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The New Subsidy Control Bill: A welcome move to more flexibility or just more red tape?

  • United Kingdom
  • Competition, EU and Trade
  • State aid

23-07-2021

The new Subsidy Control Bill was introduced to Parliament on 30 June 2021 (“the Bill”) in line with the obligations agreed by the UK Government in the Trade and Co - Operation Agreement between the EU and the UK (“the TCA”). The Bill looks to bring the UK’s various and somewhat disparate obligations in terms of subsidy control under one roof. Very much a “one ring to rule them all” approach it would seem, with the Bill intended to come into force in 2022.

The official line in terms of the Bill is that it will operate to streamline the provision of targeted subsidies, without falling back to the position of propping up failed businesses as seen in the 70s, with the oft cited criticism of the EU state aid regime being its cumbersome approval process and the strict parameters it imposed linked to specific types of costs and maximum percentages of support against such costs.

In the Government’s words the Bill heralds the start of a “simple, nimble” subsidy regime. This is an interesting (some would say novel) claim when the Bill is 58 pages long and the State aid provisions in the Treaty on the Functioning of the European Union (“the TFEU”) are a mere few pages long. Of course a veritable blizzard of guidance notes and regulations have issued forth from those few pages in the TFEU, and the Bill also refers to the potential for statutory guidance and the need for regulations. Time will tell as to the extent of guidance, regulations etc. that will accompany the Bill, but there must be a risk of mission creep.

There a number of quite significant changes in the Bill that move the subsidy control regime away from the high level principles previously set out/envisaged under the TCA, with some of these arguably taking us back towards the realm of the old State aid regime (which of course still applies in certain, albeit limited, circumstances). We have summarised what we consider to be the most important new aspects of the Bill below.

So no notification requirement?

One of the big criticisms of the old State aid regime was the frustratingly long periods of time it often took to get an approval through (with years not being unusual, although it is fair to say the block exemption system addressed this for all but the most complex/large project/schemes).

So has this cumbersome requirement to get pre approval been ditched? Well not exactly, with the provisions of the Bill including both a mandatory and voluntary referral procedure to the Competition and Markets Authority (“the CMA”).

Prior to giving so called “Subsidies of Particular Interest” (as yet undefined and to be done so via regulation and a new concept not set out in the TCA) public authorities:

  • must make a referral to the CMA; and
  • cannot grant the subsidy until the CMA has completed its report (or failed to do so in the stipulated time period) and a cooling off period has expired (so in effect, standstill obligations).

It is interesting to note that the CMA can only make recommendations as to how a subsidy could be altered to comply with the principles, prohibitions etc. in the Bill and thus cannot outright prohibit a subsidy being granted once the cooling off period has expired. It would, however, be a brave public authority who would press on in light of an adverse CMA report, with the prima facie evidence for a challenge that would represent.

Whilst the timescales for the issue of reports by the CMA are quite short (5 days to confirm they consider a report is necessary and 30 days to report, with that capable of being extended by up to 40 days in exceptional circumstances by the Secretary of State), these timescales are triggered by a notice from the public authority and that notice has to include:

  • why the public authority considers that the subsidy/subsidy scheme in question meets the criteria for a Subsidy of Particular Interest; and
  • the assessment by the public authority as to compliance with the principles, prohibitions and conditions (where applicable).

Could this notice requirement morph into a position akin to that under the State aid rules where the process was elongated by the European Commission (“EC”) claiming insufficient information had been given (after all the timescale for approval was always notionally 2 months) and resetting the clock? We can foresee a scenario of requests for more detail from the CMA to elongate the timescales, much in the same way as the EC did.

There is also an ability to make a voluntary referral to the CMA in terms of Subsidies of Interest (again not as yet defined), which do not carry the standstill obligation applicable to Subsidies of Particular Interest. Making such a referral is likely to increase the risk of it being called in by the Secretary of State (see below) which would see it treated akin to a Subsidy of Particular Interest (with the standstill obligations that come with that).

At first blush it is difficult to see the tangible benefits of making such a voluntary referral, unless it could be used to run down the clock for challenge to the subsidy. However, it would seem to us to be quite a bold move to apply the subsidy in advance of a CMA report being published.

Can subsidies be reviewed even if not notified?

The Bill also affords the Secretary of State the ability to call in “subsidies” for review by the CMA where these are;

  • Subsidies of Interest; or
  • considered to risk a breach of the requirements of Chapter 1 (the principles) or Chapter 2 (the prohibitions and other requirements) of the Bill if granted; or
  • deemed to risk negatively effecting competition or investment in the UK.

The Secretary of State also has the right to make post – award referrals (in the circumstances referred to in bullets 2 and 3 above) to the CMA of any subsidy. This would include a direction by the relevant public authority to provide to the CMA:

  • details of the assessment carried out by the public body before the subsidy was granted;
  • evidence on which the assessment made was based; and
  • if no assessment has been undertaken the reasons for that.

This will trigger a report by the CMA with the limitation periods regarding challenge linked to the date such a report is published. The effect of this is somewhat mitigated by the requirement for the referral to be made before the end of 20 working days starting on:

  • the day the entry regarding the subsidy was made on the database; or
  • in respect of a SPEI of less than £14.5 million (subject to the Small Amounts of Financial Assistance Exemption – see below) the date on which the subsidy is given.

Are there any restrictions on the levels of funding as against total costs?

The Bill affirms the position under the TCA of no rigid requirements in terms of levels of support as against costs or limitations as to costs that can be funded, with the need to “merely” justify the subsidy is compliant with the principles and any prohibitions and other requirements. This, however, comes at a cost of certainty, which the old Block Exemptions under the EU State aid rules gave in the form of safe harbours. Our view is any assessment as against the principles is potentially very subjective in nature and further guidance is needed as to how they will be applied.

It is possible that a sort of indirect restriction in terms of eligible costs may be applied via the Subsidies of Special Interest. This could be linked to both quantity and the nature of costs, as well as funding as a percentage of such costs (if over a certain level), but we will only know if that is the intention when the relevant regulations are published.

It is also noted that the Bill refers to streamlined subsidy schemes, which are provided via a Minister of the Crown and must be laid before parliament after it is made. These could be used (we would anticipate) to allow for schemes that relate to certain types of subsidy that will be automatically regarded as compliant with the Principles etc. (in effect block exemptions).

Do public authorities have to do an assessment as against the Principles?

Arguably with the TCA, the burden of proof shifted from a subsidy being unlawful unless and until proved not to be (i.e. it is approved by the EC) to it being lawful unless and until proved unlawful via the Judicial Review process. In theory, this shifts the risk considerably, but this is somewhat tempered by the inclusions within the Bill of statutory requirements that public bodies:

  • must consider the subsidy control principles before deciding to give a subsidy; and
  • must not give the subsidy unless it is of the view that the subsidy is consistent with those principles.

This would appear to create a statutory duty on the public body and the ability to take action against them for a breach of the same (which has a significantly longer limitation period than the remedies expressly set out in the Bill).

So are the principles the same as in the TCA?

Broadly yes, but there is a new principle which (sensibly in our view) requires that “subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom”.

There is also a whole new set of principles which apply (in addition to the common principles) and which must be considered before giving a subsidy in the areas of energy or the environment.

Linked to these new (and much sign posted) common principles, is an interesting new prohibition on subsidies relating to displacement. This operates to prohibit subsidies that are conditional upon the relocation of economic activity from one area of the UK to another where that entails closing down all or part of those existing operations. With no apparent special treatment for areas that are disadvantaged (other than perhaps an easier ride in terms of compliance with the principles), this seems somewhat at odds with the much touted levelling-up agenda.

The new energy and environmental principles are quite detailed and could be argued to go against the mantra of a “simple, nimble” system. Additional principles in this area, where you would expect subsidies to be more prevalent than in other areas, seem to go somewhat against the net zero carbon aim of this Government.

What if a measure is deemed (correctly or incorrectly) not to be a subsidy at all?

An interesting and seemingly unanswered question in both the TCA and the Bill is the position in terms of where a measure is not deemed to be a subsidy by the granting public authority. In theory, if there is no subsidy then there are no obligations under the Bill, including no transparency obligations. The TCA did expressly refer to a right of action in the event that a measure that has not been treated as a subsidy is considered to operate such that it should have been, but this does not seem to have been replicated in the Bill (which seems odd as it is expressly referred to in the TCA).

There also remains the conundrum of what limitation periods apply in such instances, as challenge periods in all cases seem to link into the transparency obligations. This begs the question of when action must be taken where a challenge is made as to the assessment of a measure by a public body that has concluded (rightly or wrongly) that it is not a subsidy.

Other points to note in the Bill

  • The Small Amounts of Financial Assistance exemption in the TCA is set at £315,000 in the Bill and it has been confirmed (with the wording somewhat unclear in the TCA) that previous amounts of de minimis under the EU State aid rules within the applicable (3 fiscal year) reference period must be included in any cumulation exercise. In the context of Services of Public Economic interest (“SPEI”) the relevant threshold is £725,000.
  • There is no obligation to report certain awards below £500,000 (and awards of up to £14.5 million where they relate to SPEIs) on the transparency database.
  • The definition of "ailing or insolvent enterprises", with support for the same heavily restricted under the Bill, is at first sight quite simple. Applying this prohibition may not, however, be simple and is likely to require a quite detailed analysis on a case by case basis as to whether it is triggered. The lack of special provisions for start-ups and those that operate in certain sectors (i.e. hi-tech and innovation) could also unduly and unnecessarily impact on the ability to support sectors where we would normally expect support to be encouraged.
  • The appointment of Competition Appeal Tribunal (“CAT”) as the body to hear any judicial review of subsidies granted is considered to be a prudent move, given this body’s experience in applying other areas of Competition Law and the synergies that these will have with the new subsidy control rules in the Bill. It is interesting to note that in terms of remedies, if the CAT wishes to order clawback it will have to conclude, on the basis of its own assessment, that the subsidy is inconsistent with the requirements of the Bill (i.e. not in line with the Principles or is a prohibited subsidy). We see this as a sensible clarification as against the position in the TCA.

Can this be summed up as a simpler, nimbler process?

This new regime has no presumption of unlawfulness in terms of a subsidy, with at first sight a very time limited and potentially costly enforcement process and so could be seen as a big shift away from the delays and red tape of the EU State aid era. However, this shift comes at a price in terms of a current lack of certainty regarding what is enough to comply. The principles are very subjective in nature and this is likely to lead to differing interpretations and uncertainty (and thus risk) without further guidance or regulations.

In terms of the need for mandatory referral (and call ins by the Secretary of State), clarity is required urgently as to the definition of Subsidies of Interest and Subsidies of Particular Interest. The scope of these and the wriggle room the CMA may be able to afford itself in terms of reporting (i.e. requesting more information form the granting authority so stopping the clock) will very much determine how nimble the new regime will be in reality.