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Challenging Subsidies: Fighting Back Against Market Distortion

October 2024

Introduction 

As the UK subsidy control regime evolves under the Subsidy Control Act 2022 (SCA 2022), businesses and other affected parties now have clearer legal mechanisms for challenging subsidies granted by public authorities.

Companies may be adversely affected by the grant of subsidies, and they should regularly review what is uploaded to the subsidy database. If they fail to monitor it, they may later find themselves impacted by subsidies awarded to competitors, potentially facing strict time bars without recourse to challenge them. This is particularly relevant for businesses operating in certain key sectors that are frequently affected by subsidy decisions, including:

1. Construction and Infrastructure: Subsidies often support large-scale infrastructure projects, enhancing competitiveness and sustainability (see examples here).
2. Technology and Innovation: R&D grants are common to promote technological advancements and innovation (see examples here).
3. Transport: Government subsidies frequently target transport infrastructure improvements and the promotion of sustainable transport solutions (see examples here).
4. Energy: Subsidies are often granted to support renewable energy initiatives and to facilitate transitions to greener energy sources (see examples here).
5. Environmental Projects: Subsidies in this area focus on renewable energy, waste management, and carbon emission reductions (see examples here).

For companies active in the UK but incorporated in one of the 27 EU member states, it is important to note that the UK’s subsidy control regime under the SCA 2022 is distinct from the State Aid regime outlined in Articles 107 and 108 of the TFEU (Treaty on the Functioning of the European Union). The most notable distinction is that there is no requirement for prior approval before the grant of subsidies. However, for larger subsidies, public authorities are required to seek a non-binding opinion from the Subsidy Advice Unit (SAU) to assess compliance with subsidy control principles.

This article outlines the grounds for appealing against public subsidies, the legal mechanisms available, and examples of recent challenges, such as Durham Company Limited v Durham County Council, to illustrate how businesses can protect their competitive position.

Understanding subsidy control and grounds for appeal 

Under the SCA 2022, subsidies granted by public authorities must comply with the following key principles:

• Common Interest (Section 12): The subsidy must pursue a specific public policy objective, such as addressing market failures or promoting social or regional equity.
• Proportionality (Section 12): The subsidy must be proportionate to the public policy objective and limited to what is necessary to achieve the goal.
• Minimising negative effects on competition and trade (Section 16): The subsidy should be designed to minimise its distortive impact on competition or international trade.
• Necessity (Section 13): The subsidy must be necessary to achieve the public policy objective, ensuring that there are no less harmful alternatives available.
• Change of behaviour and incentive effect (Section 14): The subsidy should incentivise the beneficiary to take actions they would not have taken without the subsidy. This principle ensures the subsidy leads to additional investment or development that would not have occurred otherwise.
• Avoiding harmful effects on competition and investment (Section 16): Subsidies must avoid causing undue harm to market competition and investment within the UK.
• Transparency (Section 32): Details of the subsidy must be made public to ensure transparency, allowing competitors and the public to scrutinise its effects.

Who can appeal? 

Appealing a subsidy is not limited to direct competitors of the subsidy recipient. The SCA 2022 also grants standing to a variety of interested parties to challenge subsidies, including industry groups representing the interests of a particular industry and local authorities or other entities that have a direct interest in the subsidy’s competitive impact.

It is important to remember that collective action against a subsidy can sometimes be taken if an entire industry is adversely impacted. This approach may be preferable if an individual complainant has no appetite for pursuing a “lone wolf” action due to cost risks. Collective action can provide a more unified front and share the financial burden of challenging the subsidy, making it a viable option for businesses concerned about potential competitive distortion.

First case under the SCA 2022: Durham

One of the first significant cases under the SCA 2022 was The Durham Company Limited (t/a Max Recycle) v Durham County Council [2023] CAT 50. In this case, Max Recycle, a private waste services company, challenged Durham County Council under Section 70 of the SCA 2022, alleging that the Council was improperly using public resources to subsidise its own commercial waste collection services, thereby distorting competition.

The Competition Appeal Tribunal (CAT) ruled in favour of the Council, concluding:

1. The Council was not engaged in an economic activity when fulfilling its statutory waste collection duties. Pursuant to Section 7(2) of the SCA 2022, activities carried out for non-economic purposes (such as public health) are not within the scope of the SCA.
2. Any advantage from economies of scale in commercial waste collection benefited customers rather than the Council.
3. There was no enforceable right to financial assistance within the Council as there was no separate legal entity receiving the aid.

Commentary

While the decision favoured the Council, challengers can draw important lessons:

– Challenging cross-subsidisation: private competitors can scrutinise whether public bodies leverage economies of scale from statutory activities to cross-subsidise commercial services, a practice that could still breach the SCA 2022.

– Economic activity focus: future challengers can argue that even where statutory duties are fulfilled, if public authorities are engaged in commercial activities alongside these duties, they should be held to the same subsidy rules.

– Transparency: challengers should demand more rigorous separation of public authorities’ commercial and non-commercial functions to avoid hidden subsidies and unfair competitive advantages.

Mechanisms for challenging subsidies 

1. Judicial review

The primary route for challenging a subsidy is through judicial review in UK courts, as set out in Section 70 of the SCA 2022. Affected parties must demonstrate that the public authority has breached its obligations under the SCA 2022, either by granting a subsidy that does not comply with the statutory principles or by failing to follow proper procedures.

Judicial reviews must generally be brought within one month of the subsidy being awarded, in line with Section 71 of the SCA 2022. Courts can assess whether the subsidy complies with the principles of the SCA 2022 and may quash the subsidy if it is found to be unlawful.

2. Referral to the Subsidy Advice Unit (SAU)

For subsidies that qualify as Subsidies of Particular Interest (SOPIs), such as those exceeding £10 million, or those granted in sensitive sectors, businesses can refer the subsidy to the Subsidy Advice Unit (SAU) within the Competition and Markets Authority (CMA) under Section 52 of the SCA 2022.

The SAU reviews these subsidies for compliance with subsidy control principles and provides non-binding advice to the public authority. Although the SAU cannot directly overturn a subsidy, its findings can provide strong grounds for a legal challenge.

For example, the Welsh Freeports Subsidy Scheme was referred to the SAU due to its significant impact on competition within the freeport zones. Referrals like this allow businesses to raise concerns about distortive subsidies in sectors where competitive dynamics are particularly sensitive to government intervention.

3. 3. Office of the Internal Market (OIM)

The Office of the Internal Market (OIM), part of the Competition and Markets Authority (CMA), provides independent advice and monitoring on issues related to the UK internal market, including subsidies. While it doesn’t directly rule on individual subsidy disputes, businesses can raise concerns with the OIM if they believe a subsidy impacts the internal market. This can provide an avenue for seeking further scrutiny of subsidies that could distort competition across the UK’s nations.

4. An informal complaint to the awarding body

An informal complaint directly to the awarding body can be a first step before pursuing formal legal channels. Businesses can use this approach to raise concerns about the potential distortive effects of a subsidy, seeking clarification or voluntary remedies from the public authority. This option may provide a quicker, less adversarial resolution to subsidy disputes.  However, the prospects of success will depend to some extent on the goodwill of the public body concerned and its innate desire to act in a way that is legally compliant.  Such informal approaches will be more likely to yield fruit if there sits behind them at least the possibility of a more legalistic, judicial review challenge (which comes back to the point that complainants still need to act quickly).

Steps to consider before an appeal

1. Assess the impact

Businesses should first assess how the subsidy distorts competition and gather evidence of its negative impact. Evidence may include financial data, market analysis, and detailed comparisons of market conditions before and after the subsidy’s award. This forms the basis of a challenge under Section 70 of the SCA 2022. Consultation with legal advisers and an economic expert is advisable to help make the case for and quantify the existence of an adverse market distortion.

2. Seek legal advice

Working with legal advisors, businesses should evaluate whether the subsidy complies with the SCA 2022. This includes determining whether the subsidy meets the requirements for proportionality under Section 12, minimisation of distortion under Section 16, and whether it addresses a valid policy objective under Section 11.

3. Prepare for judicial review

If a subsidy clearly violates subsidy control principles, a judicial review under Section 70 may be the best course of action. Given the month-long timeframe to issue, as mentioned above, it is imperative to act swiftly.

Key case studies: learning from previous challenges 

1. Eventech Ltd v The Parking Adjudicator [2015] CJEU Case C-518/13

In this case, Eventech Ltd, a minicab company, challenged the UK policy of allowing black cabs to use bus lanes while preventing minicabs from doing so. The Court of Justice of the European Union ruled that such selective advantages could amount to unlawful state aid. Although this case was brought under EU state aid rules, it offers important insights into how similar challenges could arise under the SCA 2022.

2. The Durham Company Limited (t/a Max Recycle) v Durham County Council [2023] CAT 50

As discussed earlier, this case is one of the first major challenges under the SCA 2022. The Competition Appeal Tribunal found in favour of the Council, highlighting the distinction between economic and non-economic activities and providing guidance on how public authorities’ statutory duties interact with subsidy control principles.

Conclusion 

As the UK’s subsidy control regime matures under the SCA 2022, businesses must be proactive in monitoring subsidies granted to competitors. By challenging subsidies that breach the SCA 2022’s principles, such as proportionality under Section 12 or minimisation of distortion under Section 16, businesses can protect their market position and ensure fair competition.

Public bodies are increasingly seeking assurances from subsidy beneficiaries to ensure compliance with the SCA 2022. However, businesses negatively affected by subsidies should not hesitate to take action, whether through judicial review under Section 70 or by referring the matter to the Subsidy Advice Unit under Section 52. Acting swiftly, gathering robust evidence, and utilising the legal avenues available under the SCA 2022 can ensure that subsidies comply with the law and that their competitive landscape remains fair. Similarly, once a subsidy has been referred to the SAU, businesses are able to make submissions on the nature of the subsidy which will influence the SAU report. Whilst the SAU report is an advisory function, it is unlikely a public authority will ignore recommendations made by the SAU and thus it can be a powerful tool to effect change to a proposed subsidy without court action.

How we can help 

We specialise in advising clients on navigating the complex landscape of subsidy control. Whether you need assistance with preparing an SCA statement, briefing papers to public authorities, the SCA, or the CMA, or appealing against subsidies, our team is here to help.

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