What is happening and why?
On 30 June, the UK Government announced its draft Subsidy Control Bill (the “Bill”) which sets out the framework for how the UK will subsidise businesses post-Brexit. The UK government has hailed the Bill as a major departure from the EU state aid rules. In practice, the Bill provides a framework for implementing the UK’s international commitments on subsidy control, as set out in the Trade and Cooperation Agreement agreed with the European Union, and in other existing international trade obligations and World Trade Organisation (“WTO”) rules.
The Bill introduces a decentralised subsidy control framework outlining principles with which public authorities must comply when awarding subsidies. One of the key aims of the Bill is to ensure that the subsidy control regime is not used to encourage a “race to the bottom” between different regions of the UK.
While there are some important differences as compared to the EU state aid regime, the fundamental principles are comparable and any subsidies given under the Northern Ireland Protocol will continue to be governed by EU rules.
What are the subsidy control requirements?
Under the Bill, authorities wishing to award subsides will have to follow a self-assessment process to ensure the award meets the seven “subsidy control principles” set out in Schedule 1:
- pursue specific policy objectives that either: (a) remedy an identified market failure, or (b) address an equity rationale (e.g., social difficulties or distributional concerns);
- are proportionate to their specific policy objective and limited to what is necessary to achieve it;
- are designed to change the economic behaviour of the beneficiary and that change should be: (a) conducive to achieving the specific policy objective, and (b) would not happen without the subsidy;
- do not compensate for the costs the beneficiary would have funded anyway;
- are the least distortive means of achieving the stated policy objective;
- are designed to achieve the specific policy objective while minimising negative effects on competition and investment within the UK; and
- have beneficial effects (in terms of achieving their specific policy objective) that outweigh any negative effects, e.g., on competition or investment within the UK and international trade or investment.
A separate set of nine principles apply to energy and environment-related subsidies.
Certain subsidies are generally prohibited, including unlimited debt guarantees, an approach that corresponds with global norms. Once the authority is satisfied that the proposed subsidy meets the subsidy control principles and is not generally prohibited, it can issue the award.
Exemptions to the subsidy control rules
A number of exemptions exist for small amounts of aid, as well as recovery and emergency aid associated with, for example, natural disasters. A general de minimis exemption will allow financial subsidies of less than £315,000 to be granted over a period of two financial years. Additionally, the subsidy control requirements do not apply to financial assistance of up to £725,000 granted to a business in consideration for the provision of a Service of Public Economic Interest (SPEI). Finally, the regime will not apply to measures implemented for national security or financial stability reasons, Bank of England monetary policies, and large cross-border or international cooperation projects.
The role of the CMA – voluntary and mandatory referrals
Where subsidy schemes are “of particular interest” (not yet defined) or where directed to do so by the Secretary of State, the public authority will be required to request a report from the Subsidy Advice Unit (“SAU”) to be set up within the Competition and Markets Authority (“CMA”) evaluating the SAU’s assessment of the proposed scheme. Public authorities can voluntarily request a CMA report in any cases, however, thereby providing a greater level of comfort about the granting of any given subsidy.
Where a subsidy raises questions about its compliance with the principles, the Secretary of State will have considerable discretion to ask the SAU for a post-award evaluation. Such a referral must be made within 20 working days of the subsidy’s entry in the central subsidy database (accessible to the public free of charge) or, in the case of SPEI, the day on which the subsidy is granted. If necessary, the SAU can advise on how the scheme can be modified to be compliant.
How will the regime be enforced?
While the CMA will be required to review the effectiveness of the regime and its impact on competition and investment in the UK, no ex ante approval process will apply and the CMA will not hold an enforcement role. Instead, interested parties will be able to challenge subsidy decisions in the Competition Appeal Tribunal on judicial review grounds, although the timeframe for challenge is expected to be limited to one month from the “transparency date” (i.e. the date of the award’s entry onto the subsidy database or when the interested party knew or ought to have known of the decision), the publication of the post-award referral report, or the date of the pre-action information request notice (as applicable).
What does this mean?
The UK’s new regime does provide a greater degree of flexibility than EU rules in some respects — for example, there is no requirement for central approval of subsidy schemes. However, the meaning and scope of the seven subsidy control principles remains somewhat unclear. Additional guidance on a number of the key concepts will be important to provide greater clarity and minimise the risk of uneven implementation between public authorities. This suggests that seeking CMA guidance on specific awards may be a popular option for public authorities.
From the perspective of a business that wishes to challenge any subsidy, the short timeframe for appeal means that third parties will need to move very quickly to enforce their legal rights in a way that differs materially from the EU regime.