The UK Government Publishes Its Subsidy Control Bill

The UK Government has today published its Subsidy Control Bill setting out the proposed new system of subsidy control to be implemented in the UK in 2022. As expected, it is closely aligned with the subsidy control rules in the EU-UK Trade and Cooperation Agreement which we have been following since 1 January 2021.

The Government has promised that the new system will allow quicker and more flexible support to UK businesses and that it will create a consistent, level playing field for subsidies across the UK.

Before giving a subsidy or setting up a subsidy scheme, a public authority will have to satisfy itself that the subsidy or scheme satisfies the seven subsidy control principles set out in the Bill. These principles will ensure the subsidy or scheme:

• Serves a specific policy interest to remedy an identified market failure or address an equity rationale
• Is proportionate and necessary
• Is designed to change the economic behaviour of the beneficiary
• Does not cover costs that the beneficiary would have funded anyway
• Is the least distortive means of achieving the policy objective
• Is designed to achieve the policy objective whilst minimising any negative effects on competition and investment within the UK
• Has beneficial effects in terms of achieving the policy objective which outweigh any negative effects on competition or investment within the UK or on international trade or investment.

The Government has provided a template which can be used by an authority to record its analysis of compliance with the subsidy control principles. The Bill contains additional principles which must be satisfied in the case of subsidies and subsidy schemes in relation to energy and the environment.

A new division within the Competition and Markets Authority (CMA), to be known as the Subsidy Advice Unit, will regulate and enforce the new rules.

My first impressions of the new regime are as follows:

• The new rules are clearly written and therefore easier to understand than the State aid rules – great news!
• As well as covering subsidies which may affect trade or investment between the UK and other countries, the rules also cover subsidies which will or may have an effect on competition or investment within the UK, thus seeking to preserve a level playing field within the UK. This is an increasingly important issue in this age of devolved regional government and bearing in mind the growing prevalence of generously funded city and region deals. In the same vein, there is an outright prohibition on subsidies given on condition that the recipient relocates some or all of its existing economic activities from one area of the UK to another (unless the relocation would have happened even without the subsidy). This is welcome since it will avoid the risk of devolved regions engaging in subsidy races to attract businesses to relocate from elsewhere in the UK.
• Where an enterprise’s activities involve dealing in goods or services on a market for a purpose which is not economic, financial assistance given for those activities will not be regarded as a subsidy. This is currently expressed in quite broad terms in the Bill which potentially opens up new possibilities for arguing the subsidy control rules do not apply and it will be interesting to see whether the drafting is tightened up during the Bill’s passage through Parliament.
• A key characteristic of the new regime is that it puts responsibility in the hands of a public authority to assess whether there is a subsidy and, if so, whether it aligns with the subsidy control principles. This assessment should slot neatly within the existing range of legal requirements and policy considerations which have to be addressed in connection with a public sector decision and so may not be as onerous an exercise as it may at first appear to be. No doubt Government guidance and publication of CMA reports will make assessment of compliance with the subsidy control principles easier over time.
• Whilst there are a number of exemptions within the Bill, there is nothing to suggest that there will be anything equivalent to the General Block Exemption Regulation under the State aid rules. Instead, it will be for public authorities to assess for themselves whether a proposed subsidy or subsidy scheme complies with seven subsidy control principles. However, assistance from the CMA will be available under the referral and reporting mechanism (see below).
• The rules apply to both the provision of subsidies and the setting up of subsidy schemes. However, the rules take a more relaxed approach to subsidies which are given pursuant to a subsidy scheme. In particular, there will be no need to carry out a further assessment as to whether a subsidy given under a scheme complies with the subsidy control principles, and it will only be necessary to publish details of such a subsidy on the Subsidy Database if it is for more than £500,000 (assuming details of the scheme have been published).
• It is also nice to see that the Bill provides clarity in some of the areas where there has been uncertainty. For example, when using the proposed new exemption for minimal financial assistance of up to £315,000 (see below), it is made clear that de minimis aid provided under the State aid regime is also to be counted towards this limit.

There are some interesting new features which, on a first read, promise to achieve a system which is relatively easy to navigate and which will not involve lengthy delays. Some of the key features are as follows:

• There will be a two-tier system for subsidies or subsidy schemes of interest and subsidies or subsidy schemes of particular interest. There will be regulations to define these and it seems the categorisation of a subsidy or subsidy scheme may depend on its value and the sector in which the beneficiary operates.
• A subsidy of particular interest, or a subsidy scheme of particular interest, must be referred to the CMA before it is implemented. The CMA must report on the subsidy or scheme usually within 30 working days. Following publication of the CMA’s report, there is a ‘cooling off period’, usually five working days, before the subsidy can be provided or the subsidy scheme can be put into effect. The purpose of the cooling off period is presumably to allow interested parties an opportunity to challenge the subsidy or scheme before it is implemented. These timescales are refreshingly short compared to the many months or years it can take to get a decision when State aid is notified to the European Commission.
• Although a subsidy or subsidy scheme of interest does not have to be referred to the CMA, there will be the ability to make a voluntary referral. In this case, the CMA can decide whether or not it will make a report and the public authority will not have to await publication of the report before providing the subsidy or setting up the scheme, although it may wish to wait if the purpose of making the voluntary referral is to achieve certainty that the subsidy or scheme is considered compliant. The voluntary referral mechanism may be helpful where there is doubt over whether a subsidy or scheme satisfies the subsidy control principles and the authority would like to mitigate the risk of a challenge. However, it is likely that the CMA will approach voluntary referrals on a priority basis, perhaps responding only to those which raise particular concerns or points of principle.
• Helpfully, the CMA’s report following a referral may include advice about how the public authority’s assessment of the lawfulness of the subsidy or scheme could be improved and as to how the subsidy or scheme could be modified to make it lawful. We may see the CMA over time becoming proactive in guiding public authorities towards better decision making which should help to achieve more certainty in the application of the rules going forward. It will be interesting to see whether the Subsidy Advice Unit incorporates the sort of economic and market analysis we see under competition law into its assessment of whether subsidies comply with the subsidy control principles. This approach would likely make the subsidy control principles more difficult and uncertain to apply and so may be unlikely, especially given the Government’s promise that the new rules will allow authorities to be nimble and flexible.
• The Secretary of State can refer a subsidy or subsidy scheme to the CMA after it has been implemented if they consider that the subsidy control rules have not been complied with or that there is a risk of negative effects on competition or investment within the UK.
• The rules on referral do not apply to certain types of subsidy, including: subsidies given under a subsidy scheme and subsidies given using the exemptions for minimal financial assistance (see below) and SPEI assistance. ‘SPEI’ stands for services of public economic interest, and there are specific rules for subsidies for SPEI which broadly mirror the State aid rules on services of general economic interest (SGEI).
• Certain types of subsidy are prohibited altogether, including unlimited guarantees (unlimited in duration or amount), and there are additional conditions which apply when providing a subsidy to a business which is ailing or insolvent. Happily, there is a definition of ‘ailing or insolvent’ which is clearer and probably easier to apply than the definition of ‘undertaking in difficulty’ which we had under State aid law.
• The Bill puts the Subsidy Database on a statutory footing. There is a requirement to publish details of subsidies and subsidy schemes. However, this transparency requirement does not apply to subsidies of up to £500,000 given pursuant to a published subsidy scheme, to subsidies of less than £14.5m for SPEI services or to subsidies of any amount for specific types of SPEI service, including hospital care, provision of long term care, childcare and social housing.
• As noted above, there is an exemption for ‘minimal financial assistance’ of up to £315,000 over a rolling period of three financial years, subject to complying with certain procedural and notification requirements. This exemption is similar to, but more generous than, the de minimis exemption under the State aid rules, but de minimis aid given under the State aid regime counts towards the limit. For these purposes, ‘financial year’ means a period of 12 months ending on 31 March. This is a notable change compared to the de minimis regime where, although the rules did not make it clear, it was assumed that financial years meant the financial years of the aid recipient. There is a similar exemption for ‘SPEI financial assistance’ of up to £725,000 given for SPEI services and, again, de minimis aid given under the SGEI de minimis exemption in the State aid rules counts towards this limit.
• There are exemptions for temporary subsidies given in response to natural disasters, exceptional occurrences or national or global economic emergencies. These may be helpful in the event of a future pandemic or financial crisis and so fingers crossed they will never be needed.
• Section 77 of the Bill creates a quasi-contractual right for a public authority to recover any subsidy which is used for a purpose other than the purpose for which it was given. This will be useful if the public authority has forgotten, or not had the opportunity, to include a clawback clause. It is always important to spell out exactly what a subsidy must be used for and I would still recommend incorporating a clawback clause into the documentation notwithstanding the new right in section 77.
• The CMA’s new Subsidy Advice Unit will play a big role in the new regime, both in relation to reporting on subsidies and subsidy schemes following a mandatory or voluntary referral, or referral by the Secretary of State, and in relation to dealing with any challenges. Challenges to the lawfulness of a subsidy will involve an application to the Competition Appeal Tribunal (CAT) by sending a notice of appeal in accordance with the Tribunal Procedure Rules made under section 15 of the Enterprise Act 2002. The application will be determined on judicial review principles and the usual judicial review remedies will be available. Furthermore, the CAT will be empowered to order recovery of an unlawful subsidy. Any person whose interests may be affected by the subsidy or subsidy scheme can bring a challenge, but there will be a short time limit within which any challenge must be brought. This is typically within one month from when details are published on the Subsidy Database, but where a pre-action request is made for information relating to the subsidy or scheme, the period of one month does not start running until that information has been provided. For those subsidies which are not required to be published on the Subsidy Database, the period of one month does not start running until the time when the challenger first knew or ought to have known of the subsidy decision. The fact that challenges will be determined on judicial review principles will mean that a public authority will be judged on the basis of reasonableness and rationality and so the CMA will likely allow for a margin of discretion.

All in all, my first impressions of the Bill are positive. It promises to bring a degree of precision and clarity which we do not see in the State aid rules and which has certainly been absent from the temporary rules we have been following since 1 January 2021. The role which has been scoped out for the CMA looks to be sensible and proportionate and will, I think, give the Government a sporting chance of delivering on its promise to create a system which is based on common-sense principles and free from excessive red tape.

Bethan Lloyd is a Partner specialising in Subsidy Control, State Aid, Public Procurement, Public Law and Competition Law.