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UK State Aid control and the Subsidy Advice Unit: A duty to ask but not to listen?

November 2022

1. Introduction

On 11 November, the UK Competition and Markets Association released its guidance note on how it will operate its functions under the Subsidy Control Act 2022 (“SCA”)[1].  The SCA received royal assent on 28 April 2022. The operative parts of the statute will take effect on 4 January 2023.

The SCA is a critically important piece of the jigsaw in terms of the UK’s post-Brexit regulatory framework for subsidy control.  The oversight activities of the CMA (acting through its dedicated unit, the Subsidy Advice Unit (“SAU”)) will also form an important part of the landscape.   With the publication of the guidance note, a clearer picture emerges of how the SCA (and the SAU) will work in practice.

2. What is subsidy control and why have it?

The EU rules strictly regulate the grant of any subsidy by the public sector to private sector businesses, recognising that this can distorts competition by favouring recipients over rivals.  Subsidies could also foster inefficiency as had been proven by a desire of certain national governments to bail out failing domestic companies, largely for political or industrial policy reasons.

Obviously these rules no longer apply in the UK.  In some respects, the SCA maintains a degree of continuity with the legal regime in place while the UK was a member of the European Union.   However, the model is far from being a “copy and paste” of the EU system.

Subsidies (also referred to as State aid) take forms beyond the grant of direct financial hand-outs.  They can include overpayments by public bodies for services or goods supplied by the private sector, disposals for less than market value and the provision by public bodies of guarantees for the benefit of private enterprises.

Conversely, there is no aid where a public body concludes a transaction on arm’s length market terms.   Where a contract has been awarded through an open and transparent competitive tender process, there will be an assumption that no illegal subsidy has been given.  Likewise, there will be no aid if a public asset is sold through a transparent and open competitive auction.

With some exceptions, the EU rules generally require subsidies above a certain value to be scrutinised and approved by the EU Commission before being implemented.  Failure to observe this requirement can lead to the aid being declared unlawful and the public body needing to recover it from direct or indirect beneficiaries.

3. Key features of the SCA

As part of the EU-UK Trade and Cooperation Agreement (“TCA”), the EU required the UK to maintain a subsidy control regime with the aim of avoiding subsidised UK goods entering the EU single market tariff free, competing with EU produced goods on an unfair footing.  Similar requirements for controls were also imposed by the World Trade Organisation (of which the UK is now a full member in its own right) as well as various FTAs to which it is party.

The SCA is the UK’s implementation of these requirements.  However, it differs markedly in many important respects from EU State aid law.  Notable features of the new law include the following:

• As now, the notion of subsidy is broad and includes various forms of financial support from public resources (e.g. guarantees, disposals at undervalue, preferential loans). This is in line with the UK’s TCA, WTO and FTA obligations;
• There will be no general duty to seek clearance for all forms of state aids. In most cases, public bodies will self-assess whether the subsidy they are providing is compliant with the applicable subsidy control principles set out in legislation (an “Assessment of Compliance”) and discussed below.  This is entitled “the baseline route”;
• For “Subsidies and Schemes of Particular Importance” (“SSoPI”), public bodies will have a mandatory obligation to notify the SAU of the intended scheme. They will not be able to put the scheme into effect until the SAU has conducted a review and published a report on whether or not the aid scheme is compliant with the “subsidy control principles”;
• Unlike State aid decisions issued by the EU Commission, the reports, advice and opinions of the SAU will not be binding. However, failure to follow them would provide ammunition to claimants seeking to challenge the legality of the measure;
• Certain categories of aid are prohibited and others required to comply with certain conditions in order to be allowed (see section 4 below);
• Other, more benign forms of aid in contrast may benefit from the “streamlined route”, which would obviate even the need for the detailed “Assessment of Compliance”;
• The SCA introduces transparency requirements relating to the award of subsidies/ making a subsidy scheme.  Interested parties will have the right to contact the public authority to obtain further information about the subsidy measure and key details of public aid will be published in an open, public database;
• The Competition Appeal Tribunal will hear appeals by interested parties (or the Secretary of State) against subsidy decisions, using judicial review principles and will have the power to impugn an unlawful subsidy.  A party may wish to complain for example if views it as incompatible with the subsidy control principles.  It may also consider that no Assessment of Compliance was undertaken or that a subsidy fell within the SSoPI category but was not referred to the SAU.  Time limits for appeals are tight: appeals generally need to be brought within one month of the date the claimant gained actual or constructive knowledge[2]; and
• Subsidies with a Northern Ireland dimension will be governed by the EU-UK Withdrawal Agreement rather than the SCA.  The EU Commission will retain jurisdiction to review

By reducing ex ante controls, the Government has said it aims to “empower local authorities, public bodies, and central and devolved administrations to design subsidies that deliver strong benefits for the UK taxpayer”.

4. Prohibited and conditional subsidies and “Assessments of Compliance”

Ss 19-26 of the SCA prohibit the following classes of subsidy:

1. Subsidies contingent on export performance (goods only)
2. Subsidies contingent upon the use of domestic over imported goods or services (goods only)
3. Unlimited state guarantees to enterprise
4. Subsidies granted to “ailing or insolvent” enterprises where there is no credible restructuring plan
5. Subsidies explicitly contingent upon relocation within the UK internal market

The following categories of subsidy are permissible, subject to satisfaction of certain conditions:

1. Restructuring aid for “ailing or insolvent” enterprises
2. Subsidies for an export credit insurance provider
3. Subsidies for an airline carrier to operate routes
4. Subsidies related to services of public economic interest (e.g. subsidised transport services for less profitable routes) (above £725,000 over three years)

If prohibitions apply, the subsidy cannot proceed.  For those subsidies in the second list, where applicable conditions are met, a proportionate “Assessment of Compliance” will need to be undertaken.

Indeed, it is anticipated that the authority will follow the “baseline route” for most cases of proposed aid, conducting an “Assessment of Compliance” (including those not found in either of the two lists above).    As part of that exercise, authorities must ensure the measure would be consistent with seven subsidy control principles laid down in the legislation[3].  These include for example considering whether the subsidy measure benefits wider society (Principle A) and is proportionate in relation to the aims it seeks to achieve (Principle B)[4].  For energy related subsidies or aid with an environmental dimension, a similar but distinct set of principles are applicable[5].   Whilst these principles are broadly inspired by EU rules and decisions, they will in our view not slavishly conform to those precedents (which could lead to concerns from the EU Commission further down the line about whether assessments are adequate).

In certain cases, an Assessment of Conformity will also be followed by a SAU referral, as discussed below.

For certain subsidy types which the Government considers to be at low risk of distorting competition (or which otherwise promote its objectives), the “streamlined route” is available.  Relevant guidance on the scope of this route is set out in secondary legislation.  This is even simpler than the “baseline route” as authorities need only show they meet the relevant criteria for the streamlined route, without engaging in any deeper analysis.

If and when the authority decides it is at liberty to proceed, it must publish details of the scheme on the UK Government’s transparency database.

5. Mandatory and voluntary review processes

The public authority must also assess whether the subsidy falls within the definition of a “Subsidy or Scheme of Interest” (“SSoI”) or “Subsidy or Scheme of Particular Interest” (“SSoPI”).  BEIS has provided guidance on the scope of these categories of aid[6].

There is a mandatory duty to notify the subsidy for review (discussed below) for SSoPIs.  There is no general duty for a public body to notify an aid scheme within the SSoI definition although it may request a report from the SAU.  The SAU will have no general obligation to review a notified SSoI referred to it.  In its guidance it has said that the decision will be taken with regard to three prioritisation principles (impact, significance and resources)[7].

6. Duty of referral and CMA guidance on procedure

As mentioned above, a subsidy must be referred to the SAU (and therefore not assessed merely in-house) if it falls within the scope of an SSoPI or if the Secretary of State directs that a proposed subsidy or scheme be ‘called-in’ for SAU review.   For other subsidy types, there may also be the possibility for the granting authority to refer the proposed subsidy to the SAU on a voluntary basis.

Mandatory notifications must be accompanied by certain information, including the authority’s own Assessment of Compliance (and underlying evidence).  Where applicable, it must also explain why it considers the subsidy to be a SSoPI.   The SAU’s guidance provides detailed advice on what is expected in terms of reporting format and detail.

The SAU’s guidance also confirms that it will be willing to engage in “pre-referral discussions” to assist the public body to file a complete submission.  These discussions will furthermore help the SAU to better understand the issues, objectives and context.  During this phase, the SAU will not assist the public body in achieving legal compliance nor with the design of the scheme.

For mandatory referrals (e.g. for SSoPIs), once the SAU confirms the notification is complete, it has 30 working days (extendable in certain limited circumstances) to reach a decision and publish a report in relation to the subsidy.   For voluntary referrals (i.e. SSoIs), this 30 working day period begins on the day the SAU confirms the notification is complete, having satisfied applicable information requirements.

The SAU will publish non-confidential details of the notification on its website and encourage stakeholder input into its review.   Third parties may, for example, wish to question whether the aims of the scheme could have been achieved in a less restrictive or interventionist manner.

Much of the focus of the SAU’s review will be on the sufficiency or otherwise of the authority’s own Assessment of Compliance.  Where deficiencies are identified in the Assessment, a negative report is likely to emerge.  Once the SAU reaches its decision, a further 5-day “cooling off” period applies, during which the authority may not proceed with the subsidy.

7. SAU information gathering powers

The SAU will benefit from significant legal powers to gather information from the public authority, either by means of documentary disclosure, meetings or phone calls.  Failing to comply with information requests may attract penalties.

Some of the information requested may relate to sensitive matters or include commercially sensitive data (for example related to proposed recipients of subsidies).  The SAU generally has a duty to maintain the confidentiality of such information.  It expects assistance in that endeavour from notifying parties and a section of its guidance is devoted to how the public body should designate relevant information as being confidential.

8. SAU’s report is non-binding

As stated above, the SAU will have no power to prohibit the grant of a subsidy, even for SSoPIs.  In other words its final report will not be binding, even if its conclusions are negative.  Its role is primarily to advise public bodies on compliance with the applicable principles, how the design of the subsidy could be improved and the robustness of the Compliance Assessment undertaken by the public body.

This means that in some cases there will effectively be a duty to seek the SAU’s advice (and to hold off implementation while it deliberates), but no requirement to follow the ultimate counsel which emerges.

Whilst that may seem toothless, it is unlikely in our view that many authorities will ignore a negative report from the SAU.  The report will be a public document.  Diverging from its findings could attract criticism from the media and the public at large if it suggests public money is being poorly spent (or worse still suggests nepotism or corruption is in play).  If any third party sought a judicial review of the proposed subsidy, the challenge would be strengthened by highlighting the SAU’s own adverse findings on the scheme.

9. State aid and Northern Ireland

Under EU state aid rules, a subsidy that might have an impact on goods trade between Northern Ireland and the EU (including Ireland) in accordance with Article 10 of the Northern Ireland Protocol must still be reported to and approved by the European Commission (unless otherwise permitted under those rules).

This is an important carve-out from the SCA and ne that generates some uncertainty.  The UK Government has said that for the Protocol to apply, the subsidy must possess a direct nexus with Northern Ireland.  The EU Commission on the other hand has said it is triggered where the beneficiary merely trades in goods or services in Northern Ireland – a much lower bar.  There is a high potential for future conflict between the two blocs arising from their competing interpretations.

10. What to expect from the new framework: more transparency and ex post challenges?

The effectiveness of the SCA will ultimately depend on whether or not it encourages more efficient and impactful public spending.  It will also be judged on whether it avoids further deterioration of the UK’s strained relations with the European Union.

There remain questions over whether it will promote legal certainty of offer a sufficiently robust surveillance regime.  Key features of the framework are transparency and ex post enforcement by interested parties who consider themselves at risk of harm from subsidies.  To date, there have been relatively few challenges to subsidies brought before the UK courts (although there is currently one pending in R v. Secretary of State ex parte British Sugar (not yet reported)).

There may be occasions where the EU Commission is concerned that the UK’s new flexible system of control is allowing subsidised goods to slip into EU single market unfairly, contrary to the principles of the TCA.   As mentioned above, there is also the prospect of turf wars between the EU and UK over when the SCA is displaced by the Northern Ireland Protocol, a matter that may need to be resolved in litigation before the Court of Justice of the European Union.

Whether or not the new flexible system works for businesses may depend on which side of the fence they sit from time to time.  Where they stand to benefit from the grant of a subsidy, they may welcome the faster and more flexible approach.  The 30-working day deadline will give them more visibility over time frames than they had with notifications to the Commission under the EU rules.  Where aid is granted to a competitor, they may bemoan the absence of a strong public enforcement mechanism, particularly where they lack the appetite for litigation risk in a judicial review action.

[1] See “Operation of the subsidy control functions of the Subsidy Advice Unit” available at: https://www.gov.uk/government/publications/guidance-on-the-operation-of-the-subsidy-control-functions-of-the-subsidy-advice-unit

[2] The detailed rules are laid down in Section 98A of the SCA.

[3] See Schedule 1 of the SCA.

[4] Guidance is available here: https://www.gov.uk/government/publications/subsidy-control-bill-policy-papers/overview-of-the-subsidy-control-regime-a-flexible-principles-based-approach-for-the-uk

[5] See Schedule 2 of the SCA.

[6] Guidance is available here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1049846/subsidy-control-bill-policy-statement-subsidies-schemes-interest-particular-interest.pdf

[7] As explained at pp 32-33 of the SAU Guidelines.

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