On 4 January 2023 the provisions of the Subsidy Control Act 2022 (“the Act”) came into force. This Act replaces the interim regime, based on the UK-EU Trade and Cooperation Agreement (TCA), which was put in place when the UK left the EU and, broadly speaking, replaces the previous state aid regime. It is key that charities understand the new regime as this will have a bearing on support which charities receive from the public sector, including grant funding.
The aims of the Act are to support the UK Government’s priorities, including economic recovery, its ‘levelling-up’ and net zero agendas and investment in research and development. To help public authorities navigate the new regime, the UK Government has issued guidance on the Act with further guidance issued by the Competition and Markets Authority (CMA).
The provisions of the Act broadly mirror the interim subsidy control regime, as per the TCA, but the Act contains more detail and there are some key differences to note.
The definition of a subsidy within the Act makes it clear that the purpose is to regulate competition on both a domestic and an international level. The Act goes beyond the requirements in the TCA as it covers subsidies that have, or may have, an effect on competition or investment within the UK.
This may have an impact if, for example, financial assistance is given in Scotland which influences competition with the rest of the UK. It could mean that financial assistance is more easily caught by the regime. Public authorities can no longer seek to argue (as was the case with state aid) that there could be no aid due to lack of potential effects on trade between member states given the new focus on the UK’s domestic market. Other than this, the definition of a subsidy appears to be very similar to aid which was caught under the state aid regime, and also to the definition of a subsidy under the TCA.
Public authorities must now assess whether to grant a subsidy against the seven subsidy control principles. The principles are broadly similar to those set out previously but there is an added UK-specific principle requiring authorities to minimise any negative effect on competition and investment within the UK.
This process could involve a complex legal assessment but the Government has issued a template to guide public authorities in making the assessment.
The Act allows for public authorities to establish subsidy schemes (this is similar to approved schemes under the state aid regime). The steps required to assess a scheme are very similar to those used when assessing an individual subsidy. If a subsidy falls under an existing scheme there is no need to carry out an assessment against the principles. This may reduce the administrative burden if a public authority is considering awarding several similar subsidies to different recipients for the same purpose.
The Government has created ‘streamlined subsidy schemes’ for subsidies that align with the Government’s strategic priorities. These schemes are voluntary mechanisms which provide a pre-assessed route for public authorities to award subsidies more quickly. There are three streamlined routes currently in place for research, development and innovation, energy usage and local growth. All subsidies issued under a streamlined route must meet specific conditions. The UK Government has issued guidance for each route to assist public authorities with interpreting and complying with those conditions.
Subsidy Schemes of Interest (SSoI) and Subsidy Schemes of Particular Interest (SSoPI) are subsidies which are deemed to be potentially more distortive. These schemes will be subject to further scrutiny by the Subsidy Advice Unit (SAU) which has been established within the Competition and Markets Authority (CMA) to provide non-binding advisory reports. It will be mandatory, in respect of an SSoPI, for a public authority to refer their assessment of the subsidy or scheme to the SAU for an independent evaluation before the subsidy is given or the scheme is made. For SSoIs, the public authority can voluntarily refer their assessment for evaluation, but they aren’t required to do so.
This is a significant departure from the EU state aid regime, where (unless exempt), all subsidies required prior approval by the European Commission (without which the subsidy would be illegal). This difference in approach will take some getting used to for public authorities.
A recent report published by the SAU provides some helpful guidance on what the SAU looks for in a public body’s assessment against the principles. This report related to a mandatory referral by Arts Council England (ACE) in relation to a proposed subsidy of £11.46 million to the English National Opera (ENO).
ACE outlined that the subsidy would have a number of policy objectives including facilitating ENO’s community engagement and education activities and to allow ENO to develop its business model and to explore options of operating outside of London. The SAU found that ACE had engaged with each of the seven subsidy control principles and provided evidence which helped to demonstrate how the conclusions in their assessment had been reached. The SAU did note that ACE’s assessment against the principles could have been stronger for several reasons including:
The SAU also noted that the assessment might have been stronger if ACE had made better use of aspects of the UK Government and SAU’s guidance.
When considering whether a subsidy qualifies as a SSoI or a SSoPI, the rules on cumulation must be taken into consideration. Under these rules, smaller related subsides granted to the same recipient in the last three financial years will cumulate towards the relevant SSoI and SSoPI thresholds. This is because related subsidies which are issued to the same recipient would greatly increase the second subsidy’s potential to cause substantial distortion.
Public authorities will only have to refer a SSoPI to the SAU if (i) the subsidy in question exceeds £1 million and (ii) it meets the relevant cumulated threshold of £10 million. So, if a recipient has received one subsidy totalling £9.5 million and it then receives a second related subsidy which totals £800,000 this wouldn’t need to be referred to the SAU even though it has taken the combined total subsidy above the £10 million SSoPI threshold. The reason for this is because the second subsidy did not exceed £1 million.
The Minimal Financial Assistance (MFA) rules allow public authorities to award low value subsidies without the need to comply with the majority of the subsidy control requirements. The financial threshold of MFA subsidies is £315,000 and a recipient cannot receive more than this over three financial years. This is very similar to the de minimis rules under the state aid regime.
It is important to note that MFA subsidies are also subject to the rules on cumulation. This means the total of each MFA subsidy, along with other subsidies given to the recipient (including services of public economic interest assistance, aid given under the EU State Aid de minimis regulations and small amounts of financial assistance (SAFA)) will be combined. This prevents entities being able to receive numerous low value subsidies, but that cumulatively exceed the total threshold.
The Act requires public authorities to publish information on subsidies and schemes (unless exempt) on a central transparency database within three months of its decision to give the subsidy or make the scheme.
Subsidy awards given under schemes only need to be uploaded if they exceed £100,000. This is a significantly lower threshold and a shorter timescale within which to publish the information compared to under the previous regime.
The new regime will be enforced through the Competition Appeal Tribunal (CAT). Interested parties may apply to the CAT for a review of a public authority’s subsidy control decision. An interested party will have one month to apply to the CAT for a review. This is a significantly shorter period compared to the previous state aid regime which provided parties with up to ten years to investigate from the date of the last award. The shorter window of challenge will be welcome to public authorities.
The CAT will have the power to order public authorities to take back the subsidy from the recipient where there has been a breach of the substantive subsidy control requirements. It is therefore crucial that the recipient of a subsidy also seeks appropriate advice before accepting the subsidy.
It’s important to consider the implications that the new regime might have for your organisation. The UK Government noted that while there are similarities to EU state aid rules and the TCA, the new regime is not the same and inviting direct comparisons may cause confusion to those who are unfamiliar with EU rules or who are new to subsidy control policy.
It will be beneficial to keep up to date with the statutory guidance, which may be updated from time to time to reflect developments of best practice or changes to the regime following any judgements from the CAT. It will also be helpful to review reports from SAU referrals to gain a better understanding of how to carry out an assessment of a subsidy against the subsidy control principles.
If you would like to discuss any of the above information or the Act in more detail, please contact Caterina Capaldi or your usual Anderson Strathern contact.