The UK Subsidy Control Act comes into force – Practical considerations for beneficiaries of subsidies

Subsidies and rules governing the distribution of subsidies remain a hot topic in the wake of the COVID-19 pandemic, ongoing Ukraine war and the economic, energy and cost of living crisis. Governments around the world are increasingly seeking to tackle these challenges by granting large amounts of subsidies to private entities, with a view to, for example, building supply chain resilience and mitigating the cost of energy bills for consumers.

Within this rapidly developing geopolitical context, and after two years of applying the subsidy control provisions contained in the EU-UK Trade and Cooperation Agreement, the UK now has a fully enacted and in force domestic subsidy control regime as of the 4th of January.

We have set out below some key practical considerations for beneficiaries when entering into transactions with UK Government bodies that could involve subsidy. For a brief summary of the regime, see our previous blog post on the Subsidy Control Act.

Timing is everything

The UK’s subsidy control regime relies on public authorities to self-assess compliance against the requirements set out in the Subsidy Control Act 2022 (the Act), and in particular to assess:

• whether the proposed public assistance constitutes the grant of subsidy;
• whether it falls under any of the prohibitions or subsidies subject to additional conditions set out in the Act, for example aid to rescue ailing or insolvent companies; and
• whether the proposed assistance is compliant with a set of seven general principles.

This assessment, particularly with respect to the general subsidy control principles, necessarily involves a degree of judgment and discretion on the part of the public authorities. A few points for private stakeholders to note by way of example:

• Public authorities are required to assess whether the assistance has a negative impact on competition in the UK and whether the beneficial impact of the assistance outweighs the negative impact on competition.
• However, this assessment and the fact that enforcement lies with third-party complainants bringing a legal challenge before the UK Courts – there is no equivalent prior clearance as under EU State aid rules to rely on – means that beneficiaries can find little comfort that the courts will declare the measure lawful.
• The consequences of an adverse finding can be significant for beneficiaries, including the unwinding of the transaction and repayment of the subsidy. This is particularly problematic for certain types of beneficiaries, such as ailing or insolvent companies as well as non-profit making organisations that depend on the assistance for their ongoing liquidity, and economic development and infrastructure projects.

Beneficiaries should therefore be prepared to engage with public authorities as early as possible in the process of assessing the subsidy against the subsidy control principles, including considering evidence necessary to justify the subsidy award and substantiate the compliance assessment. This is particularly relevant where subsidies fall within the category of measures which must be referred to the CMA’s Subsidy Advice Unit for review, namely Subsidies of Particular Interest.

Additionally, depending on the nature of the subsidy award, beneficiaries can opt to ‘wait it out’ i.e., delay implementation of the transaction until the period (up to three months) during which third-party complainants must bring a legal challenge has elapsed to see whether the risk of challenge materialises. Beneficiaries may therefore want to include a condition precedent which reflects the level of risk they are willing to assume that the transaction could be unwound in the event a challenge is brought and is successful.

Contractual protections in transaction documents

In addition to reflecting the above timing considerations in transaction documents:

• Beneficiaries should consider other contractual protections to manage the risk of a successful legal challenge. For example, beneficiaries could consider building in provisions which protect their right to be involved in the public authority’s self-assessment. Such protections could also include involvement in any request for a report by the CMA’s Subsidy Advice Unit for Subsidies of Particular Interest and Subsidies of Interest and in developing a joint strategy to defend a potential legal challenge. Provisions which enable beneficiaries to be involved in the process is particularly important given the CMA’s guidance does not expressly state whether it will permit direct involvement from subsidy recipients during its review process.
• Importantly, beneficiaries should also bear in mind that they are unlikely to be able to rely on warranties and indemnities regarding the legality of the subsidy. Such provisions might themselves be considered subsidy and are unlikely to comply with the subsidy control principles if the primary subsidy award is found to be unlawful.

In summary, while the new regime enables significantly quicker and more flexible grants of subsidy than under the EU State aid regime, it does not provide beneficiaries with the legal certainty needed particularly when it comes to measures that are crucial to the continuation of their business or to fund large projects. Given this, beneficiaries should, based on their specific scenarios, consider risk management options including building contractual protections into transaction documents.