‘State aid’ is the term we would hear or read on a daily basis during the Brexit negotiations. The media described it as one of the ‘make or break’ issues which neither party, the UK or the EU, was willing to find the middle ground to land on. Now a year later since the end of the transition period, the term ‘subsidy’ has replaced ‘State aid’ in the context of public authorities awarding financial assistance.

This note considers what has been happening to the UK’s subsidy control post-Brexit and further provides an overview of the UK’s proposed new subsidy control regime.

Background

After Brexit, the UK is no longer subject to EU State aid rules. In September 2020, the government announced its intent to design a new domestic subsidy control regime that best suited the needs of the UK. On  June 30, 2021, the Subsidy Control Bill (Bill) was presented to Parliament.

The Bill is currently going through its parliamentary stages in both Houses before it becomes law.  In the meantime, public authorities considering giving subsidies must comply with the UK’s international obligations under the UK-EU Trade and Cooperation Agreement, the WTO Agreement on Subsidies and Countervailing Measures and the UK’s bi-lateral free trade agreements with third countries. To this end, the Department for Business, Energy and Industrial Strategy has published guidance on its website: “Guidance on the UK’s international subsidy control commitments,” which sets out key steps for public authorities to follow when awarding subsidies.

Overview of the Bill

The purpose of the Bill is to create a domestic subsidy control regime that reflects the UK’s strategic interests and particular national circumstances, providing a legal framework within which public authorities make subsidy decisions. It is very different in structure from the EU regime.  Under the new framework, it is the granting authority itself (under Clause 12) that has the responsibility to assess the proposed regional subsidy against the seven subsidy control principles (discussed below).

There are six Parts to the Bill.

• Part 1 sets out the key definitions that are used in the Bill.
• Part 2 sets out the seven main principles and nine additional energy and environment principles for a public authority to consider when making a decision whether to give a subsidy or make a subsidy scheme. That is, the public authority must not give the subsidy or make the subsidy scheme unless it considers that doing so is consistent with the principles.

The effect of each of the seven principles, set out in Schedule I, is as follows:

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 should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
3. Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change, in relation to a subsidy, should be conducive to achieving its specific policy objective, and something that would not happen without the subsidy.
4. Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
5. Subsidies should be an appropriate policy instrument for achieving their specific 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 UK.
7. Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including in particular negative effects on competition or investment within the UK, international trade or investment.

• Part 3 sets out subsidies that are exempt from some or all of the subsidy control requirements in Part 2. Exemptions from the requirements include subsidies given to address different emergencies such as natural disasters.
• Part 4 sets out the functions of the Competition and Markets Authority (CMA) and requires the CMA to establish a body called the Subsidy Advice Unit for the purposes of carrying out those functions. Part 4 further requires that certain subsidies and schemes must be referred by public authorities to the CMA before they may be given or made.
• Part 5 sets out the enforcement provisions. Interested parties will be able to apply to the Competition Appeal Tribunal (CAT) to review a decision to give a subsidy or make a subsidy scheme. The CAT will apply the same principles when hearing an application for review as would be applied by the High Court on application for judicial review and will be able to grant the same types of relief as are available in such proceedings.
• Part 6 covers miscellaneous and financial provisions.

Further, on January 25, 2022, the government published a 15-page guidance document (Guidance): “Illustrative Guidance on Subsidy Control” to help public authorities to interpret the main principles and other requirements relating to the giving of subsidies.

Will this New Subsidy Control Regime Work?

The government claims that this new regime is designed to be flexible, agile and tailored to support business growth and innovation and to promote competition and investment in research and development. But will it work?

One of the key features of the UK’s new regime is that there is no requirement of prior approval whereas the default position in the EU State aid rules is that subsidies are generally unlawful. Less bureaucracy may be a good thing, but could this lead to some harmful subsidies being awarded to the extent that competition might potentially be distorted?

As noted above, subsidies should address an equity rationale such as “distributional concerns” under Principle A. But it is unclear what ‘distributional concerns’ means, especially in relation to regional development. For example, how will a local authority be to choose measures which favour one area in its county as being more disadvantaged than some other part of the UK?

Given the Guidance published on January 25, 2022, can public authorities be confident and certain as to what is permissible in the giving of a subsidy? Or would there still be inconsistent decisions across the country? Principle B should help limit ‘subsidy races’ between authorities whereas Principles F and G require authorities to consider the effects of the proposed subsidy across the UK. Yet the Guidance does not address how the latter principles (Principles F and G) on proportionality are to be applied. As such, authorities might be tempted to favour local applicants deemed to be more disadvantaged than other areas, and this gives rise to a need for some superior authority to police the regime. As some commentators have already stated, there may also be a risk that subsidy decisions might end up being litigated in courts if the regime fails to deliver legal certainty to granting authorities and businesses. This in turn could create investee insecurity in accepting grants.

An overarching policy question may be to what extent the government would be willing to help businesses. Based on data from eth European Commission’s State aid scoreboard, in 2019 the UK spent 0.51% of GDP on State aid (excluding agriculture, fisheries and railways) while France spent 0.85% and Germany 1.54%.

Would the UK’s regime be intended to break this trend? If so, would that lead to more subsidies being awarded to bail out unsustainable companies? How the new regime plays out remains to be seen.  At the time of writing this note, the Bill has passed its second reading in the House of Lords and is now at the committee stage, where detailed line by line examination and discussion of amendments is taking place.