UK’s New Subsidy Control Law: Key Features You Need to Know
Richard Eccles highlights the key features of the Subsidy Control Act 2022
Public authorities and businesses in the UK have not escaped State aid controls with the UK’s withdrawal from the EU. Partly in order to fulfil commitments made in the UK-EU Trade and Co-operation Agreement, the UK government enacted the Subsidy Control Act 2022 which came into force at the start of 2023. This Act applies to any type of subsidy or financial assistance provided by a public authority to an enterprise, i.e. any business.
The new rules impose important considerations for any business receiving funding in any form from any public authority, because a court could order recovery of any non-compliant funding, i.e. it could require the relevant public authority to obtain repayment from the beneficiary business, possibly with interest. Public authorities, on the other hand, should be concerned to ensure that any financial assistance or support that they provide to any business is fully in compliance with the Act so that the projects or activities that they support financially can proceed without being reopened through subsequent legal action.
This briefing note highlights some key features of the regime laid down by the new Act, but without purporting to cover all aspects or details of the legislation. Certain types of subsidy are prohibited outright, some are prohibited unless specified conditions are satisfied. Subsidies meeting certain definitions have to be reviewed by the Competition and Markets Authority (“CMA”) before being granted, whilst other specified types of subsidies can be referred voluntarily by the relevant public authority to the CMA. Whether or not subject to review by or referral to the CMA, all subsidies must comply with the specified subsidy control principles (unless exempt) and there are additional separate subsidy control principles for the energy and environment sector. Further, there are transparency requirements whereby any subsidy amounting to more than £100,000 must be recorded by the relevant public authority on a transparency register to be provided by the Secretary of State.
The scope of the Subsidy Control Act
The scope of the Act is wide. A “public authority” is defined as including any person who exercises functions of a public nature, and an “enterprise” is defined as including any person engaged in an economic activity involving the supply of goods or services on a market. A “subsidy” means any financial assistance given directly or indirectly from public resources by a public authority, which confers an economic advantage on one or more enterprises. To be caught by the Act, the financial assistance must be specific, that is it must benefit an enterprise over other enterprises in the same sector. Also, to be caught, the financial assistance must have an effect on competition or investment within the UK or on UK trade or investment as between the UK and another country.
The Act applies not only to individual subsidies but also to subsidy schemes made by a public authority for the granting of subsidies under such schemes. The Act generally contains parallel provisions in respect of subsidy schemes and subsidies granted under such schemes. However, for convenience, this briefing note refers just to subsidies as opposed to subsidy schemes.
Relevant financial assistance includes grants or loans, the foregoing of revenue, the provision or purchase of goods or services and a contingent transfer of funds such as guarantees. In order to be treated as conferring an economic advantage, financial assistance must be provided on terms that are more favourable to the relevant enterprise than the terms that might reasonably have been expected on the relevant market. Taken together, these provisions mean that the provision of goods or services at under-value or the procurement of goods or services at over-value could be subject to the Act, as could likewise the provision of a guarantee on terms more favourable than could be expected from financial institutions.
The Secretary of State has issued detailed statutory guidance under the Act. Public authorities are required to have regard to this guidance when giving any subsidy.
The subsidy control requirements of the Act do not apply to any subsidy concerning Northern Ireland which is covered by Article 10 of the Northern Ireland Protocol to the EU Withdrawal Agreement. This results from the continued applicability of EU State aid rules in relation to Northern Ireland under the Withdrawal Agreement.
There are certain exemptions under the Act for specific types of public funding, and perhaps most importantly, there is a de minimis exemption for financial assistance, including any related subsidies, of less than £315,000 over three years ending with the specified year in which the relevant subsidy is given. The application of this de minimis exemption is subject to specified procedural requirements being fulfilled. These involve a defined written notification and a defined written confirmation being given by the public authority to the beneficiary enterprise and (in between) a specified written confirmation being given by the enterprise to the public authority.
Subsidies to enterprises providing services of public interest are exempt up to a level of £725,000 in a period of three consecutive financial years, subject to fulfilment of specified requirements concerning proportionality and specification of relevant details including the nature and scope of the relevant services and the relevant amounts, in a written contract or arrangement, and subject to the observance of procedural requirements (which concern notification by the public authority to the relevant enterprise and specified confirmation by the enterprise to the public authority regarding the amount concerned).
In any event, the transparency requirements apply regarding any financial assistance by a public authority of over £100,000.
There are further general exemptions for subsidies relating to natural disasters and economic emergencies, national security and other matters, including subsidies for nuclear energy or (subject to HM Treasury having issued a relevant “financial stability direction”) financial stability.
Certain types of subsidies are prohibited outright under the Act. These include the following:
- Unlimited guarantees, i.e. guarantees for unlimited amounts of debts or liabilities, or guarantees of unlimited duration;
- Subsidies contingent on export performance for goods or services, but excluding short term export credit insurance against non-marketable risks and certain export credits or export credit guarantees;
- Subsidies contingent on the use of domestic over imported goods or services (other than in the audio-visual sector).
Certain other types of subsidy are not prohibited outright but are prohibited unless certain conditions are met. The first such type of subsidies is any subsidy to an enterprise for relocation of its economic activities. Such a subsidy is prohibited unless the subsidy will reduce the social or economic disadvantages of the area that is to benefit from it, the subsidy will result in an overall reduction in social or economic disadvantages in the UK generally, and the subsidy is designed to bring about a change in the size, scope or nature of the relevant economic activities.
The other types of subsidies which are prohibited unless specified conditions are fulfilled, are subsidies for rescuing or restructuring an ailing or insolvent enterprise, and are essentially as follows:
Subsidies for rescuing such an enterprise are prohibited unless:
- the subsidy consists of temporary liquidity support in the form of a loan or loan guarantee;
- the enterprise is preparing a restructuring plan; and
- the subsidy contributes to a public interest objective by avoiding social hardship or preventing a severe market failure (or there are other exceptional circumstances).
Subsidies for restructuring such an enterprise are prohibited unless:
- the relevant enterprise is an SME whose owners, creditors or new investors have contributed significant funds or assets to the restructuring (or have a contractual obligation to do so);
- the enterprise has not received a restructuring subsidy in the previous five years (unless the relevant circumstances were unforeseeable and not caused by the beneficiary enterprise);
- the subsidy is granted in the context of a credible and realistic restructuring plan prepared by the relevant enterprise with a view to ensuring its return to long-term viability within a reasonable period; and
- the subsidy contributes to a public interest objective by avoiding social hardship or preventing a severe market failure (or there are other exceptional circumstances).
These provisions concerning subsidies for rescuing or restructuring an enterprise do not apply to subsidies for deposit takers (i.e. entities licensed as such under the Financial Services and Markets Act 2000) or insurance companies. Separate provisions are set out concerning restructuring or liquidating deposit takers and insurance companies.
Subsidy control principles
Public authorities must not grant any subsidy unless they are satisfied that the subsidy is consistent with the subsidy control principles set out in the Act, and they are expressly required to consider these principles before awarding a subsidy. As regards subsidies in relation to energy and environment, additional energy and environment principles apply and public authorities must consider these and ensure that the subsidy is consistent with them before awarding any subsidy in relation to energy and environment.
The subsidy control principles essentially comprise the following:
- Subsidies should pursue a specific policy objective to remedy an identified market failure, or address an equity rationale such as local or regional disadvantage, social difficulties or distributional concerns;
- Subsidies should be proportionate to their specific policy objective;
- Subsidies should be designed to bring about a change of economic behaviour of the beneficiary (i.e. a change which would not happen without the subsidy and which is conducive to achieving the specific policy objective);
- Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;
- Subsidies should be an appropriate instrument for their specific policy objective and that objective should not be achievable through other, less distortive, means;
- Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment in the UK;
- The beneficial effects of subsidies should outweigh any negative effects, including effects on competition or investment in the UK and international trade or investment.
The energy and environment principles include the following:
- Subsidies should be aimed at and incentivise the beneficiary in delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market, or increasing the level of environmental protection;
- Subsidies should not relieve the beneficiary from liabilities arising from its responsibilities as a polluter;
- Subsidies in the form of partial exemptions from energy-related taxes and levies in favour of energy-intensive users must not exceed the total amount of the tax or levy concerned;
- Subsidies in the form of compensation for electricity-intensive users given in the event of increased electricity costs resulting from climate policy instruments must be restricted to sectors at significant risk of carbon leakage due to the cost increase;
- Subsidies for the decarbonisation of emissions linked to industrial activities must achieve an overall reduction in greenhouse gas emissions and reduce the emissions directly resulting from the industrial activities;
- Subsidies for improvements of the energy efficiency of industrial activities must make such improvements by reducing energy consumption (directly or per unit of production).
Further specified energy and environment principles concern subsidies for electricity generation adequacy, renewable energy or cogeneration.
The Secretary of State may adopt streamlined subsidy schemes under the Act, known as streamlined routes, which provide guidance to public authorities on the application of the subsidy control principles. Three such streamlined routes were adopted on 5th January 2023, concerning (respectively) Research, Development & Innovation, Energy Usage (supporting the transition to net zero carbon emissions) and local growth (increasing growth in areas around the UK). Each of the streamlined routes are essentially statements by the Secretary of State in relation to low risk areas of subsidy, of types which are recognised as meeting strategic UK objectives. Where a proposed subsidy complies with the criteria of a relevant streamlined route, it can be regarded as complying with the subsidy control principles. The criteria of the streamlined routes comprise a range of issues including, for example, eligible costs and cumulation, and are outside the scope of this briefing note.
Referral of subsidies to the CMA
Public authorities must refer all proposed subsidies falling within the definitions of “subsidies of particular interest” to the CMA for prior scrutiny. Such referral has suspensory effect on the power to award such a subsidy during the CMA reporting period and for a further five working days thereafter. The CMA reporting period is basically 30 working days following a confirmatory notice from the CMA to the public authority (to be issued within five working days). Public authorities may voluntarily refer subsidies meeting the definitions of “subsidy of interest” to the CMA.
A “subsidy of particular interest” is defined in secondary legislation, and is in essence a subsidy for restructuring or a subsidy which meets one of the following criteria (and which does not concern rescuing and does not concern liquidation or liquidity of a deposit taker or insurance company):
- The amount of the subsidy is greater than £1 million and the total amount of this subsidy and related subsidies to the relevant enterprise in the applicable three-year period exceeds £10 million; or
- The subsidy is made for activities in a “sensitive sector” (see below) and the amount of the subsidy exceeds £1 million and the total of this subsidy and related subsidies to the enterprise in the applicable three-year period exceeds £5 million; or
- The subsidy is for relocation of activities and the amount exceeds £1 million.
The “sensitive sectors” are the following: the manufacture of basic iron, steel and ferro-alloys; aluminium or copper production; the manufacture of motor vehicles or motorcycles; shipbuilding; the manufacture of air and spacecraft (and related machinery); and electricity production.
A “subsidy of interest” is defined (in the same secondary legislation) as a subsidy which is not a subsidy of particular interest and which is one that meets one of the following criteria:
- The total amount of the subsidy and any related subsidies to the relevant enterprise in the applicable three-year period exceeds £5 million; or
- The subsidy is for relocation of economic activities; or
- The subsidy concerns rescuing or concerns liquidating or liquidity of a deposit taker or insurance company; or
- The subsidy is given under a subsidy scheme made in the form of a tax measure.
The Secretary of State may (in specified circumstances) issue a call-in direction to a public authority, requiring it to refer a subsidy to the CMA. Such a direction can be given in respect of any subsidy of interest and also in respect of any subsidy in respect of which the Secretary of State considers that there is a risk of failure to comply with the prohibitions or the subsidy control principles or the energy and environment principles under the Act, or in respect of which the Secretary of State considers that there is a risk of negative effects on competition or investment in the UK. The Secretary of State can also issue a call-in direction in respect of a subsidy which has been voluntarily referred by the relevant public authority to the CMA, and following such a direction the referral will then be treated as a mandatory referral to the CMA.
Enforcement of the regime is primarily a matter of judicial review action by interested parties in the Competition Appeal Tribunal (the “CAT”). The powers of the CAT on such review include making orders cancelling the relevant subsidy decision, prohibiting or requiring specified steps to be taken, or requiring the relevant public authority to obtain recovery of the amount of the relevant subsidy from the beneficiary enterprise. Any actions to challenge a subsidy award decision must be commenced promptly, within a specified one-month period.
Public authorities have powers in respect of misused subsidies. They can recover all or part of the amount of any subsidy from the beneficiary enterprise to the extent that the subsidy is used for a different purpose from that for which it was granted.