Navigating the UK subsidy control and EU State aid regimes: how the introduction of the UK’s Subsidy Control Act impacts the analysis

The UK’s Subsidy Control Bill receives Royal Assent

More than a year after the UK Government sought views on how best to design a bespoke approach to subsidy control for the UK, the Subsidy Control Bill finally received Royal Assent and became an Act of Parliament on 28 April 2022 (as the Subsidy Control Act, or the Act).

In July, the Government published two consultations, one requesting views on draft guidance prepared by BEIS on the interpretation and implementation of the Act which is intended as an aid for public authorities when navigating the new regime (see here), and another requesting views on draft guidance prepared by the Competition and Markets Authority (the CMA) setting out a framework for the operation and functions of the Subsidy Advice Unit (the SAU), an advisory body established within the CMA to provide non-binding advice on higher risk subsidies (see here).

While the regime is not expected to come into full effect until the SAU has been sufficiently staffed, which is expected to be this autumn (and until such time businesses and public authorities should continue to apply the principles set out in the Trade and Cooperation Agreement (the TCA, considered in detail here) and any other applicable international obligations), public authorities and businesses should already start considering the impact of the new regime and how future analyses will differ to those previously conducted against the European Union’s (the EU’s) State aid framework.

Following on from our previous blog (The future for UK subsidy control remains unclear) in which we considered the first steps taken by the Government to create a domestic subsidy regime, this blog looks at (i) the additional clarity the Act provides, (ii) the remaining unknowns with respect to how the regime will function in practice, and (iii) the implications for businesses resulting from the divergence between the UK and EU systems.

What the finalised legislation tells us

While the Act may not provide the definitive clarity that granting authorities and beneficiaries were hoping for as to the types of subsidies that will (or will not) be allowed under the UK’s new regime, the finalised legislation nevertheless clarifies certain key features and procedures:

• Self-assessment: Granting authorities will need to self-assess any proposed subsidies against the principles listed in Schedule 1 of the Act. The principles largely mirror those in the TCA and that sit behind the EU’s State aid rules.
• Minimum financial assistance: The UK regime helpfully sets a minimum threshold exempting financial assistance up to the amount of £315,000 over the course of three financial years.
• Natural disasters and exceptional circumstances: Just as the EU State aid regime does (see Articles 107(2)(b) and 107(3)(b) of the Treaty on the Functioning of the European Union), the UK regime includes an exemption for aid granted in relation to natural disasters or “other exceptional circumstances”. The European Commission (the Commission) has considered both the Covid-19 pandemic and the war in Ukraine as “exceptional occurrences” and relied on its equivalent exemption to grant a large number of aid measures under so-called ‘temporary State aid frameworks’. Interestingly, similar aid may now be granted under the new UK regime. This will be especially important given that the economic impact of the war in Ukraine on UK businesses may yet intensify or only become apparent once the new UK rules are in full force later this year.
• Subsidies and schemes of interest, or of particular interest: Pursuant to the Act, granting authorities must notify the CMA before granting a subsidy, or subsidy scheme, of particular interest (SSOPI), and have the option of whether to notify the CMA with respect to subsidies, or subsidy schemes, of interest (SSOI). These processes are discussed in more detail below.
• Enforcement: Interested parties will have recourse to the Competition Appeal Tribunal (the CAT) to challenge subsidy awards on judicial review grounds.

What the finalised legislation does not tell us

Subsidies of interest and of particular interest

One key unknown relates to the exact thresholds that will be used to determine whether a subsidy is designated as an SSOI or an SSOPI. The UK Government, as part of an initial public consultation seeking views on its proposed approach, suggested that financial assistance valued at between £5m and £10m will constitute an SSOI, and financial assistance valued at more than £10m will constitute an SSOPI. Under the Government’s proposal, the monetary threshold for aid that constitutes an SSOPI is reduced to more than £5m if the beneficiary participates in a so-called sensitive sector – these are likely to be sectors in which there is a record of international trade policy disputes (e.g., the production of electricity), or evidence of global overcapacity (e.g., the manufacture of basic iron and steel). The consultation document also proposes that any aid granted for the purpose of rescuing a beneficiary from insolvency will automatically constitute an SSOI, and future guidance will set out when a rescue subsidy should be considered an SSOPI.

Public authorities proposing to grant an SSOI will be encouraged – but not required – to notify the SAU of its self-assessment. The SAU will then have up to 5 working days to inform the public authority of whether it intends to prepare a report, and following that (should the SAU deem it appropriate to do so) it will have a further 30 working days to publish a report on the proposed subsidy. If the proposed subsidy meets the designation of an SSOPI, the granting authority will be required to notify the CMA, which will then have 30 working days to prepare an advisory report setting out non-binding advice on how to improve the public authority’s assessment of compliance with the principles set out in the Act.

Functions of the SAU

The CMA’s consultation on the operation and functions of the SAU gives some insight into the proposed workings of the SAU. Nonetheless, the absence of any mechanism that allows the CMA to formally approve a subsidy (as exists for the Commission under the EU State aid regime), and the CMA’s limited role as an informal advisor whose advice will have no binding effect, will leave open an increased risk that an aggrieved interested party could challenge a subsidy after it has been granted. Notwithstanding that the SAU’s advice will be non-binding, third parties could in practice use the advice strategically in challenging financial assistance before the CAT. The resulting uncertainty – particularly in the months immediately following the Act coming into full force – will mean that granting authorities and beneficiaries alike should undertake rigorous self-assessments that are tightly tied to the Act and its associated guidance.

While the SAU will only advise public authorities on the accuracy of their assessment of the subsidy control principles set out in the Act, it will be for the CAT to decide on whether a subsidy award is compatible with those principles. The main risk associated with an interested party challenging a subsidy award before the CAT will largely be felt by the beneficiary, who may be required to repay the subsidy with interest if the challenge is successful. Given the potential outcomes that might result from granting an incompatible subsidy and the fact that this risk is principally borne by beneficiaries, there is a risk that granting authorities will have less incentive than businesses to assess in detail whether (a) financial assistance is a subsidy, and if so (b) that the subsidy complies with the Act. Indeed, history suggests that public authorities often tend to try to place the burden of this assessment on recipients, who may not be well-placed to make this assessment – at least not without legal advice.

The role of the SAU, which is currently being consulted on, should therefore be to provide relative certainty to businesses and public authorities as to the legality of proposed subsidies and the risk of legal challenge. In our response to the CMA’s consultation on the operation of the SAU, we have underlined the importance of the SAU being able to provide a conclusion on whether it thinks proposed subsidies comply with the Act.

It remains to be seen whether the proposed system will, in practice, provide the SAU with de facto approval powers, or whether the stated intention of affording more flexibility to businesses will be achieved. The current uncertainty could temporarily ‘chill’ stakeholders’ willingness to obtain State support for fear of legal challenge and, if successful, becoming subject to a recovery order. Ultimately, the key question for all stakeholders will be whether the subsidy gives rise to any basis for and whether there is a significant risk of legal challenge.

Divergence from the EU’s State aid regime

Compared with the UK’s new regime, EU State aid rules’ numerous notices, guidelines, block exemptions and extensive case law can be quite complex and time consuming to navigate for stakeholders. The strict review process under the EU regime means that the Commission must always check compatibility of State aid measures with existing EU law (unless the notification obligation is exempted, for example due to the applicability of the general block exemption regulation or the de minimis threshold). Nevertheless, the rules provide clarity on measures which will be compatible with the internal market and give legal certainty to stakeholders. The ex-ante process means that State aid measures which are contrary to EU law cannot be implemented. This gives potential beneficiaries certainty that any block-exempted or approved measure is unlikely to be challenged.

In contrast, the UK subsidy control regime is new, with no precedent, and built around self-assessment of compliance with currently untested principles set out in the UK’s free trade agreements (including the TCA). While these principles are largely consistent with the spirit of the EU State aid regime, the UK Government has suggested that authorities should interpret and apply them more flexibly such that beneficiaries can more easily adapt to the needs of the moment. It is hoped that this flexibility will unlock appropriate funding for strategic projects, which may lead to a race for subsidies between the UK and Continental Europe – something to watch out for and to be carefully considered by businesses.

The full text of the Act can be found here. For businesses considering the impact of the new Act, or simply to discuss if and how this new Act could be relevant to you, please do get in touch with one of the authors or our wider team.