developers or other organisations to develop areas which were previously referred to as ‘Assisted Areas’. Under the EU state aid regime, regional development subsidies could generally be granted with confidence where they were promoting development of Assisted Areas safe in the knowledge they were unlikely to be challenged (provided they met certain conditions). Subsidies could, alternatively, be cleared with the European Commission, which could use its broad discretion to consider the benefit to regional development as a persuasive factor.

With the introduction of the Act, it is not immediately clear whether regional development subsidies will be given positive treatment on the same level, as no specific provision has yet been made for them. The obvious policy route open to the government is to establish a streamlined subsidy scheme (or series of schemes) which allows public authorities to grant a range of regional subsidies which intersect with the Levelling Up⁷ agenda and its objectives relating to, e.g., regenerating brownfield land. Unless that happens, public authorities will continue to have to make assessments against the principles on a case-by-case basis.

Oversight: the CMA’s role

The Competition and Markets Authority (‘CMA’) will now take on the role of overseeing subsidy awards through a new Subsidy Advice Unit (‘SAU’) established by the Act⁸. Subsidies or schemes ‘of particular interest’, which are those which can be assumed to have a significant risk of negative effects, must be referred to the SAU before granting. This threshold will be based on the financial amounts involved, whether they involve ‘sensitive sectors’, and whether they involve particular design features. Subsidies or schemes ‘of interest’, which may pose such a risk, may also be referred voluntarily, and the SAU will have discretion whether to review these. In either case, the SAU must then draft a non-binding report within (ordinarily) 30 working days.

Subsidies or schemes which do not meet either the ‘of interest’ or ‘of particular interest’ thresholds will not require further referral. Furthermore, once a scheme ‘of interest’ or ‘of particular interest’ has been established, subsidies granted under it will not require separate review. There are also a number of exceptions, such as for subsidies in response to natural disasters, given as minimal financial assistance, or for national security, which will not require referral. It is worth noting though that establishing a subsidy or scheme which does not meet the thresholds for review does not necessarily mean it is home and dry: the Secretary of State can call in schemes or subsidies for review which have not been referred voluntarily⁹.

Even after the report has been prepared, there will be a delay until a cooling off period of 5 working days (unless extended by the Secretary of State) has expired, during which time the public authority cannot give subsidies and can only be patient¹⁰. In addition, the Competition Appeal Tribunal (‘CAT’) will handle requests for judicial review of subsidy decisions¹¹. Interested parties have only a one-month window in which to apply to the CAT to review the subsidy decision¹². There is also limited scope for post-award referrals to the SAU, although only the Secretary of State will have the power to do so¹³.

However, while referring to the SAU will inevitably involve delays in implementing a subsidy, it will have the advantage of giving public authorities legal certainty about their planned programs. It will also ensure, at least for the subsidies which are referred, that there is greater consistency in what schemes are permitted and more informed decision making about negative impacts.

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