Subsidy Control – Ready for Regulation?

Subsidy Control - Ready for Regulation?

It has been nearly six months after the passage of the Subsidy Control Act in April 2022 (the Act) and nearly two years after the UK government committed to creating a Subsidy Control regime in the Trade and Cooperation Agreement with the EU. As the regime coalesces around the guidance, procedure and bodies which will dictate its final form, we take stock of where things are in anticipation of the regime coming fully on-stream in the autumn.

DLA Piper will be running a Subsidy Control event in November 2022 to prepare would-be grantors and recipients of subsidies for the new rules coming in to force. [The event will be attended by speakers from the CMA and BEIS.] If you would like to attend, please contact the author or your usual DLA Piper contact.

The biggest change: Self-assessment by public authorities

Prior to Brexit, State aid was required to be pre-approved by the European Commission via a notification and approval process, unless a pre-existing block exemption applied (although, in reality, the majority of aid granted in the EU was and still is granted via block exemption rather than notification). Where a notification did need to be made to the Commission, it would be made by a dedicated team within BEIS. Broadly speaking, the State aid regime was an ex ante system of enforcement: all State aid was forbidden unless expressly pre-approved.

The new Subsidy Control regime turns this on its head and creates a largely ex-post enforcement regime. Public authorities are required under the Subsidy Control Act to make an assessment of the subsidy awards themselves against seven principles set out in the Act, namely the subsidies must be:

• In pursuit of a common interest objective;
• Proportionate and necessary;
• To bring about a change in the behaviour of the beneficiary;
• Not paid where the costs would funded anyway;
• The least distortive means of achieving a desired policy objective;
• Achieving their objectives while minimising negative effects on competition and investment within the UK; and
• Such that their positives outweigh their negatives.

Some readers will notice that these principles are closely related to those set out in previous EU guidance, such as its guidance on environmental aid. This is not a coincidence, as the principles closely match those set out in the TCA, which the EU aims to follow by applying its pre-existing State aid regime.

In order to assist public authorities with determining these principles, BEIS will publish statutory guidance on how to comply with the seven principles and the Act more generally. A consultation was run on this draft guidance in the summer¹, and the final guidance is expected to be in a substantially similar form. This guidance covers much of the same subject matter as previous extensive BEIS guidance documents which explained the State aid regime to UK public authorities, only this time it does so on a largely blank slate - as no case law or decisional practice for the new regime currently exists.

The ex-ante element: the CMA Subsidy Advice Unit

Once the operative provisions of the Act come into force, the accompanying draft Subsidy Control Regulations² are also likely to be passed in substantially their present form. These regulations provide for referral to the Competition and Markets Authority (CMA) of particularly distortive subsidies. Subsidies of Particular Interest (SoPI) must be referred, whilst Subsidies of Interest (SoIs) can be voluntarily referred.

SoPIs and SoIs will be assessed by the Subsidy Advice Unit (SAU), an independent body within the CMA established under the SCA.

However, unlike the European Commission in the EU State aid regime, the role of the SAU will be advisory only and the public authority will make the final decision as to whether to grant the subsidy following a cooling off period after publication of the CMA’s report.

Two key criteria govern whether a Subsidy is to be a SoPI, namely:

• The size of the Subsidy, with a GBP10m threshold having been suggested as a general threshold, above which most Subsidies will require notification to the CMA; and
• The sector to which the Subsidy relates, with various industries (such as the steel, aircraft and car manufacture) with a history of international trade disputes having a lower mandatory notification threshold of GBP5m.

The CMA published draft guidance on how it will operate the SAU and a draft statement of policy on its enforcement during the summer³, with the final guidance expected to be substantially in a similar form. Given that the SAU’s Subsidy Control role is purely advisory, its enforcement guidance relates to its information gathering powers.

The ex-post element: the Competition Appeal Tribunal

Under the new system of private enforcement, challenges to subsidy decisions are made through judicial review. The Competition Appeal Tribunal (CAT) hears these applications and has powers to grant judicial review remedies and order recovery of subsidies it deems to have been unlawfully granted.

An application for judicial review can be made by “interested parties”, which includes anyone whose interest may be affected by the giving of the subsidy, including the Secretary of State. In a departure from the European Commission’s 10-year limitation period for investigating State aid, applications must now be made within one calendar month from acquiring sufficient knowledge of the making of the subsidy decision (likely the date of publication on the subsidies database). This brings the process of challenging a Subsidy more into line with the process of challenging other decisions of the State via judicial review.

It will be interesting to see the interplay between the CMA reporting process and the CAT judicial review process, and the extent to which a government body will be able to ignore a non-binding CMA report while creating a case for lawfulness of the Subsidy which can survive judicial review.

Part 5 of the Act contains forthcoming amendments to the CAT Rules⁴, setting out how the procedure for challenging a Subsidy will be run.

Getting ahead of the game: the transparency database

Although the provisions requiring Subsidies over GBP100,000 to be logged on the UK Subsidies database⁵ are not yet in force, this has not stopped thousands of Subsidies from having been registered already by local and national government bodies. Information must be published in relation to the Subsidy’s purpose, recipient and amount.

What about Northern Ireland?

Where the Northern Ireland Protocol applies the State aid rule, the Subsidy Control rules do not apply, and vice versa. The EU State aid rules will continue to apply in the UK in respect of measures which affect trade in goods or electricity between the EU and Northern Ireland (including - perhaps especially - between Northern Ireland and the Republic of Ireland).

Given the previously wide application of the State aid rule it had previously been thought that State aid law could leak via the Protocol into UK subsidy decisions. For example, a Subsidy to the Norwich factory of a corporate group with a factory in Northern Ireland could conceivably benefit the Group as a whole and therefore potentially advantage the Northern Irish factory in its trade with the EU: would this be enough to trigger the Protocol?

The recent case of British Sugar v SoS for International Trade [2022] EWHC 393 appears to have put this argument largely to rest for the time being. In this case, an attempt was made to apply the Protocol as a result of a theoretical and unproven effect on trade. The judge gave the argument short shrift: noting that to apply the Protocol would be to “permit a barely discernible tail to wag a very large dog”.