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UK Government consults on new subsidy regime

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05 February 2021

Following Brexit, with some limited exceptions, the EU State aid rules no longer apply in the UK. The UK Government (the Government) has made clear that it intends to establish a new UK subsidy regime, with the UK-EU Trade and Cooperation Agreement (the TCA) ensuring that the EU and the UK will each have in place its own independent system of subsidy control (with neither being bound to follow the rules of the other).

The system will also be designed to ensure that the UK honours its international obligations under WTO rules and other free trade agreements agreed by the UK. On 3 February 2021, the UK Government published a consultation inviting views on the best way to design the UK’s bespoke approach to subsidy control. The consultation will close on 31 March 2021.

In summary, although the consultation now outlines in considerable detail the various factors the Government intends to take into account when establishing the UK’s new subsidy control regime, a number of questions remain unanswered. For example, although it now appears unlikely that a comprehensive ex ante approval regime will be established for all types of subsidy, there remains scope for some form of mandatory notification requirement to be put in place for at least some types of subsidy (particularly those ultimately defined as “high risk”). Further, although the identity and powers of any new independent body to be established remains uncertain, it is clear that the UK courts will play an important role in any new regime.

In its press release accompanying the consultation, the Government strongly indicates that the new system will be a clear departure from the “inflexible and bureaucratic EU state aid regime, and tailored to better support start-ups, small businesses and new industries.” It therefore seems clear overall that in designing the new UK subsidy regime, the Government intends to adopt a far lighter approach to regulation than has previously been the case.

Scope of the regime

Unsurprisingly, the scope of subsidies to be covered by the new regime broadly follows the detailed definition set out in the TCA (which itself closely follows the definition of State aid applied under the existing EU regime, albeit using slightly different terminology in some instances). Broadly speaking, the consultation suggests that for a subsidy to fall within the scope of the new UK regime it:

  • must constitute a financial contribution provided by a “public authority”;
  • must confer a benefit on persons supplying goods or services in the course of a business, which would not be available under commercial terms;
  • must be specific (benefitting a particular enterprise or enterprises within a particular sector, industry or region); and
  • must or could have, a harmful or distortive effect on trade or investment within the UK or internationally.

In designing its bespoke subsidy control system for the UK, the Government has proposed a legislative regime built around a set of “subsidy control principles” (as agreed between the EU and UK in the TCA). When granting subsidies, public authorities will be placed under a legal obligation to meet the terms of the principles unless they fall within an exemption. A set of seven principles has been put forward in the consultation, on which the Government would intend to issue guidance to assist public authorities in demonstrating compliance. These principles include a requirement that subsidies are provided to meet a specific public policy objective to remedy an identified market failure or to address an equity concern, that subsidies are proportionate and should be the minimum size necessary to achieve the stated public policy objective, and that public authorities should seek to minimise any harmful or distortive effects on competition within the “UK internal market” that might arise from a subsidy. The Government is also seeking views as to whether any additional principles should be included on top of the requirements agreed in the terms of the TCA.

The Government intends to prohibit outright certain types of subsidy, and impose conditions in relation to others. Subsidies to be prohibited include export subsidies, subsidies contingent upon the use of domestic goods over imported goods or services, unlimited State guarantees and subsidies granted to “ailing or insolvent enterprises” where there is no credible restructuring plan in place. The consultation also notes that subsidies that are likely to give a business in one nation or region an unfair competitive advantage over those operating in another area will also be discouraged.

Again, consistent with the approach currently taken under the EU State aid regime, the Government is also consulting on the extent of any sector- or category-specific rules that should be introduced in relation to, for example, energy and the environment, disadvantaged areas, transport and R&D. The consultation also considers whether additional measures could be included to prevent the “uneconomic relocation” of economy activity between England, Scotland, Wales and Northern Ireland.

Exemptions

As under the current EU State aid regime, the Government is proposing to introduce specific types of exemption to ensure that the lowest risk and most time-critical subsidies can proceed without having to ensure that they comply with the subsidy control principles. The proposed exemptions currently include small amounts of financial assistance (generally measures below 325,000 Special Drawing Rights, or approximately £340,000 at the time of publication), relief to compensate for “exceptional occurrences” (such as natural disasters or other exceptional non-economic occurrences such as compensating businesses for the immediate economic impact of the pandemic), subsidies granted to address a national or global economic emergency, and other services of public economic interest (for example, social housing or rural public transport services).

In order to reduce the burden placed on public authorities by the new regime, the Government is also consulting on whether any additional measures could be introduced to help ensure that lower risk subsidies are able to proceed with maximum legal certainty and minimum bureaucracy (for example, by setting out specific categories of subsidy that are deemed to be in compliance).

Process

In terms of process, the Government notes that public authorities would always be required to follow and apply the proposed subsidy control principles on a case-by-case basis. Public authorities will be supported in demonstrating compliance with the principles through the provision of guidance and a template to record how the terms of the principles have been met when designing a subsidy. However, the consultation also seeks views on whether to include an additional process that would specify how to evaluate subsidies that could be considered to be at high-risk of causing harmful distortion to the UK internal market. This may include legislation to require public authorities to carry out a more detailed review of the effects of competition for high risk subsidies before their award (a “Competition Impact Review”). If such a measure were included, it is noted that the Government would also need to consider whether the scope of any more detailed competition review should be extended to include impact on trade and investment with other countries.

The Government also seeks views on whether a voluntary or statutory standstill period could be considered before the highest risk subsidies are disbursed to allow challenges or requests for information to be received. It is also considering whether a new independent body (discussed in further detail below) could offer advice on compliance for the highest risk subsidies (perhaps in the form of a review of a public authority’s assessment and, if required, recommendations on how to design the subsidy to minimise distortive effects).

Oversight and enforcement

The Department for Business, Energy and Industrial Strategy has developed a new publicly accessible transparency database for public authorities to record subsidies, which was also launched this week. The Government proposes placing a legal obligation on public authorities to submit information on any subsidies awarded above set values. This would include details of the subsidy instrument, amount, date granted, granting authority and the purpose of the subsidy. Public bodies would also be placed under an obligation to upload information within six months of the commitment to award a subsidy, in line with the UK’s commitment under the TCA.

Although the Government is committed, under the terms of the TCA, to the establishment of an independent body that will have an appropriate role within the UK subsidy control regime, the identity of this body is still to be determined. The Government is seeking views on the functions of this independent body, including its responsibilities in facilitating and managing a subsidy control regime, as well as potential enforcement functions. The consultation leaves open the question of which body would carry out this work, noting that there are a range of options to consider. These include establishing a new body or subsuming the functions within the remit of an existing body (such as the Competition and Markets Authority).  The possibility is also left open for different elements of the regime to be ultimately overseen by a combination of bodies.

In terms of enforcement, the consultation makes clear that decisions by a public authority to award a subsidy will be open to challenge through the courts. The extent to which enforcement of the subsidy control regime takes place through the courts will depend on whether the new independent body is given enforcement responsibilities and powers.

The consultation also seeks views on whether a specialist judicial forum (such as the Competition Appeal Tribunal) should hear challenges to subsidy schemes and rewards. 

Finally, the UK has also committed to providing a recovery power for the courts where subsidies have been found to have been given unlawfully under the TCA. However, given the UK’s good track record on compliance with subsidy control provisions under the existing EU State aid regime (with very few cases ending in recovery), the Government expects that it will only be necessary for the courts to make use of the new recovery power in exceptional circumstances.

As mentioned above the consultation ends on 31 March 2021. We will continue to monitor developments and keep you updated.

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