Conscious uncoupling: the UK’s subsidy control regime comes into force, but has much changed?
Background
Two years after the EU State aid rules ceased to apply in the UK, from 4 January 2023, the UK’s domestic subsidy control regime came fully into force.
In the intervening period, the UK has applied the subsidy control provisions set out in free trade agreements with other countries, notably the provisions of the UK-EU Trade and Cooperation Agreement, and the World Trade Organisation (WTO) rules on subsidies, as well as the relevant provisions in the Northern Ireland Protocol which retain the European Commission’s jurisdiction over certain aid measures relating to trade in goods and wholesale electricity. While those agreements set out the key building blocks for the UK’s domestic regime, the advent of the Subsidy Control Act 2022 (Act) and accompanying guidance brings with it a more detailed framework for the lifecycle of a subsidy – from review to grant to potential challenge.
Over the last two years, and within the constraints of its international commitments, the UK has had the opportunity to shape a subsidy regime that meets its objectives (including considering the impact of any subsidies on competition or investment within the UK, as well as trade or investment between the UK and third countries/territories). However, a “fresh start” always brings its own difficulties and uncertainties. In this article, we explore some of the challenges and opportunities the new subsidies regime presents and consider how far we’ve come from the EU State aid rules.
A rose by any other name?
The Act defines a “subsidy” by reference to a cumulative four-limb test, requiring (i) public resources given by a public authority; (ii) that confers an economic advantage; (iii) in a specific way; and (iv) that has or is capable of having an effect on competition or investment within the UK or trade or investment between the UK and a third country/territory. This definition applies to both the production of goods and the provision of services.
The departure from the notion of “State aid” signals a conscious decision to move away from the EU lexicon – which has been the subject of considerable EU and domestic case law. It was initially expected that this may result in a corresponding increase in scope for different interpretations and new constructs under the new regime. While the practical application of the UK’s new regime over the last two years has broadly resembled the EU approach (albeit with the key distinguishing factor of self-assessment under the UK regime), as challenges are inevitably brought to test the boundaries of the new rules, we may see further departure from the tried and tested ways of EU concepts.
Of course, a “fresh start” comes at the expense of legal certainty and predictability, with the corresponding knock-on effect on compliance burdens for public authorities and subsidy recipients. There is also a risk that this uncertainty leads to public authorities defaulting to the well-known and familiar State aid concepts, thereby adopting what is potentially a more restrictive set of principles than those required under the Act when self-assessing the legality of a measure. In an effort to mitigate this risk, the UK Government has published a swathe of guidance and secondary legislation designed to assist public authorities with their self-assessment (including when they must refer a measure to the Competition and Markets Authority (CMA, acting through its new Subsidy Advice Unit) for non-binding advice). The Government has also provided further guidance on the content of the pre-action information public authorities are required to provide to complainants upon request, which is fundamental to effective private enforcement, a key element of the UK regime. It will take time to see whether this guidance is adequate to mitigate the risk of UK authorities defaulting to a more restrictive approach in light of potential risk of challenge.
Key challenges and opportunities
Burden of self-assessment
Public authorities are solely responsible for assessing the compatibility of a measure against the principles set out in the Act. While the newly created Subsidy Advice Unit within the CMA can assist public authorities with formal referrals under the Act, it will not provide general advice to authorities, for example, as to whether a measure constitutes a subsidy or whether the compatibility principles are met, outside of that referral process which is only available to specific types of subsidies. In any event, its advice is not binding on public authorities. The CMA does not have enforcement powers, nor will it prohibit subsidies from being granted. Instead, the Competition Appeal Tribunal (CAT) has the power to review subsidy control decisions and make recovery orders (although the standard of that review is limited to judicial review principles and will not entail a merits assessment of a particular subsidy).
The lack of a pre-approval process for subsidies represents a key difference from the EU State aid regime. This follows the UK’s policy decision to “seize the opportunities arising from Brexit” to design a more flexible and agile system which allows “public authorities to deliver subsidies where they are needed, without facing excessive bureaucracy or lengthy pre-approval processes”.1
However, as a result, it may prove quite burdensome for authorities to carry out the detailed legal and economic analysis required without the certainty of what will be challenged and the extent to which the CAT will interfere in their assessments. Despite being heralded as cutting through the red tape of the EU State aid regime, the new subsidy control regime has the potential to create greater administration for some lower value awards than under EU State aid rules. The burden on public authorities also poses a variety of risks, including inconsistency in approach between different authorities, especially for devolved administrations.
Last month, the Government introduced various draft “Streamlined Routes” designed to help reduce this burden. The Streamlined Routes, which are expected to come into force imminently, enable authorities to award certain subsidies without the need to carry out a full compatibility assessment, and resemble the familiar (and well-used) block exemptions under the EU regime.
Clear safe harbours
In line with the approach under the WTO rules (and in contrast to the EU State aid regime), the default position under the Act is permissive of subsidies, meaning they are generally allowed provided they satisfy the relevant criteria under the Act.
However, certain types of subsidies are still prohibited. For example, unlimited government guarantees, or subsidies granted to “ailing or insolvent” companies without a credible restructuring plan, as are any subsidies that might cause enterprises to relocate jobs and business activities from one area of the UK to another, unless such relocation has the effect of reducing social or economic disadvantage in a particular area. Others will only be permitted subject to specified conditions (e.g., subsidies to banks, other deposit takers or insurance companies, unable to demonstrate credibly that they can be restored to long-term viability).
The Act sets out certain exemptions (from all or some of the relevant requirements) for subsidies that are: (i) for a de minimis amount (i.e., less than £315,000, or less than £725,000 for services of public economic interest); (ii) related to natural disasters and exceptional circumstances (e.g. to deal with pandemics such as Covid-19); (iii) given for the purposes of national security; (iv) given as part of the Bank of England’s monetary policy activity; (v) granted on financial stability grounds; (vi) intended for large cross-border or international projects; (vii) related to legacy and Withdrawal Agreement schemes (which also cover payments to be made under such schemes after the Act’s entry into force); and (viii) certain tax measures.
The inclusion of safe harbours provides some much-needed legal certainty and helps to reduce the compliance burden on public authorities, whilst also giving additional comfort to recipients and potentially discouraging broad information requests from prospective challengers (and associated time and cost savings). There will, of course, be an adjustment period while case law is developed in order to delineate the boundaries of these safe harbours.
Challenges arising from the CMA's role and remit
Splitting oversight and enforcement between the CMA and the CAT may likewise present some challenges. When devising the regime, the UK Government considered that having a single, authoritative entity that fulfils the monitoring and oversight and advice functions would enable the independent body (i.e. the CMA) to “accumulate knowledge and develop as a centre of excellence in the field and ensure that the most robust and consistent approach is taken”.2 However, it remains unclear how this acquired knowledge would be capitalised, given that the enforcement powers would lie with the CAT.
In its own guidance, the CMA makes clear that its role is not to second guess the assessments made, and judgements taken, by a granting authority with respect to the need, form and amount of a subsidy. It will “not decide whether a subsidy can be given” and will not “directly assess” compliance with the subsidy control requirements (including the compatibility principles).3 Rather, where a subsidy is referred to the CMA, it will “evaluate the public authority’s assessment” by considering, in particular: (i) “how well” does the public authority’s assessment address the subsidy control requirements; (ii) whether appropriate evidence has been identified and used in the assessment; and (iii) whether the public authority’s analysis and conclusions are “generally consistent” with such evidence.4 The CMA’s evaluation must take into account any effects of the proposed subsidy on competition or investment within the UK and may include advice on how the public authority’s assessment could be improved, or the proposed subsidy or scheme be modified to ensure compliance with the requirements of the Act.5 However, the CMA will not carry its “own assessment”6 or second-guess the judgments made by the public authority on need, form or quantum.
More broadly, it is not yet clear how impactful the role of the CMA will be, particularly as subsidy control decisions are ultimately the responsibility of the granting body. Further, it is unclear whether there would be any ‘consequences’ of public authorities choosing to depart from the advice provided by the CMA (e.g., when a subsidy is challenged at the CAT).
Transparency burden and lack of oversight for subsidy recipients
The Act sets out several transparency requirements. Public authorities are required to include information in the Government’s new subsidy database (available here) in relation to each subsidy and subsidy scheme, subject to certain exceptions (including a de minimis threshold of £500,000).
These transparency requirements also apply to payments to be made under legacy schemes (subject to limited exceptions in relation subsidies given to the agriculture, fisheries or audio-visual sectors).
Public authorities also have a duty to provide information about a subsidy or a scheme to an “interested party”, who may request information to decide whether to apply to the CAT for a review of a subsidy or scheme on the grounds that the public authority has failed to comply with the relevant subsidy control principles. This information right (which must be responded to within 28 days of a written request) is likely to prove burdensome for public authorities and may lead to an increase in the number of challenges. It will also delay the limitation period for a challenge to be brought, which is one month from the “relevant date”. The “relevant date” is typically the date of publication of the transparency notice on the Government database, unless pre-action information is requested within one month of such transparency date, in which case the start date for the limitation period is delayed until the granting authority informs the interested party that it has provided information in response to such request.
Public authorities will therefore need to ensure that they keep robust audit trails, including records of awards granted, decisions and any external reports. While an “interested party” could theoretically encompass subsidy recipients, the information request must state that the party is considering applying for judicial review. It is unlikely, therefore, that this pre-action request process will be used by subsidy recipients in order to get comfort around the legality of any subsidy. Subsidy recipients will, instead, have to be cautious with their due diligence when considering whether to apply for and accept any subsidies, as the subsidy may be subject to scrutiny or challenge by a third party, which could potentially bring unwanted delays. While a subsidy decision is not automatically suspended as a consequence of a challenge (unlike in other fields such as public procurement awards), the CAT does have discretion to direct otherwise.7
Potentially more flexibility for devolved administrations
It is, of course, worth noting that Acts of Parliament are exempt from the majority of provisions in the Act, although they still remain subject to compliance with the UK’s international obligations.
Subject to certain limitations, devolved administrations have the power to decide if they can issue subsidies based on the UK-wide principles. This may allow devolved governments to set up their own schemes and design subsidies independent of the wider UK Government schemes. However, unlike Acts of Parliament, subsidies and schemes contained in devolved primary legislation remain subject to the subsidy control requirements in broadly the same way as regular subsidies, and a compatibility assessment is still required. Although any appeals of subsidies introduced by devolved legislatures will not be reviewed by the CAT and will instead be considered by the High Court of England and Wales, the Court of Session in Scotland or the High Court in Northern Ireland (as applicable).
Final remarks
Since leaving the EU, the UK has had more freedom to decide where to spend public money. This has become particularly important in recent times, given the cost of living crisis, the war in Ukraine and its impact on energy markets and net zero targets. The Act provides the framework and defines the bounds of such freedom. But like all new regimes, there will still be some uncertainty about its application as it takes time to bed down. This is exacerbated by the ongoing uncertainty as to whether UK courts will draw on EU concepts when interpreting the new rules, given the similarity between the concepts contained in the Act and EU State aid in spite of the new terminology. The limited role of the CMA means that public authorities, who are new to their subsidy assessment role, will be responsible for compliance. In addition, not all public authorities have the necessary resources to carry out the complex analysis that may be required in certain cases of subsidy control.
