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It's coming home: the Subsidy Control Bill and the repatriation of State aid law

Nick Pimlott
19/07/2021

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United Kingdom

A striking feature of the negotiations of the post-Brexit trading arrangements was the emergence of State aid or subsidy control as a key issue of contention between the UK and EU.

Within the EU, the ability of Member States to subsidise industry is heavily controlled and restricted by the European Commission, which seeks to ensure a level playing field and avoid subsidies that might distort fair competition and patterns of trade between Member States. 

It is therefore unsurprising that the EU should seek to ensure that in free trade agreements with third countries, as the UK now is, its counterparties are required to adopt systems of subsidy control to protect EU Member States from unfair competition from subsidised imports. More surprising is the extent to which subsidy control became a contentious issue in the negotiations over the UK-EU Trade and Co-operation Agreement (TCA) that was struck shortly before Christmas 2020.

Under EU law, State aid is prohibited unless and until it is notified to the European Commission for clearance or it falls under an exemption.  The Commission has the exclusive power both to clear individually notified aid and to grant general exemptions for certain categories of aid.  In practice, therefore, Member States have to work closely with the Commission on State aid matters.

During its membership of the EU, the UK in fact managed its State aid affairs extremely well. The UK typically granted much less aid and was subject to much fewer infraction actions by the Commission than other comparable Member States such as France or Germany.  So it might have been expected that the UK would simply map across EU State aid law into domestic law with the possibility for divergence over time, as it had done for many other systems of law, notably competition law. 

Instead, the UK Government, through concerns about sovereignty and a desire for freedom to use Government support to "level up" the country, sought to escape entirely from State aid or subsidy control and, for a time in 2020, it seemed as though the whole deal might run aground on the rocks of State aid. 

However, the UK did finally agree to provisions on subsidy control in the TCA with the EU.  The UK is now seeking to implement these provisions via domestic legislation in a Subsidy Control Bill that was introduced to Parliament on 30 June 2021.

Subsidy control provisions in the TCA

The subsidy control provisions of the TCA require both parties to operate and maintain systems of subsidy control built around common principles, namely:
 
  • Subsidies should pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale such as social difficulties or distributional concerns
  • Subsidies are proportionate and limited to what is necessary to achieve the objective
  • Subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and would not be achieved in the absence of the subsidies
  • Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy
  • Subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means
  • Subsidies' positive contributions to achieving the objective outweigh any negative effects, in particular negative effects on trade or investment between the EU and the UK
Subsidies are defined in the TCA in a similar way to the concept of State aid in EU law, although the terminology used is in some respects different.  A subsidy means financial assistance which:
 
  • arises from the resources of the parties [i.e. the UK or the EU as relevant], including: 
    • a direct or contingent transfer of funds such as direct grants, loans or loan guarantees; 
    • the forgoing of revenue that is otherwise due; or
    • the provision of goods or services, or the purchase of goods or services;
  • confers an economic advantage on one or more economic actors;
  • is specific insofar as it benefits, as a matter of law or fact, certain economic actors over others in relation to the production of certain goods or services; and
  • has, or could have, an effect on trade or investment between the parties.
Various types of subsidy are expressly prohibited (see further below) and exceptions are provided for (see further below), both of which, again, have their parallels in EU State aid law. 

The TCA requires the parties to establish and maintain an operationally independent authority or body with an "appropriate role" in its subsidy control regime.  Importantly from a UK perspective, the independent body is not required under the TCA to have the power to approve subsidies in advance in the manner of the European Commission under EU State aid law, although such ex ante control is clearly not precluded.

The TCA also requires the parties to ensure that their courts and tribunals are empowered to review subsidy decisions and impose effective remedies including suspension, prohibition, requirement of action by the awarding authority, damages and the recovery of the subsidy from the beneficiary.  Interested parties must also have a right to bring claims in respect of subsidies.

UK implementation of the TCA – the Subsidy Control Bill

Absent EU State aid law, the UK has no domestic law regulating the granting of Government subsidies.  The subsidy control provisions of the TCA therefore require the UK to start from scratch and construct a new system of subsidy control.  Following public consultations in the first part of 2021, a major step on this road was taken on 30 June 2021 with the introduction to Parliament of the Subsidy Control Bill (Bill).

The Bill (cl. 12) requires public authorities to consider the "subsidy control principles" (as set out above) before deciding to give a subsidy or set up a subsidy scheme and they must not give the subsidy or set up the scheme unless of the view that the subsidy/scheme is consistent with those principles. Specific alternative principles are applied in the case of subsidies in relation to energy and environment. This duty applies broadly speaking to any public body that would be amenable to judicial review.

The definition of a subsidy in the Bill (cl. 2) mirrors that in the TCA with the important difference that, whereas the TCA only catches subsidies that have or could have an effect on trade and investment between the UK and the EU, in the Bill as a drafted a subsidy is caught if it has an effect on competition and investment within the UK, in addition to trade and investment between the UK and the EU (or third countries).

Prohibited subsidies

Certain types of subsidy are prohibited outright, including:
 
  • Unlimited guarantees
  • Subsidies that are contingent in fact or law upon export performance (with certain exceptions)
  • Subsidies that are contingent upon the use of domestic over imported goods or services
  • Subsidies that are contingent on relocation within the UK
  • Subsidies for rescuing an ailing or insolvent enterprise unless given as during the preparation of a restructuring plan in order to avoid social hardship or prevent a severe market failure and the subsidy is given in the form of a loan or loan guarantee to provide temporary liquidity support
  • Subsidies for restructuring an ailing or insolvent enterprise (with certain exceptions)
  • Subsidies for restructuring or liquidating ailing or insolvent deposit takers or insurance companies
  • Subsidies for air carriers for the operation of a route except where the carrier is subject to a public service obligation in relation to the route, the subsidy will provide benefits to the public at large, or the subsidy is a start-up subsidy for opening a new route to a regional airport which will increase the mobility of citizens and stimulate regional development.
Exemptions from the subsidy control requirements

Exemptions from the proposed subsidy control regime in the Bill include:
 
  • Subsidies of less than £315,000 given to one enterprise over the course of the two preceding financial years (minimal financial assistance)
  • Subsidies of less than £725,000 given to one enterprise over the course of the two preceding financial years for the purpose of performing a services of public economic interest (SPEI services)
  • Subsidies given to compensate for or respond to natural disasters or national or global economic emergencies
  • Subsidies for the purposes of national security or financial stability
  • Subsidies in relation to certain large cross-border or international co-operation projects
  • Subsidies in relation to nuclear energy
Legacy subsidies that were granted pre-Brexit and remain subject to EU State aid law are exempt as are subsidies covered by the Northern Ireland Protocol under the EU-UK Withdrawal Agreement (which also remain subject to EU State aid law).

Subsidies given by way of Act of Parliament are also exempt.  However, subsidies given by way of primary legislation of the devolved legislatures are subject to the subsidy control requirements set out in the Bill. 

Oversight by the Competition and Markets Authority

As widely expected, the Government has decided that the Competition and Markets Authority (CMA) should perform the functions of the independent authority required by the TCA.  However, consistently with the TCA, the Bill does not require pre-clearance of subsidies by the CMA in the manner of the European Commission.  Instead, the CMA is required to produce reports on whether certain subsidies or subsidy schemes comply with the subsidy control principles. 

In the case of subsidies or subsidy schemes "of particular interest", the authority proposing to give the subsidy or set up the scheme must request a report from the CMA before giving the subsidy/setting up the scheme.  In the case of subsidies or subsidy schemes "of interest", the authority may make a voluntary request for a report from the CMA.  The concepts of subsidies/schemes "of particular interest" and "of interest" are to be defined in regulations.

The Secretary of State in addition will have a "call-in" power to direct a public authority to request a report from the CMA in relation to a proposed subsidy or subsidy scheme and a power to refer a subsidy or subsidy scheme to the CMA for a report after it has been made. 

The CMA's report must include an evaluation of the reasons why the authority considers that the subsidy control principles are satisfied, taking into account any effects on competition or investment within the UK.  The report may also include advice on how the subsidy or the scheme might be improved or modified.

Importantly, and in line with the Government's aim to streamline the giving of subsidies where justified, public authorities will not be bound to follow the advice and recommendations in the CMA's report and will, in principle, be able to give subsidies even where the CMA considers that they are not compatible with the subsidy control principles.   Whether in practice public authorities will choose to exercise this freedom to go against the findings of the CMA remains to be seen. 

Appeals to the Competition Appeal Tribunal

An interested party who is aggrieved by the making of a subsidy decision may apply to the Competition Appeal Tribunal (CAT) for a review of the decision.  An interested party is a person whose interests may be affected by the giving of the subsidy or the making of the scheme, or the Secretary of State.  The CAT must determine the application applying the same principles as would be applied in judicial review. 

If the CAT upholds the appeal, it has a range of orders that it may make by way of a relief: a mandatory order, a prohibiting order, a quashing order, a declaration and an injunction.  In addition, the CAT is specifically empowered to make a recovery order where it finds that the subsidy decision did not comply with the subsidy control requirements set out in the Bill.  A recovery order would both empower the public authority to recover the subsidy from the beneficiary and require the authority to exercise that power. 

Interested parties have the right to make a request to public authority for information about a subsidy or subsidy scheme for the purpose of enabling the interested party to determine whether a subsidy or scheme was given/made in accordance with the subsidy control requirement.  Authorities must respond to such requests within 28 days. This is a potentially important procedural right that could help to support future claims against subsidy decisions.

Commentary

The EU State aid rules have been criticised, with some justice, for being overly bureaucratic and technical.  To avoid pre-notification to the Commission, State aid above the de minimis level had to fall within one of the categories of permitted aid under the Commission's General Block Exemption Regulation (GBER) and meet the detailed criteria and thresholds relevant to the particular category.

Whilst the GBER did provide a mechanism for the granting of quite substantial amounts of "good" aid without notification, it was arguably something of a straightjacket that may have inhibited the granting of otherwise beneficial subsidies.  The new UK regime does away with all that and places responsibility for assessing whether a proposed subsidy is beneficial or not directly in the hands of the grant-giving authority.

But with responsibility come risks.  Under the Bill, public authorities not only have to have regard to the subsidy control principles; they also have to reach their own view based on the evidence in each case on whether the proposed subsidy is consistent with those principles before giving the subsidy. Factors such as the proportionality of the subsidy, whether the subsidy is the least distortive measure and the balancing of the positive and negative effects of the subsidy on competition are complex and fact-dependent issues.  Guidance, which is expected to be published by the Secretary of State, may assist but will not obviate the need for authorities to assess each proposed subsidy or subsidy scheme on its own merits.  In cases, it can be expected, of significant or important subsidies, the authority's reasoning and evidence will be subject to scrutiny by the CMA.

The subsidy control requirements under the Bill are in an important respect more extensive that the EU State aid rules.  EU State aid law only applies to aid that might have an effect on trade between EU Member States.  Although in practice that rule has been interpreted expansively, it does impose some limit on the reach of the EU State aid rules such that interventions that are clearly localised with no possibility of a cross-border effect would fall outside the scope. The Bill by contrast applies the subsidy control requirements not only to subsidies with cross-border effect but also to subsidies that are "capable of having an effect on competition or investment within the UK".  This means that UK-specific and potentially local measures will be caught.  An unknown factor at present is whether the CMA and domestic courts will look for evidence or actual or likely effects on competition or whether, like the European Courts, they will regard the criterion of "capable of having an effect on competition or investment within the UK" as a low threshold test that is inherently likely to be met by most forms of subsidy.

Then, there is the question of enforcement.  Under the EU rules, enforcement was primarily a matter for the European Commission, although interested parties had the right to bring proceedings in national courts in respect of non-notified unlawful aid.  The new UK regime for enforcement will open the possibility of actions in the CAT by interested parties directly challenging not just the existence of a subsidy but the rationale for and benefits of the subsidy, matters that are the exclusive preserve of the European Commission under the EU rules.  It is notable that the Government has chosen to confer the review jurisdiction for subsidy decisions on a specialist tribunal with expertise in competition matters.  Whilst the CAT's jurisdiction is limited to judicial review, the fact that the CAT is empowered (consistently with the subsidy control provisions of the TCA) to make recovery orders and award damages suggests that at some level the CAT may be expected to determine whether the authority's subsidy decision was substantively wrong and incompatible with subsidy control principles in the Bill and the TCA.

Furthermore, recovery of unlawful aid under the EU rules has traditionally been a matter of great contention and difficulty for the European Commission.  Recovery orders against the UK have been extremely rare, so much so that, whilst the UK remained a member of the EU, it was not even legally certain how the UK would or could have made recovery if ordered to do so by the Commission.  The recovery remedy provided under the Bill is therefore a genuine legal innovation that promises to streamline the recovery of unlawful subsidies in justified cases.  Whilst it cannot be expected that the recovery remedy will be anything other than a rare occurrence, its existence  and the relative ease and speed with which an action seeking recovery could be brought (compared to the Commission's cumbersome investigation procedures) will undoubtedly increase the background risk for both authorities and beneficiaries of getting the subsidy control analysis wrong. 

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