UKs new subsidy control legislation gets the green light

On 28 April 2022, the Subsidy Control Act received Royal Assent.  This is the final stage of the legislative process for a new system to regulate the granting of subsidies by UK public authorities.  The Act establishes a framework to be applied by public authorities before they decide to grant subsidies.  

Key takeaways

• New UK subsidy control legislation is expected to come into force this autumn.
• Public authorities will be required to self-assess whether the financial assistance they grant is consistent with key principles.
• Subsidy Advice Unit to be established within the Competition and Markets Authority, which will have oversight of the regime and will be responsible for advising public authorities on more complex subsidy measures.
• Public authorities will be required to publish information about subsidies via the "Search for UK subsidies" database.
• The Competition Appeal Tribunal ("CAT") will have powers to hear appeals of decisions on judicial review grounds.

Context

EU State aid law ceased to apply within the UK following the end of the Brexit implementation period, subject to the terms of Article 10 of the Northern Ireland Protocol.  In particular, Article 10 provides that the EU State aid rules continue to apply in relation to aid measures which have an effect on trade in goods or electricity between Northern Ireland and the EU.  In these circumstances, the European Commission and the European Courts retain their competence to take action against the UK under the State aid rules.

Although EU State aid law no longer has general application in the UK, the UK is subject to a number of international commitments with respect to the granting of subsidies.  Those commitments arise from a range of sources including the EU-UK Trade and Cooperation Agreement ("TCA"), the UK's membership of the World Trade Organisation ("WTO") and the provisions of the UK's Free Trade Agreements.

In early 2021, the UK government decided it needed to prepare new subsidy control legislation to ensure compliance with its international commitments.  However, the government was also keen to ensure that the new regime was designed in a way that is capable of supporting the delivery of its strategic priorities such as levelling up, achieving net zero carbon and supporting the economic recovery from COVID-19.

On 3 February 2021, the government launched a consultation on designing a new approach to subsidy control.  The Subsidy Control Bill was subsequently introduced to Parliament on 30 June 2021.  The final stage of the legislative process was completed when the Subsidy Control Act received Royal Assent on 28 April 2022.

What are the key impacts of the Act?

First, the Act confirms the definition of "subsidy".  The definition is largely based on the definition used in the TCA.  In short, it captures financial assistance which: 

• is given from public resources by a public authority;
• confers an economic advantage on one or more enterprises;
• is specific such that it benefits one or more enterprises over other enterprises with respect to the production of goods or provision of services; and
• has, or is capable of having, an effect on competition or investment within the United Kingdom, or trade or investment between the United Kingdom and another country.

Second, UK public authorities will have the power to decide whether to grant subsidies.  In doing so, they will be required to apply certain principles to ensure that subsidies' beneficial effects in terms of achieving a specific policy objective outweigh any negative effects on competition, investment or trade.  This includes a special list of principles for subsidies targeting energy and environment objectives.  However, in certain cases, public authorities will be able to rely on exemptions, which mean that a full assessment of compatibility with the relevant principles will not be required.  The majority of those exemptions reflect the provisions agreed in the TCA and are similar to the types of exemptions available under the EU State aid regime.  For example, exemptions apply to minimal financial assistance below a threshold of £315,000 and subsidies relating to services of public economic interest assistance, which cannot exceed £725,000.

Third, the Subsidy Advice Unit ("SAU") will be set up within the Competition and Markets Authority.  The powers of the SAU will be relatively limited in comparison to those of the European Commission in respect of State aid measures.  In particular, the SAU's primary functions appear to be monitoring and oversight of the new regime.  However, in certain cases, public authorities will be required to seek non-binding advice from the SAU in advance of awarding subsidies.  

Fourth, the Act introduces transparency requirements relating to the award of subsidies and making of subsidy schemes.  In particular, public authorities will be required to publish certain information about subsidies decisions to a searchable electronic database.  In this context, the Department for Business, Energy & Industrial Strategy has established the "Search for UK subsidies" website.  These requirements will be far-reaching and apply to most subsidies of a value exceeding £100,000.  They are therefore likely to capture measures which would previously not have been subject to the European Commission's notification requirements and thus escaped any form of transparency obligations.

Fifth, the Act provides the CAT with powers to hear appeals by interested parties based on judicial review principles.  Those appeals must be brought within strict time limits – typically within one month of the interested party acquiring sufficient knowledge.  The CAT may either dismiss the application or grant relief (a mandatory order, prohibiting order, quashing order, declaration or injunction).  The CAT may also refer the decision back to the decision maker.  Relief granted by the CAT has the same effect as the corresponding relief granted by the High Court on the determination of proceedings for judicial review, and is enforceable as if it were relief granted by the High Court.  The CAT may also order a public authority that has given a subsidy to recover the amount of that subsidy from the beneficiary.

In general, interested parties are expected to rely upon information published by public authorities via the Search for UK subsidies database.  However, the Act does provide interested parties with the right to request pre-action information about subsidies for the purposes of deciding whether to apply for a review of a subsidy decision and imposes obligations on public authorities to provide information in response to such requests. Such a request effectively resets the start of the time limit for bringing an appeal to the date on which the public authority provides notice that it has responded to the interested party's request.

Next steps

The government has indicated that the new regime will come into force in autumn 2022.  Until then, public authorities are required to comply with the UK's commitments on subsidy control set out in its Free Trade Agreements with other countries, notably the provisions of the TCA, and the WTO rules on subsidies, as well as Article 10 of the Northern Ireland Protocol.  However, once the new regime is in force, the UK's international commitments on subsidy control will continue.  For example, there will be some cases where the Act and Article 10 of the Northern Ireland Protocol will be engaged simultaneously.

The Act will be supported by various guidance and secondary legislation, some of which will be published ahead of the new regime coming into force.  In this context, the government is currently consulting on secondary legislation on when public authorities can and must seek guidance from the SAU.  In summary, public authorities may seek advice from the SAU in relation to "subsidies of interest" and must seek advice on "subsidies of particular interest".  The proposed thresholds for determining when a subsidy is of interest or of particular interest are summarised below.

Preliminary observations

Much of the content of the Act is based closely on the TCA provisions on subsidies, with many of those provisions based closely on pre-existing EU State aid law and WTO subsidies law concepts.  However, in addition to complying with its international commitments on subsidies, it is clear that the UK has put its own stamp on this new regime.  In particular, the government has been clear that the new regime has been designed to reflect the UK's own strategic interests.

A key indicator of this new approach is the government's intention to distance itself from the EU State aid model, which requires public authorities to seek prior approval of State aid measures through a formal notification process unless a 'block exemption' applies.  This is expected to result in more streamlined processes for the award of subsidies, in particular, for larger projects.  Time will tell in terms of gauging the significance of this distinction given that, according to the European Commission's statistics, more than 95% of EU State aid is awarded based on block exemptions with granting bodies being accountable for determining whether an exemption is available.

There are clearly a number of points of detail yet to be confirmed, such as the referral mechanisms for subsidies of interest and of particular interest.  Therefore, it will be important also to keep a close eye on the guidance and secondary legislation being finalised over the coming months.

One area of obvious tension that needs to be addressed is what happens in situations where a measure is subject to both the Act and Article 10 of the Northern Ireland Protocol.  In particular, it is unclear what powers the SAU might have (if any) in these circumstances and how these powers would interface with the European Commission's powers.  It is also unclear whether the CAT will have competence to review measures based both on the Act and the Protocol.