Following expiry of the transition period, under the UK-EU Withdrawal Agreement which expired at the end 2020, the UK has been in a further state of transition when it comes to state aid.
The EU State Aid rules were revoked and UK is only now seeing the very beginnings of the proposed system of effective subsidy control that was part of the UK-EU Trade and Co-operation Agreement (TCA). –The Subsidy Control Bill, published on 30 June 2020 sets out the rules which apply to the award of public subsidies to businesses.
What were the EU State Aid Rules?
The EU State Aid rules provided a mechanism for policing the amount of government subsidies and other interventions, such as tax reliefs, could give to their local industries. This was necessary in order as part of a framework in order to ensure a level playing field in the EU single market.
Having left the EU, the UK government revoked the application of the EU state aid rules, but did commit to put in place and maintain an effective system of subsidy control in order to prevent unfair trade with the EU and other WTO partners.
What is the new Subsidy Control Bill?
The Subsidy Control Bill sets out the legal framework for the mechanism for regulating subsidies. For state aid practitioners, this is reasonably familiar and regulates financial assistance which:
(a) is given, directly or indirectly, from public resources by a public authority;
(b) confers an economic advantage on one or more enterprises;
(c) is specific, that is, is such that it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services, and
(d) has, or is capable of having, an effect on:
(i) competition or investment within the United Kingdom,
(ii) trade between the United Kingdom and a country or territory outside the United Kingdom, or
(iii) investment as between the United Kingdom and a country or territory outside the United Kingdom.
A notable point of difference is that, unlike the EU rules, the draft Bill regulates “public resources given by a public authority”; rather than, as under the EU rules, aid granted by a Member State or through State resources.
The EU rules provide the two are treated in the alternative, and catches both a subsidy which is funded from the state; as well as subsidy which is funded by private entities but is directed by a public authority or designated quango.
The second interesting tweak is the definition of public authority which is narrowly defined as a person who exercises “functions of a public nature”. This is not defined, but we can look to guidance from the Courts on the interpretation of the same form of words in the Human Rights Act. The key puzzle for many of our “hybrid” public authorities - such as universities - is whether they are caught when performing a commercial function, such as contract research or collaboration agreements and not public education.
The Subsidy Control Bill requires public authority to ensure that the subsidy meets the following principles, which mirror the subsidy control principles in the TCA:
- Subsidies should pursue a specific policy objective in the common interest
- Subsidies should be proportionate and necessary
- Subsidies should be designed to bring about a change of economic behaviour of the beneficiary.
- Subsidies should not normally compensate for the costs the beneficiary would have funded in any event
- Subsidies should be the least distortive means of achieving policy objective
- Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.
- Subsidies’ beneficial effects should outweigh any negative effects.
These principles are accompanied by a detailed list of prohibited subsidies; as well as a list of exemptions.
These rules are supported by a mechanism for referral of subsidy decisions and a scheme of judicial review to the Competition Appeal Tribunal by aggrieved parties.
In order to ensure that the regime of subsidy control works there is a duty to ensure that the decision-making in respect of any subsidy is published on a subsidy database.
At the same time that the Subsidy Control Bill was announced the Government also announced the proposal for an electric battery gigafactory in Sunderland. On being asked by reporters about the extent of taxpayer support, the Prime Minister responded:
"There are ongoing discussions about ways we can support people who are going to bring fantastic green technology into this country. Obviously they're confidential but this is something that is a massive benefit to the UK economy.
There is certainly something ironic in announcing a regime for regulated subsidy control, which provides for transparency, while maintaining that taxpayer subsidies should remain shrouded under the cloak of commercial confidentiality.
In providing a mechanism for the effective control of subsidies transparency is not really optional - so while it might be entirely reasonable for negotiations to be subject to a degree of commercial confidentiality, the legal basis, value and terms of the final, agreed subsidy are not.
The Subsidy Control Bill will likely go through several revisions before it makes its way through Parliament to come into force. All public bodies need to comply with the new rules to ensure a level playing field. Business recipients of aid from the public sector will need to understand how to navigate these rules in agreeing public funding.
You can find out more about the Subsidy Control Bill at the following website:
https://bills.parliament.uk/bills/3015/publications
For further information on this or any other queries on state aid or the Subsidy Control Bill, contact Uddalak Datta or another member of the commercial team in your local office.
