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The future of state aid in a post-Brexit economy

Published: 19th May 2021
Area: Corporate & Commercial

Now that the UK has officially left the European Union, there are a number of mechanisms within the business world that will gradually begin to change, including the way in which the UK regulates state aid.

However, with a complex system still in place and change on the horizon, can the UK use the opportunity to refine state aid subsidies to its advantage?

What is state aid?

State aid – or subsidy control as it is referred to post-Brexit – is an umbrella term given to various forms of financial assistance provided by a public body to a private business, which carry the risk of distorting competition in the marketplace. Financial support mechanisms that fall under the banner of state aid include:

 

  • Subsidies and grants; and
  • Tax-advantaged venture capital schemes such as venture capital trust (VCT), enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS).

Prior to Brexit, state aid subsidies were governed by a number of EU laws, including the General Block Exemption Regulation (GBER), which aimed to monitor and control Member States when giving aid. Now the UK is no longer required to so closely abide to those regulations, there is an opportunity to formulate a new system that benefits UK businesses and the potential to re-visit some of the rules applicable to the venture capital schemes.

What needs to change?

Past EU Commission audits revealed that the UK was administering the venture capital schemes in a manner which wasn’t fully-compliant with, or in the spirit of, GBER. This led to the introduction of stricter rules, some of which although seeking to ensure greater compliance with EU requirements, are arguably too tightly drawn and fail to take into account the realities of business practice, in particular the very start-up businesses that the schemes seek to support.

One such rule which would merit being looked at as a potential area for change is the company age test.

Company age test

This test was designed to ensure that schemes were more appropriately targeted at young and innovative companiesHowever, this has proven to be regularly problematic. Even for the newest and most novel of businesses, acquisitions of intellectual property or assets from the founder’s prior endeavours, no matter how nominal or incidental, can prejudice the outcome of the test. As a result, companies that should have been eligible for the schemes have been excluded in the past.

Unfortunately, this outcome is a product of legislation which, although rightly designed to avoid artificial structuring and abuse in compliance with the EU state aid rules, fails to provide for any ‘de minimis’ exception. Although the UK must still have a subsidy control mechanism in place which aligns with EU regulation in the new system, there is room for the UK to relax certain parameters, ensuring eligible businesses do not miss out.

How does this benefit the UK?

Whilst it is likely that the current setup of the venture capital schemes will remain largely unchanged, certain tweaks and refinements could smooth out some of the snagging points currently created by the EU’s rules. In this case, refining the company age test would be a good place to start.

The venture capital schemes are one of the most important finance mechanisms we have. They promote investment and provide support to ambitious companies, ensuring a healthy flow of capital through the market and it is essential that these continue, regardless of the changes the UK decides to embrace in future.

Contact us

To find out more about what our investment funds team can do for you, contact Peter Mayhew.

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