A new system for Subsidy Control – but what will change in practice?

Insights 2023 - Part 1 

This is the first article in our Insights Series which will be published at the end of each month throughout 2023, covering a different aspect of the UK tax landscape. Part 1 looks at the UK’s new subsidy control landscape.

The Subsidy Control Act 

The UK government has presented the new Subsidy Control Act (SCA) as the advent of an area where Britain can use its newfound freedom to move away from the EU’s system of block exemptions to a more dynamic and nimbler regime (BEIS, 2021). The relevant legislation has been in place since early 2022, but only came into force on 4 January 2023, and much about how the system will operate is yet unknown. This is in part because the new system has been designed to be less prescriptive than its EU predecessor, with much of how it works  determined by the key players within the UK system – namely, the Competitions and Markets Authority, granting authorities and businesses. In this article we look at each of these players and how they may shape the new subsidy environment in the UK.

Competitions and Markets Authority (CMA)

The CMA has, understandably, been given a significant role in the new subsidy control system. How it reacts will be crucial in determining if the SCA is more liberal than the previous EU regime. The newly established Subsidy Advice Unit (SAU), which is part of the CMA, has the power to advise, but not to rule on Subsidies and Schemes of Interest (SsoI), and Subsidies and Schemes of Particular Interest SsoPI). SsoIs are classified as having the potential to distort domestic competition, international trade, and investment, and SsoPIs are those with a greater potential to cause distortion. Referring an SsoI to the SAU is optional, but a SsoPIs must be referred.   Other types of subsidies include a streamlined route for approval for low-risk subsidies and a ‘normal’ route for all other types of grants (BEIS, 2022, p. 169).  

One of the key unknowns in the new system is the extent to which local authorities will use the SAU as a method of validating their SsoIs even when they are not strictly required to do so. The de minimis limit on the new system is £315,000 (BEIS, 2022, p. 188), which may prove problematic for the CMA if granting bodies refer many of their optional cases to it. If a backlog of approvals builds up it will rob the new system of one of its key advantages: the ability to quickly deliver subsidies.  

The CMA’s increased prominence also comes at a time when the organisation has been facing challenges in developing the post-Brexit regulatory environment (Committee of Public Accounts, 2022) such as a struggle to recruit highly specialised staff and a loss of access to EU information sharing.  However, the CMA has confirmed that the SAU will be operational when the legislation comes into effect, but it remains to be seen if it can deliver the benefits of the new regime. 

Granting bodies 

By far the biggest player in the subsidy market by number of schemes and budget remains the UK government, with BEIS having 78 schemes open. Excluding the numbers from Covid-19 subsidies, the BEIS schemes indicate significant areas of spending for the UK Government in the energy market through the Capacity Market Programme (£15bn), contract for renewables (£15bn) and electricity generation from low carbon sources (£32.5bn) (BEIS, 2022). The number of granting bodies for a subsidy in the UK has also increased considerably due to devolution.  The Scottish government had 52 schemes open with a budget of just under £4bn. Likewise, the Welsh government had 34 schemes with a budget of just under £1.5bn (BEIS, 2022).  There has also been considerable further devolution to English regions and with the rise to prominence of the levelling up agenda the number of potential granting bodies is likely to keep increasing. 

All existing schemes were either established under the EU rules or under the guidance of the trade section of the Trade and Cooperation Agreement, and historically the UK has spent less on state aid than equivalent countries in Europe. For example, in 2019, the UK spent 0.51% of GDP on state aid, while France spent 0.85% and Germany 1.54% (Jozepa, 2021). However, recently the government has approved funding plans for £2.6bn under the UK Shared Prosperity Fund (UKSPF), the UK replacement for EU structural funding.  This fund is intended to allow direct funding to where it is needed the most and to spread opportunity across the UK (Department for Levelling Up, Housing and Communities, 2022). However, critics of the fund note that while it does match the level of EU funding, it also allocates funds in a very similar way, meaning that ‘inequities in the EU funding regime that could have been addressed will instead be entrenched’ (Phillips, 2022).

What these trends appear to show is that even being outside of the EU state aid rules has not led to a significant increase in the number of grants being made by authorities or a change to the manner in which they are allocated. Given the current state of the public finances this also looks unlikely to change any time soon.  If this lack of appetite for grants persists, we may find that changing the system of approvals for subsidies has little overall impact on the volume or value of subsidies that are actually granted.

Business impact

As the new system is designed to be less prescriptive than the EU system, there will be a greater emphasis on rival businesses and state actors to identify and challenge subsidies that they perceive to be unfair at the Competition Appeal Tribunal (CAT). This tribunal has similar powers to that of judicial review, but it can additionally compel authorities to recover incorrectly granted subsidies. The government has anticipated high levels of compliance by public authorities and accordingly believes it should be rare that subsidies are challenged and recovered in this way (BEIS, 2021).   Practitioners are more circumspect and are expecting an uptick in litigation in this area.  This is particularly so given the criteria to be applied by a CAT judge in determining challenged subsidies (proportionality, minimal negative effect on competition, distortion of competition etc (BEIS, 2022, p. 22) are broadly worded and therefore subject to different interpretation meaning appeals may be more likely.  

The SCA also introduces additional administrative and compliance burdens.  For example, as the system is self-regulating, when a business is considering taking a grant from an authority it may wish to seek additional advice as to whether the subsidy is compliant with the SCA.  Businesses will also need to be more aware of the subsidy environment generally and regularly review the BEIS database for subsidies granted to their competitors. The timeline for responding to a subsidy is one calendar month from one of the following: publication on the BEIS data base, the issuing of an SAU report or the granting body responding to their request for pre-action information (BEIS, 2022, p. 132). This is a very short timescale especially in the case where a business has been unaware of a subsidy and will need to formulate a plan of action quickly if they wish to object. 

For those with EU operations, regard will also need to be given to existing EU state aid laws and potentially new regulations which empower the EU Commission to intervene in takeovers of EU companies or public procurement bids when supported by state subsidies from third countries.  However, given that most of the terms of SCA were agreed as part of the UK’s exit negotiations, the impact of these new EU rules should be limited.  

Where does this leave UK subsidies?

It will take time to fully understand whether the new UK subsidy regime is a seismic change.  Whilst the SCA is certainly less prescriptive than the EU regime, the UK’s reluctance to spend heavily on subsidies and a lack of appetite to change the allocations of subsidy on offer radically, mean there may not be a revolution in the UK’s subsidy environment in the short term.  How the CMA and granting bodies react to the legislation will be interesting to watch and businesses will need to be on their toes to adapt to a new regime that can move very quickly.  

If you would like insight into the new regime, please use the contact details below 

Bibliography 

BEIS. (2021). Government response to the consultation on subsidy control. London: BEIS.

BEIS. (2021, June 30). New subsidy system to support UK jobs and businesses, boost the economy and strengthen the union. Retrieved from Gov.UK: https://www.gov.uk/government/news/new-subsidy-system-to-support-uk-jobs-and-businesses-boost-the-economy-and-strengthen-the-union

BEIS. (2022). Draft Statutory Guidance on the United Kingdom Subsidy Control Regime. London: BEIS.

BEIS. (2022, December 16). View subsidies awarded by UK government. Retrieved from Gov.uk: https://searchforuksubsidies.beis.gov.uk/schemes?

Committee of Public Accounts. (2022). Regulating after EU Exit. London: House of Commons.

Department for Levelling Up, Housing and Communities. (2022, December 5). Department for Levelling Up, Housing and Communities. Retrieved from Gov.UK: https://www.gov.uk/government/news/government-kickstarts-26-billion-investment-in-communities-as-uk-takes-back-control-of-eu-funding

Jozepa, I. (2021). EU State Aid Rules and WTO. London: House of Commons Library.

Phillips, D. (2022, April 13). IFS response to UK Shared Prosperity Fund. Retrieved from IFS: https://ifs.org.uk/articles/ifs-response-uk-shared-prosperity-fund