It has now been over six months since the Brexit transition period ended and the interim subsidy control regime came into effect. Over the last two weeks there have been substantial developments in the subsidy control arena, the main takeaways of which shall be the focus of this article which considers:
- the newly published DBEIS FAQs relating to the current interim subsidy control regime which provides some practical assistance to subsidies being considered in the here and now; and
- some of the key takeaways from the Subsidy Control Bill (the Bill) as published on 30 June 2021 and expected to take effect in 2022, subject to amendments.
The Bill lays the groundwork for a fully-fledged domestic subsidy control regime which is intended to ensure that subsidies are awarded in a manner consistent with the UK’s international subsidy commitments whilst also protecting the integrity of the UK’s internal market.
The Bill is draft legislation subject to the Parliamentary process and requires Royal Assent before it can become law. Further, the EU and Japan in particular will both be meticulously examining the details of the proposed regime to ensure it remains compliant with the UK’s international commitments, including the EU-UK Trade and Co-operation Agreement (TCA). Therefore, substantial amendments are still possible if not probable.
For now public bodies should continue to apply the five step process when awarding subsidies to ensure compliance with the UK’s international subsidy commitments. We previously published two subsidy control articles focusing on the interim regime. Please find part one here and part two here.
To support public bodies in the application of the five steps the DBEIS recently published a set of FAQs which provide some clarity on the practical application of the interim subsidy control regime where the TCA is applicable.
Current interim regime – updated FAQs
Some of the key clarifications are as follows:
- Market Terms Exemption – the FAQs clarify that where financial assistance is provided on a commercial basis, or goods or services that are required by the public body are purchased at a market rate then there will be no subsidy. In such a case, steps two to five of the DBEIS guidance need not be considered. We would however reiterate that in relying upon this exemption, the strength of supporting evidence is key.
- Small Amounts of Funding Exemption (SAFE) – where less than 325,000 special drawing rights (SDR) worth of assistance is awarded to a single economic actor over a three year consecutive fiscal period (i.e. the current financial year and the two financial years immediately preceding the current financial year) then there is no requirement for compliance with the ‘principles’ under the TCA. This is a more generous version of the popular and widely utilised de minimis exemption under the state aid regime. Importantly, the FAQs have clarified that any subsidy awards made under the state aid de minimis exemption are to be cumulated with the TCA SAFE and together must not exceed the relevant threshold.
- Publication and Transparency Requirements – under step five of the DBEIS guidance public bodies are required to publish details of the subsidies they award. Where the TCA applies this should be done within six months of the award (unless the measure is exempted for example under the SAFE). There is now a live database for doing so which can be found here. Public bodies requiring access to the database should contact the DBEIS Subsidy Control Team.
- Conversion from SDR to GBP – under the TCA a number of thresholds, such as the SAFE allowance, are set in special drawing rights. This is an international reserve asset created and maintained by the IMF. The result of thresholds being set in this way is that public bodies have to undertake a conversion to ascertain the sterling equivalent. The FAQs helpfully clarify that this conversion should be undertaken using the International Monetary Fund SDR convertor.
- When are groups of companies a single economic actor? – the FAQs clarify that where a company has subsidiaries or branches they should be regarded as a single economic actor and the subsidy assessment should be undertaken at the group level. That is unless a singular entity is autonomous from the group, unable to rely upon it for resources or financing. It is important thus, for example when utilising the SAFE, that details of all previous aid each entity within the group has received is collected to make an accurate assessment as to how much of the allowance remains available.
Whilst the FAQs as a whole provide some helpful practical guidance, uncertainty on the application of the interim regime remains. Many public bodies are often understandably hesitant in making large awards at this juncture, preferring rather to wait for a more certain regime to be set out. The Bill thus came with large expectations and some of the key takeaways are considered next in this article.
The Bill – key proposals
Key elements of the Bill include:
- Definition of subsidy – the definition of what constitutes a subsidy is extended to include measures that could affect competition or investment solely within the UK and not just with third nations. This is a reflection of the UK Government’s particular priority of protecting domestic competition and avoiding subsidy races particularly with and between devolved administrations.
- Awarding a subsidy – public bodies will be required to self-asses whether the measure in question respects a broad set of ‘principles’. Authorities will be familiar with six of these from the present interim regime. However, a seventh has been added to ensure that subsidies are designed to minimise any effect on competition and investment within the UK itself, again addressing the intra-UK subsidy race concern. The seven principles are as follows:
- subsidies should pursue a specific policy objective in order to remedy an identified market failure or to address an equity rationale (such as social difficulties or distributional concerns)
- subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it
- subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change should be conducive to achieving the specific policy objective of the subsidy, and should be something that would not be achieved without the subsidy
- subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy
- subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other less distortive means
- subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the UK
- subsidies’ beneficial effects in terms of achieving the specific policy objective should outweigh any negative effects, in particular negative effects on domestic competition or investment and international trade or investment.
A subsidy, unless it is an exempt subsidy as discussed below, may only be granted if it is consistent with all of the principles (there are additional principles which need to be considered in the areas of energy and environmental subsidies).
- Transparency database – the subsidy or scheme must be uploaded to the transparency database within six months of award. The transparency database will be maintained by the DBEIS. If the Bill advances as drafted then there will be no obligation to record awards of less than £500,000 which will assist in the more efficient realisation of smaller awards.
- Independent body – one of the biggest takeaways from the Bill is that an independent body, to be known as the Subsidy Advice Unit, is to be established within the Competition and Markets Authority (CMA). This body will provide reports (with recommendations where appropriate) on proposed subsidies following both mandatory and voluntary pre-award referrals by public bodies.
Mandatory referrals to the CMA shall be required where a case is of ‘particular interest’ which is a term yet to be defined or categorised but in such cases there will be a five day cooling off period following the CMA’s report in which time the subsidy cannot be awarded. Authorities will have to be alive as to when a mandatory referral to the CMA will be required.
Voluntary referrals can be made to the CMA in cases of ‘interest’ but again this is yet to be defined or categorised and these referrals will be subject to the CMA’s discretion as to whether they will produce a report or not.
The Secretary of State may also make a post-award referral to the CMA in certain circumstances and in any case within 20 days of the details of the subsidy being published on the relevant database (or from the date of award where such publication is not required).Unlike the European Commission the CMA will not have an enforcement role and public bodies retain the final decision as to the making of an award, even where a report recommends against doing so. Departure from reports could however play into judicial review grounds.
- Small Amounts of Funding Exemption – under the interim subsidy control regime the allowance was 325,000 SDR and thus required a conversion to sterling to be undertaken when considering an award. The Bill now proposes a more practical sterling amount of £315,000 to be utilised when the final legislation comes into effect.
- Enforcement – the Competition Appeal Tribunal will be responsible for hearing applications for the judicial review of a subsidy award decision. Time limits will be narrow which will be welcomed by public bodies seeking certainty when looking to advance major projects.
- Exemptions – Part 3 of the Bill sets out that in addition to the SAFE there are also intended to be exemptions for areas of national security, economic emergencies and natural disasters. The legacy of recent economic and natural disasters can be seen in the nature and scope of these exemptions and it is intended that they will offer the required amount of flexibility for government bodies to adapt and respond efficiently to COVID-19 type situations in the future.
- Safe harbours – there have been significant calls for the Government to provide safe harbour provisions within which a subsidy that meets certain criteria may be expeditiously granted on the basis its compliance is pre-approved. Such mechanisms allow for the fast, efficient and lawful award of subsidies and are thus attractive to public bodies looking for certainty in their awards. Such mechanisms have not been detailed specifically within the Bill however they may be expected in due course as the government has the ability under the proposed legislation to create ‘streamlined subsidy schemes’ which are expected to have the same safe harbour effect.
- Prohibitions and conditions – Part 2 Chapter 2 of the Bill sets out types of subsidies which are prohibited outright and those which are subject to conditions. Of particular note is that there is an outright prohibition on subsidies that are conditional upon relocation. Such a prohibition may well be the subject of particular scrutiny as it could be seen as operating contrary to elements of the government’s levelling up agenda in supporting investment towards disadvantaged areas.
It is likely to be 2022 before the new subsidy control regime is in place. Until then, public bodies must continue to apply the interim regime and the updated FAQs will assist in this endeavour. The Bill provides a useful insight into what to expect from the new regime and we shall publish literature and legal updates as further updates emerge to assist in preparation for such.