New UK Subsidy Control Regime

The UK Government recently announced that the UK’s new subsidy control regime will commence on 4 January 2023 with the entry into force of the Subsidy Control Act 2022 (the “SCA 2022”).

The new Act is a unique and highly complex piece of legislation intended to control the giving of subsidies by public bodies in the UK. The ultimate aim of the regime is to protect competition and investment in the UK from unlawful distortions, as well as to ensure that the UK complies with its international treaty commitments including those under the UK-EU Trade and Cooperation Agreement and the World Trade Organisation.

Background

The EU State Aim regime aims to prevent distortion of competition by subsidies or other aid being given by a government or public body. The regime was formally brought into law by the Treaty of Rome in 1957 and updated by the Treaty on the Functioning of the European Union (the “TFEU”) in 2007. Article 107, paragraph 1 of the TFEU reads as follows:

"Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market."

The EU regime applied in the UK until 1 January 2021, at which point it was replaced by a set of interim arrangements to give the UK Government breathing space to design and implement a bespoke solution. The SCA 2022 is an attempt to create a “new, bespoke regime for subsidy control within the UK” – departing from EU State Aid rules – that will be “flexible, agile and tailored to support business growth and innovation, as well as help to maintain a competitive free market economy and protect competition and investment in the UK”. While it does not, by any means, represent a sweeping away of EU State Aid rules (despite the impression that the Government may have given in its public announcements), it does perhaps represent a more flexible approach to subsidy control, notably by moving away from rigid notification and approval mechanisms, and adopting instead a principles-based and self-assessment focused approach to compliance.

Key Features of the SCA 2022

The key features of the new Act are as follows:

• Definition of ‘subsidy’: the new definition of ‘subsidy’ is close to the definition under the existing EU State Aid regime, although it has been tweaked such that it is appropriate to deal with competition within the UK. This approach makes clear that the new regime is intended to manage domestic competition as well as to ensure compliance with international treaty obligations.
• Routes: the new Act takes a more risk-based approach than does the EU regime. It provides for different layers of compliance obligations depending on the category of subsidy that is proposed to be awarded:
  • the ‘streamlined’ route, appropriate for categories of subsidies that are at low risk of distorting competition, trade or investment;
  • the ‘special’ route, for categories of subsidies that have a potential of leading to undue distortion and negative effects on domestic and/or international trade, competition or investment; and
  • the ‘default’ route, to be used for all other subsidies.
• Self-Assessment: the EU State Aid regime included a standstill mechanism and a requirement for pre-approval of subsidies (subject to certain exceptions). By contrast, the new Act will permit public authorities to decide for themselves whether the proposed subsidy complies with the principles of the UK regime and whether or not to ultimately provide said subsidy. However, certain categories of subsidy are exempt and must be brought before the Subsidy Advice Unit (see below) in the first instance.
• Transparency: the SCA 2022 aims to make transparency a key aspect of the UK’s subsidy control regime. Public disclosure of key details about subsidies and schemes will, it is hoped, promote open and fair competition. The transparency rules require public authorities to upload details of both subsidy schemes and standalone awards which exceed £100,000 in value to a live database maintained by the Department for Business, Energy and Industrial Strategy.
• Subsidy Advice Unit (“SAU”): the SAU has been established within the Competition and Markets Authority to provide independent advice on subsidies or schemes with greater potential to lead to undue distortion and negative effects on domestic and/or international trade, competition or investment. Where the subsidy or scheme falls within this category, or could do so, the public authority must refer their initial self-assessment to the SAU for independent evaluation. Even where there is only a potential for the subsidy or scheme to lead to undue distortion, the public authority may still make a voluntary referral to the SAU. The SAU has no power to prohibit a subsidy or scheme. It’s role is purely advisory. However, its advice will be published and made available to the public.
• Competition Appeal Tribunal (“CAT”): the CAT has jurisdiction to review subsidy control decisions and has the power to direct a public authority to recover a subsidy (in whole or in part) from its recipient.

Takeaways and Points to Note

Only time will tell whether the new regime will achieve its stated aim of being a “flexible, agile” solution that “supports business growth and innovation… [and] protects competition and investment in the UK”. It is clear from the establishment of the SAU, the expanded role for the CAT and the Government’s reserved powers to issue secondary legislation that the Government intends to have a more hands-on approach to subsidy control than it might have had under the EU State Aid regime. Furthermore, we can already see a notable divergence from the EU regime’s approach to compliance. The self-assessment mechanism provides a notable contrast to the ‘standstill’ and ‘pre-approval’ mechanisms built into the EU State Aid rules and gives public authorities a greater level of autonomy in deciding whether the proposed subsidy complies with the legal principles. Businesses and public authorities alike should familiarise themselves with the new rules and should promptly seek legal advice where appropriate.

If you would like any further information or advice, please contact James Milliken from the Commercial team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.