Commencement of new rules and powers under the Subsidy Control Act 2022 brings to life the UK’s new subsidy control regime (which replaces the State aid rules that applied in the UK prior to the end of the Brexit transition period)

In brief

On 4 January 2023, the new UK subsidy control regime under the Subsidy Control Act 2022 (the “Act”, available here) came into force. This completes the overhaul of the UK’s approach to subsidies following Brexit and the UK’s decision to diverge from the EU’s State aid regime. The new rules will apply to subsidies granted by public authorities on or after 4 January 2023.

Key takeaways

The UK’s new subsidy control regime includes the following key aspects:

A new Subsidy Advice Unit(“SAU“) has been created within the Competition and Markets Authority (“CMA“). The SAU will have responsibility for monitoring and reporting on the effectiveness of the new regime and preparing advisory (non-binding) reports to public authorities in relation to subsidies or subsidy schemes that are referred to the SAU. This advisory role is significantly more limited than the enforcement role of the European Commission under the EU State aid rules.
The new regime diverges significantly from the EU’s approach that subsidies (or State aid) are automatically prohibited unless approved by the European Commission (or compliant with a strict and limited set of exemptions). Instead, the UK regime features a new definition of subsidies and a set of subsidy control principles, against which public authorities must self-assess the compliance of proposed subsidies via an “Assessment of Compliance”.
For certain subsidies, public authorities can opt to obtain non-binding advice regarding the SAU’s evaluation of the authority’s Assessment of Compliance. In some particularly high-risk cases, public authorities will be required to seek this advice.
The Government will have (i) a “call-in” power to require public authorities to seek advice from the SAU and (ii) a power to refer subsidies to the SAU for a compliance review even after they have been granted. Again, any advice provided by the SAU on such subsidies will be non-binding.
The SAU will have to publish notice that it has accepted a referral for an evaluation, as well as its final advice in relation to any such evaluation.

Third parties will have the opportunity to submit comments to the SAU in relation to any Assessment of Compliance that the SAU is evaluating. Further, third parties and the Government will be able to challenge subsidy decisions made by public authorities in the Competition Appeal Tribunal (“CAT“) on judicial review grounds. The CAT will have the power to order the recovery of non-compliant subsidies.

In depth

Prior to the end of the Brexit transition period, subsidies awarded by UK public authorities were subject to the EU State aid rules, which meant that these measures had to be notified to and approved in advance by the European Commission (subject to exemptions, such as for measures covered by block exemption regulations). One of the UK government’s key priorities in the Brexit negotiations was to move away from this approach, and to enable the UK to provide more “agile” and “flexible” support to UK businesses.

The Act introduced the UK government’s new post-Brexit “subsidy control” regime, which came into force on 4 January 2023. The key aspects of the new regime are set out below.

Definition of subsidy

The Act defines “subsidy” as financial assistance that is given, directly or indirectly, from public resources by a public authority, and that:

confers an economic advantage on one or more enterprises;
is specific, in the sense 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
has, or is capable of having, an effect on: (i) competition or investment within the UK; (ii) trade between the UK and a country or territory outside the UK; or (iii) investment between the UK and a country or territory outside the UK.

Seven subsidy control principles

The Act requires that a public authority must not give a subsidy unless it is of the view the subsidy is consistent with the following seven general subsidy control principles (the “Principles“):

Common interest: Subsidies should pursue a specific policy objective to order to remedy an identified market failure or to address an equity rationale (such as local or regional disadvantage, social difficulties, or distributional concerns).
Least distortive means of achieving the policy objective: Subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other, less distortive, means.
Designed to change the economic behaviour of the beneficiary: Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change should be conducive to achieving the subsidy’s specific policy objective and should be something that would not happen without the subsidy.
Costs that would be funded anyway: Subsidies should not normally compensate for the costs that the beneficiary would have funded in the absence of any subsidy.
Proportionate and necessary: Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
Competition and investment within the UK: Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the UK.
Beneficial effects to outweigh negative effects: Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including negative effects on: (i) competition or investment within the UK; or (ii) international trade or investment.

In addition to the Principles, a public authority intending to grant subsidies in relation to energy or the environment must consider certain “energy and environment principles”.

Automatic prohibitions

The Act includes automatically prohibited forms of subsidies (unless certain strict conditions can be met). These forms of subsidy include: (i) unlimited guarantees; (ii) subsidies contingent on export performance or the use of domestic (over imported) goods or services; (iii) subsidies granted for the relocation of activities; (iv) rescue or restructuring subsidies; and (v) subsidies for air carriers for the operation of routes.

Exempt subsidies

Certain types of subsidies are exempt from the subsidy control requirements. These include subsidies to compensate for damage caused by natural disasters and other exceptional circumstances, subsidies given for the purpose of safeguarding national security, and certain tax measures.

Exemptions from referral

Referral is not required in relation to (i) exempt subsidies (see above), (ii) subsidies given under a subsidy scheme, (iii) assistance below certain de minimis thresholds, (iv) assistance given to an enterprise that is providing services of public economic interest (“SPEI“) assistance, and (v) streamlined subsidies (see below).

Self-assessment

Public authorities will be able to grant the vast majority of subsidies via one of the following two self-assessment routes:

Baseline route: This route requires public authorities to self-assess the compliance of a proposed subsidy against the Principles.
Streamlined route: The Government has published “Streamlined Routes” in the following three areas: (i) research, development and innovation, (ii) local growth, and (iii) energy usage. Provided that a public authority self-assesses that a proposed subsidy meets the criteria for a particular streamlined route, it will not need to self-assess the compliance of the subsidy against the Principles.

SAU advice to public authorities

The SAU will not decide whether a subsidy can be given or directly assess whether it complies with the subsidy control rules. Instead, a public authority must undertake its own “Assessment of Compliance” and ultimately has responsibility for decisions about subsidies.

However, where a subsidy or subsidy scheme is referred to the SAU, it assists public authorities by providing an independent non-binding report (published on the government’s website) evaluating the Assessment of Compliance against the subsidy control principles and, where applicable, the energy and environmental principles.

Public authorities can request a report from the SAU where they are giving or making subsidies or subsidy schemes of interest (“SSOI“) but must refer the following subsidies to the SAU: (i) subsidies or subsidy schemes of particular interest (“SSOPI“) or (ii) subsidies or subsidy schemes called-in by the Secretary of State.

Subsidies or Subsidy Schemes of Interest

For subsidies that are more likely to have distortive effects on UK competition and investment or international trade, public authorities will be encouraged to undertake a greater level of analysis to ensure compliance with the Principles. In addition, they may request a report from the SAU (a “voluntary referral“), which will provide non-binding advice on how the authority’s assessment and the design of the subsidy might be improved. Unlike for Subsidies or Subsidy Schemes of Particular Interest (see below), authorities can grant SSOIs before they receive the SAU’s report (although such action is unlikely in practice given that the authority will have sought the SAU’s advice voluntarily and so, presumably, will want to find out its conclusions before acting).

A subsidy will be an SSOI if (i) the total amount of the subsidy and any other related subsidy given to the same enterprise exceeds £5 million, or (ii) it is a certain type of higher-risk subsidy e.g., rescue subsidies and subsidies relating to the relocation of activities (but does not fall within the definition of a subsidy or subsidy scheme of particular interest – see below).

Subsidies or Subsidy Schemes of Particular Interest

For subsidies that have the highest likelihood of having distortive effects, public authorities will be required to undertake more extensive analysis and to request a report from the SAU (a “mandatory referral“). In addition, after the publication of the SAU’s report, there will be a mandatory five working day “cooling off” period before the authority can give the subsidy.

In broad terms, a subsidy will be a SSOPI if (i) the amount of the subsidy exceeds £1 million and the total amount of the subsidy and any other related subsidy given to the same enterprise exceeds £10 million, (ii) the amount of the subsidy exceeds £1 million, the total amount of the subsidy and any other related subsidy given to the same enterprise exceeds £5 million and the subsidy is granted in a “sensitive sector”, (iii) the subsidy exceeds £1 million and is provided for the relocation of activities, or (iv) the subsidy is provided for the purpose of restructuring an ailing or insolvent enterprise, deposit taker or insurance company.

Sensitive sectors include (i) manufacture of basic iron and steel and of ferro-alloys, (ii) aluminium production, (iii) copper production, (iv) manufacture of motor vehicles, (v) building of ships and floating structures, (vi) manufacture of motorcycles, (vii) manufacture of air and spacecraft and related machinery and (viii) production of electricity.

Call-ins

The Secretary of State will have: (i) a “call-in” power to require public authorities to seek advice from the SAU and wait for a short “cooling off” period before granting the subsidies in question; and (ii) a power to refer subsidies to the SAU for a compliance review even after they have been granted.

Process for referrals

The SAU encourages public authorities to discuss referrals prior to their formal submission. Whilst this is voluntary, it helps to ensure that the SAU has all the information required to undertake its assessment (and thereby reduces the risk that the SAU rejects the request as incomplete).

Within five working days of formal submission of a referral, the SAU will undertake a preliminary assessment. For mandatory referrals, the SAU will assess whether the request contains the required information. For voluntary referrals, the SAU will also decide whether to accept the request based on its prioritisation principles.

The SAU will notify the public authority of its decision to accept, reject or decline a request for a report. The SAU will have 30 working days to evaluate the assessment of the proposed subsidy or scheme (unless a different reporting period is agreed between the SAU and the public authority).

Disclosure

As soon as practicable after the SAU notifies the public authority that it has accepted a referral (and generally within five working days), the SAU will publish information on the referral on its website. It will then publish the final report before the end of the 30-working day reporting period.

Separately, public authorities must disclose to the government’s subsidy database (i) all subsidies of more than GBP 100,000 and (ii) all subsidy schemes. Any subsidy (other than a subsidy in the form of a tax measure) or subsidy scheme (of any type) must be disclosed within three months of confirmation of the decision to give the subsidy or make the subsidy scheme. Subsidies in the form of tax measures must be disclosed within one year of the date of the tax declaration.

Third parties

Third parties will have the opportunity to make relevant representations to the SAU where referrals are accepted (e.g., identifying impacts on markets, competition or investment that would be relevant to the Assessment of Compliance). These will need to be made within a relatively short period (typically 10 working days after information about the referral is published on the SAU’s website).

Otherwise, a party whose interests may be affected by a subsidy decision (e.g., a competitor of a beneficiary) or the Secretary of State may bring a legal challenge at the CAT. Such challenges will be limited to the judicial review standard (i.e., not a review “on the merits”). The CAT will have the power, among others, to order the authority to recover the amount of a subsidy if it is found to contravene the subsidy control rules.

United Kingdom: New subsidy control regime kicks-in