Subsidy Control- out with the old and in with the new from 4 January 2023

While the Subsidy Control Act (the Act) received royal assent back in April 2022, the majority of the provisions will only come into force from 4 January 2023. This article unpacks what Department for Business, Energy and Industrial Strategy (BEIS) and the Competition and Markets Authority (CMA) have been doing over the last eight months to prepare, as well as how the regime for awarding subsidies has been tightened up over and above public bodies’ previous international trade obligations (most notably under the Trade and Cooperation Agreement (TCA) between the UK and EU).

We will focus on three main changes:

• changes to what counts as a subsidy and indeed a permissible subsidy (and the knock-on effect this has on the principles authorities must apply);
• the CMA’s new oversight regime under which certain subsidies will be scrutinised; and
• the introduction of Regulations and statutory guidance which will govern how public authorities consider subsidy control questions going forward

The major change: no requirement for an effect on cross-border trade

As they have been doing under the TCA, public authorities will be required (under section 12 the Act) to consider subsidy control principles prior to granting a subsidy or making a subsidy scheme¹, and consider additional energy & environmental principles if relevant.

As with the other subsidy control obligations of the TCA, the Act has replaced the TCA principles with principles of its own, set out at Schedules 1 and 2 of the Act. In the majority of cases, the changes to the TCA principles made by the Act are cosmetic: a “specific” has been added here and a “public” has been deleted from “public policy” there, among other changes.

A substantive change has been made with the addition of the new subsidy control principle F, increasing the number of principles to be followed under the Act to seven from the TCA’s six. Principle F of the Act will require public authorities to design subsidies and subsidy schemes “to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom”. This ties in to the Act’s expanded definition of a subsidy, which need only affect competition or investment within the UK in order to be caught, rather than the requirement under the TCA for affect cross-border trade to be affected before the rules apply.

The new requirement for public authorities to consider purely domestic effects is also a step-change from the old State aid rules, which needed an effect on trade between EEA member states (albeit this was in practice a very low bar). As a result, public authorities granting subsidies will need to expressly consider the domestic effects of their subsidies, as well as the international.

Oversight from the CMA over the interesting and particularly interesting

The most significant change to how public authorities will award subsidies going forward comes from the requirement to pre-notify subsidies or subsidy schemes of “Particular Interest” to the CMA and the ability of BEIS to call in for CMA review subsidies or subsidy schemes of “Interest”.

What qualifies as interesting or particularly interesting is set out in the Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022, and relates to the maximum amount an individual recipient would be able to receive from a subsidy, subsidy scheme or “related subsidy” (a subsidy or subsidy scheme from a different public source but awarded pursuant to the same objective) within a specified period.

Broadly speaking, if a corporate group is able to receive a subsidy of GBP1 million as a result of the subsidy or subsidy scheme and:

• the total amount of subsidy and related subsidy totals GBP10 million or more, then the subsidy or subsidy scheme is one of particular interest and must be referred to the CMA prior to its implementation; while alternatively if
• the total amount of subsidy and related subsidy adds up to between GBP5 million and GBP10 million, then the subsidy or subsidy scheme is one of interest and may be voluntarily notified to the CMA or called in for review by BEIS.

Lower thresholds for referral exist where activities are to be relocated within the UK as a condition of the subsidy, the subsidy is to rescue or restructure an ailing beneficiary or in relation to liquidating deposit takers or insurance companies.

Lower thresholds also exist for what have been identified as “sensitive sectors”. Sensitivity does not refer here to national security (the UK Government brought in a new regime under the National Security and Investment Act 2021 at the beginning of 2022 to resolve those questions)². Instead the sensitivity relates to the subsidy’s likelihood to trigger an international trade dispute, and so sectors where such disputes have flared have been singled out for more cautious treatment (namely vehicle manufacture, the production of certain metals and the generation of electricity).

Following referral to the CMA, a public authority is unable to make any awards under the referred subsidy or subsidy scheme prior to the end of a five day cooling off period following the CMA’s report on the subsidy being published. As a result, public authorities will no longer have the freedom which they briefly enjoyed under the TCA to award any subsidies immediately which in their view complied with the rules.

Binding interpretative guidance and regulations

When the TCA was brought in, BEIS published very short pieces of guidance on how public authorities could comply with their subsidy control obligations. These have now been replaced with the Statutory Guidance for the United Kingdom Subsidy Control Regime, which was published in November 2022 in advance of the Act coming fully into force.  Under section 79(6) of the Act, an authority must have regard to this guidance and comply with it where appropriate. While many of the conclusions of the Statutory Guidance will be familiar to those with prior experience of State aid, there are many aspects covered unique to the UK regime (for example, how to apply the principles).

In addition to clarifying “interest” and “particular interest” under the Act (see above), Regulations have been passed to come into force on 4 January 2023, clarifying public authorities’ obligations with respect to:

• how to calculate the size of a subsidy (the Subsidy Control (Gross Cash Amount and Gross Cash Equivalent) Regulations 2022);
• how to fulfil the transparency requirements of the Act (the Subsidy Control (Subsidy Database Information Requirements) Regulations 2022); and
• providing information to the CMA (the Subsidy Control (Information-Gathering Powers) (Modification) Regulations 2022, which amends the United Kingdom Internal Market Act 2020).

Existing subsidies and subsidy schemes will not be reopened (even if they still have more to pay out)

Subsidies granted under the EU’s previous State aid rules or during the period in which only the TCA and other international trade obligations applied will not be subject to the requirements of the newly-operative provisions of the Act. This is regardless of whether these subsidies would have been seen as non-compliant with the new principles, the Statutory Guidance or if they would have required referral to the CMA under the fully in-force Act.

Under section 48 of the Act, awards made under “legacy schemes”, i.e. subsidy schemes whose rules were determined prior to 4 January 2023 are not subject to the Act’s subsidy control requirements, while under section 2(5) of the Act financial assistance is deemed to have been awarded at the time the recipient gained the legal right to receive it. This means that public authorities with pre-existing schemes and agreements to provide subsidies are free to continue to make payments.

Conclusion: time to start doing things (slightly) differently.

The main change brought in by the TCA was procedural: unlike under the old State aid regime, where a single regulator (the European Commission) was the ultimate decisionmaker on which subsidies were lawful, public authorities were given a wide discretion as to the subsidies they could grant. The Act coming into force reigns this back slightly, by expanding the scope of regulation beyond international trade, creating binding interpretations of the rules and introducing regulatory oversight (albeit advisory) for the larger subsidies. However, the ex post enforcement character of the TCA regime will remain: those aggrieved by a subsidy award will need to have it judicially reviewed by the Competition Appeal Tribunal.

_{1 Meaning a scheme made by a public authority providing for the giving of subsidies under the scheme.}

_{2 See the Understanding the UK National Security & Investment Regime Podcast.}