‘Goodbye State Aid’: thoughts on the new Subsidy Control White Paper

It will govern all types of subsidy from things we might immediately think of when we think of subsidy (grants, loans, guarantees) to more subtle examples of subsidy (sales of assets by the State, purchase of assets by the State, public/private partnerships etc). Prior to the UK’s exit from the EU these activities were controlled by the often dreaded area of State aid law.

Business will look on with interest as subsidy has long been an important source of funding, particularly for socially important projects which require State support to be economically viable.  This is likely to be of crucial importance in the delivery of current initiatives including the levelling up agenda, the recovery from Covid and measures to help the environment.

What is the current law?

EU State aid law no longer applies in the UK following the end of the transition period.  There are two controls on subsidy under current UK law.  The first is under WTO rules.  The scope of the activity for much of UK subsidy is so limited that it is very unlikely to engage the WTO rules and so UK Subsidy is largely assessed under the Trade and Co-operation Agreement between the EU and UK (TCA).

UK law provides that where the Government is required to introduce national laws in order to comply with its obligations under the TCA, until such domestic rules are introduced the relevant sections of the TCA are effectively incorporated into national law.  Whilst the concepts used are very similar to EU State aid law, the wording is slightly different (State aid is referred to as subsidy, it refers to “economic actors” rather than “undertakings”), it is likely that the UK courts will interpret the provisions in light of EU law.  Accordingly assessment of potential subsidies under the current law largely consists of establishing whether the measure in question (grant, loan etc) would have been State aid under EU law; if so it can be considered to be a subsidy under UK law and will only be permissible if it complies with the principles established under the TCA for when the UK may provide subsidy.

What is changing?

The White Paper, once it results in an Act of Parliament, will clarify the substance and procedure around the providing of subsidies by introducing clear rules in areas such as:

• What will constitute subsidy;
• When subsidy will be permitted;
• What procedural requirements will need to be observed when subsidy is granted;
• The role of the Competition and Markets Authority as Regulator; and
• How aggrieved third parties can challenge subsidies they believe are unlawful.

What is subsidy?

What constitutes a subsidy will remain very similar to the concept of State aid.  It is defined as :

• financial assistance given directly or indirectly
• from public resources by a public authority
• which confers economic advantage on one or more enterprises and
• that it benefits such enterprise(s) over other enterprise(s) in respect to the provision of goods or services
• and has or is capable of having an effect on:
  • competition or investment in the UK,
  • trade between the UK and any other country, or
  • investment between the UK and any other country.

The main difference from the current law appears to be that an impact on competition solely in the UK will be sufficient.  This is in contrast to the previous position where an international effect was required.  As a result the new law has the potential to catch measures which were too small to be scrutinised previously.

When can a subsidy be awarded?

Where a State body wishes to award a subsidy there are a number of considerations it must examine.

In certain circumstances it can simply go ahead and award the subsidy.  For example where it is what is known as “minimal financial assistance” (similar to de minimis aid under the EU rules) or where the Government has created a so-called “streamlined route” to award the subsidy.

In other cases it will be necessary to assess whether the subsidy is consistent with principles set out in the legislation.  There are general principles similar to those which apply at present under the TCA.  For example subsidies should be targeted at a particular target area to remedy a market failure and should be proportionate to the aim pursued.  There are also specific principles which apply to certain kinds of aid (eg aid for renewable energy or aid for the environment).

In certain circumstances the awarding body will have the option to consult a specialist unit to be created within the Competition and Markets Authority (CMA).  In other circumstances such consultation will be mandatory.  This consulting role is a marked contrast to the EU approach, with the European Commission acting as an investigating and enforcing body, having the power to order recovery of aid.

Following the award of subsidy the granting body will be required to publish details of the aid on a website set up for this purpose.

In short, the process appears to contain more flexibility than the EU system, which relies more heavily on detailed categories of exempt aid rather than the broad brush, principle based approach in the White Paper.

What are the risks?

As with State aid, the primary risk falls on the recipient of the subsidy.  Ultimately the risk is that the subsidy, if granted unlawfully, will need to be repaid.  Such action would be instigated by a judicial review application to the Competition Appeals Tribunal.  Arguably this system reduces the likelihood of complaint as compared to the EU system, where a simple complaint to the European Commission can lead to a recovery.  It is a much graver decision to instigate litigation, particularly given the degree of flexibility afforded to granting bodies.  It remains to be seen to what extent such proceedings materialise.

Conclusion

Many won’t be sad to see the back of the State Aid regime, and progress towards greater certainty in this area is welcome given the lack of clarity following the end of the transition period.  The increased flexibility of the proposed system will be welcomed by granting bodies and beneficiaries.  However, this flexibility undoubtedly comes at the price of reduced certainty as compared with the EU system.

Also, whilst a reduction in risk can be seen as welcome by many, it should be remembered that subsidy control is an essential element of preserving competition and an “unfair” or “unnecessary” subsidy has the potential to damage those who do not receive it.  It will be interesting to observe how this White Paper develops as it is debated and further guidance and comment emerges.

The proposed law is intended to come into force in 2022.  Ward Hadaway LLP will run a seminar in early September to discuss the likely impact of the new law. We will send you an invitation in due course.

In the meantime, if you have any questions about State aid, competition law or subsidy and how it might apply in your organisation, please don’t hesitate to contact Dean Murray for a chat.