UK Government publishes illustrative guidance on the future operation of its subsidy control regime

The Subsidy Control Bill (the "SCB"), first introduced by the Department of Business, Energy and Industrial Strategy (the "BEIS") on 30 June 2021, is making its way through the House of Lords ahead of expected adoption in 2022. In the interim, on 25 January 2022, the UK government published a set of policy statements and illustrative regulations and guidance on how the SCB is expected to operate in practice. 

Specifically, the publications set out draft proposals for designing the categories of subsidies that will be subject to enhanced review, i.e. "Subsidies of Particular Interest" and "Subsidies of Interest", as well as the government's intention to introduce a simplified mechanism for streamlined subsidy approval.
 

Subsidies subject to enhanced review

The general scheme created by the SCB envisages ex-ante review of Subsidies' compatibility with seven "Subsidy Control Principles". Broadly drawn from the EU's State aid assessment criteria, further detail of these principles can be found in our previous client alert, here.

In addition, the UK government has stated its intention that subsidies and schemes that are more likely to cause negative effects on competition in the UK should be subject to "additional scrutiny and review".¹  There will be enhanced scrutiny for:

• Subsidies of Particular Interest: which will be subject to mandatory review before grant, and
• Subsidies of Interest: which will be subject to voluntary review.

Public authorities granting either category of subsidy will send their assessment of that subsidy's compatibility with the Subsidy Control Principles to the Subsidy Advice Unit (the "SAU") before it is granted. The SAU will be a dedicated unit within the Competition and Markets Authority, created by the SCB.²  The SAU will have 30 working days to complete its report.³  SAU reports will focus on the public authority's assessment of the contemplated Subsidy against the Subsidy Control Principles, although it will not be binding. Subsidies cannot be granted until after the expiry of a five-working days' "cooling off period" after a report's publication, although this period can be extended at the Secretary of State's direction if he or she considers the report identifies "serious deficiencies in the public authority's assessment". ⁴

Subsidies of Particular Interest 

What is a Subsidy of Particular Interest?

In defining Subsidies of Particular Interest, the government is seeking to capture "subsidies or schemes which can be assumed to be more likely to pose a substantial risk of negative effects on domestic competition and investment or international trade".⁵  The draft illustrative regulations⁶ propose that Subsidies of Interest will therefore include:

• Subsidies in any sector in excess of £[5 –10] million per enterprise;⁷
• Subsidies for restructuring ailing or insolvent enterprises or deposit takers/insurance companies;⁸ and
• Subsidies in excess of the £[1 – 5] million per enterprise that also concern a "sensitive sector".

The monetary thresholds are intended to capture the total amount of any subsidy, taken together with any other subsidy (including from other public authorities) in respect of the same, or substantially the same, project, costs or activities and for the same policy objective. ⁹

Sensitive Sectors

A subsidy will be deemed to concern a sensitive sector if it is to be granted to an enterprise that offers goods or services to the market, or provides goods and services for the purposes of any of the following:

The sensitive sectors have been chosen to reflect sectors where there is a record of international trade policy disputes, evidence of global overcapacity or indications that the sector may exhibit one of these features in the future.¹⁰

To be deemed a sensitive sector subsidy, public authorities will also need to be satisfied that the subsidy at issue will confer an economic advantage to the beneficiary within the sensitive sector. This is a sensible addition in order to avoid subjecting to review subsidies granted for other purposes that to enterprises that are only incidentally active in these sectors. 

Treatment of subsidy schemes

Where a subsidy scheme is designed in such a manner that a single award under its auspices could fulfil the criteria associated with a Subsidy of Particular Interest (or a Subsidy of Interest), then the scheme as a whole will be the subject of any referral report by the SAU. Individual grants under such schemes that meet the thresholds for Subsidies of Particular Interest or Subsidies of Interest will not be subject to a second review. 

Subsidies of Interest

The definition of Subsidies of Interest are designed to capture subsidies that "may potentially pose a substantial risk of negative effects on domestic competition and investment or international trade, but where The definition of Subsidies of Interest are designed to capture subsidies that "may potentially pose a substantial risk of negative effects on domestic competition and investment or international trade, but where there is scope for public authorities to make their own judgements about the existence and extent of that risk".¹¹  Reflecting the lesser risk that these subsidies are deemed to pose, public authorities will have the option of referring these subsidies to the SAU, rather than being required to do so. The SAU will have discretion over whether or not to review a Subsidy of Interest, however, and, as with Subsidies of Particular Interest, the SAU report will not be binding.

What is a Subsidy of Interest?

The draft regulations define a Subsidy of Interest as: 

• Subsidies between £[1 – 5] million to the same enterprise; or
• Subsidies for rescuing ailing or insolvent companies, or for liquidating or providing liquidity support to deposit takers or insurance companies.¹²

As this will be a voluntary referral procedure, the government intends that subsidies meeting the monetary threshold will not ordinarily be referred to the SAU unless they also exhibit particular "design features" – although the expectation is that rescue subsidies (or schemes) will ordinarily be referred irrespective of whether they exhibit these features or not.¹³

Design features

A final list of design features that should indicate a voluntary referral will be published before the SCB commences. In the interim, the policy statement indicates that these will likely include the following:

• Evidence of a subsidy race between public authorities; i.e. where two or more public authorities identify that each authority has offered, or intends to offer, a competing subsidy to a particular business; 
• The same or a substantially similar subsidy being granted repeatedly to the same beneficiary;  
• The subsidy is linked to the ongoing economic activity of an enterprise, rather than being a one-off activity, i.e. a subsidy totalling £[1 – 5]million or more, if paid on the basis of each unit of clean energy the beneficiary uses, would have this design feature, but the same subsidy for a one-off transformation of energy use for that business would not; and 
• The subsidy being only available to one enterprise (i.e. no tender/competition in award).

Exempt and Streamlined Subsidies

The SCB specifies certain categories of Subsidy that will be exempt from both the mandatory and voluntary referral procedure.¹⁴  These are:

• Streamlined Subsidy Schemes
• Subsidies given as Minimal Financial Assistance
• Services of Public Economic Interest
• Subsidies in response to natural disasters and other exceptional circumstances
• Subsidies in response to national or global economic emergencies
• Subsidies for national security
• Subsidies given by the Bank of England for the purposes of monetary policy
• Legacy and withdrawal agreement subsidy schemes
• Tax measures under Article 413 of the EU/UK Trade and Cooperation Agreement
• Subsidies for large cross-border or international cooperation projects
• Subsidies given under a financial stability direction
• Treasury or Bank of England subsidies for prudential reasons

Although a long list, most of these reflect established concepts under EU State aid law. Subsidies given as Minimal Financial Assistance, for example, are analogous to de minimis State aid, and subsidies in response to natural disasters and exceptional circumstances would be equivalent to State aid granted to make good the damage caused by natural disasters or exceptional circumstances, familiar from Article 107(2)(c) of the Treaty. Indeed, Services of Public Economic Interest, intended to be the cousin of the EU concept of Services of General Economic Interest, arguably should not be Subsidies at all and so should not require specific exemption.

Streamlined Subsidy Schemes

What is not immediately identifiable as a State aid concept, but is almost certainly inspired by the EU General Block Exemption Regulation, is the idea of "Streamlined Subsidy Schemes". The intention is for the government to establish "streamlined routes" for categories of subsidy deemed at low risk of causing negative effects on competition and investment within the UK or on international trade, and which the government (rather than the granting authority) has deemed to be consistent with the Subsidy Control Principles. Streamlined routes will need to be created by legislation and approved by Parliament before they can be utilised by granting authorities.

Comment

The lack of detail on the intended design of the SCB regime since it was first introduced to Parliament back in June 2021 has not prevented UK public authorities from granting subsidies in the interim.  The Subsidy Transparency Database shows that more than 1,900 subsidies have been granted since the UK departed from the EU, all of which would have been subject to their granting authorities' ex-ante assessment. While public authorities will therefore be appreciative of the new illustrative guidance on the practical operation of the Subsidy Control Principles, further detail will be needed ahead of the SCB's commencement.

The design features relevant to Subsidies of Interest, in particular, will need more elaboration. It seems somewhat strained, for example, to expect a public authority to identify that it is in a subsidy race with another public authority, and so may satisfy that criterion, whilst still determining that the offer of a "competing subsidy" meets the Subsidy Control Principles which require, inter alia, that any individual subsidy is limited to the amount necessary to achieve the targeted policy objective.

The publications do at least provide further clarity on the role of the SAU review procedure. Clearly, this process is not equivalent to the EU standard, which requires that the European Commission adopt a written approval decision before the grant of any notifiable State aid measure. Indeed, the SAU report is clearly intended to be different, given it does not bind the granting authority. It will still be an important instrument for enterprises which may wish to challenge the grant of a subsidy, if, as hoped, the SAU report examines in detail the public authority's assessment of a Subsidy against the Subsidy Control Principles. Unlike the EU State aid regime, which has a relatively accessible complaints procedure, challengers to a subsidy under the SCB will need to seek judicial review before the Competition Appeals Tribunal, which is a costly and time-consuming exercise.  It remains to be seen to what extent authorities follow SAU assessments determining that the Subsidy Control Principles have not been met.

What's next?

The SCB is currently in committee stage in the House of Lords, and is expected to enter into force during 2022. In the meantime, the various new publications make clear that more guidance is on the way, with final form guidance for public authorities on identifying Subsidies or Schemes of Interest and Particular Interest and application of the Subsidy Control Principles, new guidance for public authorities to help them understand the circumstances in which Subsidies will fall within the scope of the Northern Ireland Protocol, and the final form regulations, all promised before the SCB's commencement. 

_{1 Policy note on Subsidies and Schemes of Interest and Particular Interests, paragraph 1.
2 SCB, Clause 68.
3 This time period can be extended by mutual agreement or at the request of the Secretary of State for Subsidies of Particular Interest.
4  SCB, Clause 54(4).
5 Policy note on Subsidies and Schemes of Interest and Particular Interests, paragraph 3.
6 Draft Subsidy Control (Subsidy and Schemes of Interest or Particular Interest) Regulations 2022.
7 All of the monetary thresholds in the draft regulations remain in brackets with the intention that these will be replaced by fixed values in the final regulations.
8 Provided the relevant conditions under Clause 20 (Restructuring) and Clause 21 (Restructuring deposit takers or insurance companies) of the SCB are met.
9 Draft Subsidy Control (Subsidy and Schemes of Interest or Particular Interest) Regulations 2022, Clause 5(2).
10 Policy note on Subsidies and Schemes of Interest and Particular Interests, paragraph 14.
11 Ibid, paragraph 3.
12 Provided the relevant conditions under Clause 19 (Rescuing), Clause 22 (Restructuring deposit takers or insurance companies), or Clause 23 (Liquidity provision for deposit takers or insurance companies) of the SCB met.
13 Policy note on Subsidies and Schemes of Interest and Particular Interests, paragraph 16.
14 SCB, Clause 64.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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