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On 30 June 2021, the Government presented the Subsidy Control Bill to Parliament. The second reading of the Bill has not yet been announced.

The Subsidy Control Bill creates a legal framework and sets out conditions for public authorities that provide subsidies to businesses.

A subsidy refers to a grant, a tax break, a loan, or other form of financial assistance paid from public resources. The new subsidy control regime will replace EU state aid rules, which applied in the UK until the end of the transition period in December 2020.

This briefing provides background to Government’s approach and outlines the steps taken towards an independent subsidy control regime in the UK. It also explains the contents of the Bill and includes expert commentary in relation to Government’s proposals.

The Bill’s objectives

According to the Government, the Subsidy Control Bill “enables strategic interventions” to support its priorities, including economic recovery, its ‘levelling-up’ and net zero agendas, and investment in research and development. The Bill also aims to provide certainty for business investment and support fair competition in the UK market, by preventing subsidies that may be “harmful and distortive”.

The Bill contributes to fulfilling the UK’s obligations under international agreements, such as the World Trade Organization Agreement on Subsidies and Countervailing Measures (SCM) and the UK-EU Trade and Cooperation Agreement (TCA).

Replacing EU state aid rules

The EU state aid rules prohibit government financial support to businesses that would distort trade.

Now that these no longer apply to the UK, the Government said it aims to create a subsidy control system that is more flexible and less bureaucratic, that would allow public authorities to grant financial support suited to their specific needs.

Subsidy control principles

The Bill places an important obligation on public authorities to consider seven broad subsidy control principles before granting a subsidy.

Six principles are derived from the Trade and Cooperation Agreement and broadly require that subsidies benefit wider society and contribute to public policy objectives.

The Bill says that subsidies must be proportionate and necessary, must stimulate change in behaviour of the beneficiary, and be the right means to achieve the objectives. The benefits of a subsidy must outweigh any negative impact on competition and investment in the UK and internationally.

The Bill adds a UK-specific principle that authorities must design subsidies in a way that minimises any negative effect on competition and investment within the UK. Additional principles apply to subsidies related to energy and environment.

The Bill says that public authorities should not grant a subsidy unless they believe the principles are complied with. Information about subsidies must be included on a public subsidy database.

The Government plans to publish further guidance about the practical application of subsidy control principles and other requirements of the Bill.

Independent authority

To implement the UK’s commitments in the TCA, the Bill creates, the independent Subsidy Control Unit within the Competition and Markets Authority (CMA). This body will advise public authorities on applying the subsidy control principles. Its advice will be non-binding and the ultimate decision to grant a subsidy will rest with a granting authority.

The CMA will also monitor and report on the general functioning of the regime.

Exempted subsidies

The Government is seeking to ensure that public authorities can give the lowest risk and most time-critical subsidies “with minimum bureaucracy and maximum certainty.”

The Bill exempts low risk subsidies with minimal effect on competition and trade from the main subsidy control requirements. These include subsidies with a value under a threshold of £315,000 over a three-year period, called “minimal financial assistance”. The Government will also create “streamlined subsidy schemes”. These will be made when it judges that certain categories are compliant with the principles of the regime. Such schemes could cover different sectors and categories of subsidies, including research and development, skills, disadvantaged areas and culture.

Additional scrutiny

Subsidies of “particular interest” are those deemed potentially more distortive. They will be scrutinised in greater detail and must be referred to the CMA.

Granting authorities can also voluntarily refer “subsidies of interest” to the CMA for a report, but this will not be mandatory.

The relevant Secretary of State will have powers to refer some subsidies to the CMA when they are concerned about them being harmful or trade-distorting. The Government will define these categories of subsidies in secondary legislation and envisages that they will cover a small number of particularly high-risk subsidies. These could, for example, include financial incentives to relocate businesses, or restructuring subsidies to ailing companies.

Enforcing the regime

The UK regime will be enforced through the Competition Appeal Tribunal, which will effectively hear judicial reviews against subsidy decisions made by a public authority.

An interested party, such as a competitor of a beneficiary, will be able to bring the challenge. The Tribunal will have the power to make recovery orders which require the public authority to recoup the subsidy from the beneficiary, if the Tribunal finds that the subsidy has been given against the subsidy control requirements.

Issues

Since this Government announced that the UK will break with EU rules on state aid, law and policy experts have debated the benefits and issues of an independent UK subsidy control policy.

They have discussed the benefits of a lightly regulated, less burdensome system versus the need to have clear guidance and procedures that give legal certainty to granting authorities and businesses that benefit from subsidies. They agree that this is an opportunity to shape policy to support the UK’s own strategic priorities. There remains uncertainty over whether a more flexible system could lead to less scrutiny and more wasteful subsidies.

Experts emphasize that a well-functioning regime requires full buy-in from devolved administrations, which contest subsidy control being a reserved power.

The UK new regime will also exist besides the state aid provisions of the Withdrawal Agreement Protocol on Ireland and Northern Ireland, which continue to apply to certain trade between Northern Ireland and the EU.


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