The Subsidy Control Act – a new era of regulation in the UK

Taking back control of subsidy regulation was a key priority for the UK Government in its Brexit negotiations with the EU. The freedom to diverge provided an opportunity to create a bespoke subsidy control framework through which the UK Government could demonstrate a perceived benefit of Brexit, and more broadly facilitate its 'levelling-up' agenda.

The Subsidy Control Act (Act) has now completed its passage through the UK Parliament with Royal Assent being given on 28 April 2022. At the time of writing, the operative parts of the Act are yet to be brought into force while the Government analyses feedback received on its statutory guidance and detailed implementing regulations under the Act.

While the Act generally reflects the familiar principles of the EU state aid regime – not least because its genesis lies in the Trade and Co-operation Agreement (TCA) between the EU and the UK – it differs in key respects.

Under the Act, the provision of financial assistance by public authorities which confers an economic advantage on enterprises, broadly warrants examination for its compliance with the new subsidy regime where it is capable of having an effect on:

(i) competition or investment within the UK;
(ii) trade between the UK and a third country; or
(iii) investment between the UK and a third country.

It is notable that this is more expansive than the EU regime as it encompasses trade within the UK, not solely trade between the UK and EU or third countries. This is an extension of the principles within the Internal Market Act 2020, and demonstrates the importance the British Government is increasingly placing on maintaining the economic coherence of the UK at a time of increasing devolution of power within its constitutional structures.

Scope

The Act permits certain subsidies outright:

1. Subsidies of less than £315,000 given to one enterprise over the course of the two preceding financial years (minimal financial assistance).
2. Subsidies of less than £725,000 given to one enterprise over the course of the two preceding financial years for the purpose of performing services of public economic interest (SPEI services).
3. Legacy subsidies that were granted pre-Brexit and remain subject to EU state aid law and are therefore exempt, as are subsidies covered by the Northern Ireland Protocol (which also remain subject to EU state aid law).
4. Notably, subsidies given by way of UK Parliament legislation are exempt, but those of the devolved legislatures are not.

The de minimis principles reflect the EU state aid regime, but raise the relevant thresholds.

By contrast, other categories of subsidy are prohibited, including:

1. Unlimited guarantees;
2. Subsidies that are contingent in fact or law upon export performance (with certain exceptions);
3. Subsidies that are contingent upon the use of domestic over imported goods or services (not applicable in the audio-visual sector);
4. Subsidies that are contingent on relocation within the UK (again, reflecting the importance the UK Government is placing on protecting the internal market of the UK); and
5. Subsidies for rescuing or restructuring an ailing or insolvent enterprise unless (broadly speaking and subject to certain other conditions) given in the context of a credible restructuring plan in order to avoid social hardship or prevent a severe market failure.

For subsidies that fall outside of a prohibition or an exemption, public authorities must review these for consistency with seven "subsidy control principles", six of which derive from the TCA (there are special regimes in respect of energy and environmental sectors):

1. Subsidies should pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale such as social difficulties or distributional concerns.
2. Subsidies are proportionate and limited to what is necessary to achieve the objective.
3. Subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and would not be achieved in the absence of the subsidies.
4. Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
5. Subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means.
6. Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.
7. Subsidies' positive contributions to achieving the objective outweigh any negative effects on competition or investment within the UK, or on international trade or investment.

The sixth principle, which does not derive from the TCA, relates to the need to ensure subsidies are designed to minimise any negative effects on competition or investment within the UK. It therefore in effect expands the scope of protections – beyond those provided for within the TCA – against the negative effects of subsidies on the coherence of the UK's internal market.

Process

A key difference from the EU state aid regime is that pre-clearance of subsidies will not be required. However, the Competition and Markets Authority (CMA) will perform the function of an independent authority (as mandated in the TCA) and will, where necessary, review subsidies or subsidy schemes against the seven subsidy control principles.

In the case of subsidies or subsidy schemes "of particular interest", the public authority proposing to give the subsidy or set up the scheme must request a report from the CMA before giving the subsidy/setting up the scheme. In the case of subsidies or subsidy schemes "of interest", the public authority may make a voluntary request for a report from the CMA. 

The concepts of subsidies/schemes "of particular interest" and "of interest" are to be defined in regulations.  The Government has recently concluded a consultation on how these concepts should be defined. In outline:

• Subsidies given outside of sensitive sectors are Subsidies of Particular Interest if they are over £10m, or cumulate above this threshold.
• All other subsidies of between £5 to £10m, or which cumulate to such a value, that do not meet the Subsidy of Particular Interest criteria are Subsidies of Interest.
• Subsidies given in sensitive sectors will be Subsidies of Particular Interest if they are over £5m, or cumulate above this threshold.
• Where subsidies cumulate above the Subsidies of Particular Interest threshold, there will be a minimal value for referral of £1m. Public authorities will only be required to make a mandatory referral if the subsidy in question exceeds £1m.
• All restructuring subsidies will be Subsidies of Particular Interest.
• All rescue subsidies will be Subsidies of Interest.
• Subsidies that are explicitly conditional on relocation but meet the conditions set out for an exemption from the general prohibition of such subsidies will be treated as Subsidies of Interest below a value of £1m, and Subsidies of Particular Interest above that value.
• Tax schemes will be Subsidies of Interest unless they would in themselves allow for the giving of subsidies which cumulate over the Subsidies of Particular Interest thresholds within the applicable period (in which case they will be Schemes of Particular Interest).

The sensitive sectors are: iron and steel manufacturing, aluminium production, copper production, manufacture of motor vehicles and motor cycles, ship building, aerospace manufacturing, electricity production.  These may change over time as economic conditions change.

In addition, the Secretary of State will have a "call-in" power to direct a public authority to request a report from the CMA in relation to a proposed subsidy or subsidy scheme, and a power to refer a subsidy or subsidy scheme to the CMA for a report after it has been made. 

The CMA's report must include an evaluation of the reasons why the authority considers that the subsidy control principles are satisfied, and may also include advice as to how the subsidy or the scheme could be improved.

Crucially, and in stark contrast to the position under the EU state aid regime, public authorities will not be bound to follow any advice and/or recommendations of the CMA, and can give subsidies even where the CMA considers that they are not compatible with the subsidy control principles, although an authority that decided not to follow the advice of the CMA would need very good reasons for doing so given, as discussed below, the rights of interested parties to challenge subsidy decisions before the Competition Appeal Tribunal (CAT). 

Enforcement and transparency

In the absence of a public enforcement regime as exists in EU state aid law, the Act empowers interested parties who are aggrieved by the giving of a subsidy to apply to the CAT for a review of that decision. In determining the application the CAT will apply the same principles as in judicial review proceedings (i.e. it will not review the merits of the decision but will review whether the decision was taken lawfully in accordance with the subsidy control principles).  If the CAT finds that a subsidy was unlawful, it may make an order that the subsidy should be recovered from the beneficiary. 

An important aspect of the enforcement regime is transparency of subsidies. Transparency is needed to enable interested parties to decide whether they wish to challenge a subsidy before the CAT. In addition, according to the Government, transparency promotes accountability and enables the public to see how public money is spent and for what purpose. The Act therefore requires public authorities to upload details of most subsidy schemes and subsidy awards to a publicly-accessible database maintained by the Department for Business, Energy and Industrial Strategy.  

In addition, interested parties who are considering challenging a subsidy decision may make a pre-action information request to the subsidy-giving authority for information relating to the subsidy.  Such requests must be made within one month of information about the subsidy being uploaded to the subsidy database or, where the subsidy does not have to be uploaded to the database, within one month after the interested party first knew or ought to have known about the decision to give the subsidy. The authority must respond to the request within 28 days.

Northern Ireland

One controversial aspect of the UK Government's subsidy regime – particularly with its clear focus on maintaining the economic coherence of the UK – is the separate subsidy regime applicable in Northern Ireland by virtue of the Northern Ireland Protocol (Protocol). Article 10 of the Protocol applies a separate subsidy regime to goods and the single electricity market that affect trade between Northern Ireland and the EU; these fall outside the scope of the Act.

Critics have argued that there is the potential for the Protocol to 'reach-back' into Great Britain (despite attempts by the EU to assuage concerns) and encompass subsidies provided in mainland UK; there will likely be cases where subsidies in mainland UK engage both the Protocol and the Act.

Next steps

The UK Government has suggested that the new subsidy control regime will come fully into force in autumn 2022.  As outlined above, the Government is well-advanced in preparing regulations and guidance refining and clarifying the system in advance of its implementation. Until that point, the UK regime is in effect confined to that of its international obligations under the TCA, the Protocol, the World Trade Organisation, and the provisions of its free trade agreements.