This post, written by George Peretz Q.C., examines the Subsidy Control Bill, which was introduced to Parliament at the end of June applies across the United Kingdom. It has significant implications for the devolved administrations.
The provisions of the Bill are summarised here. But, in essence, the scheme of the Bill is to require all public authorities (including the devolved governments and public bodies in Scotland, Wales, and Northern Ireland) to satisfy themselves that any subsidy is compatible with a set of “subsidy control principles” (to be found in Schedule 1 to the Bill). Public authorities are also prohibited from granting certain kinds of subsidy that fall within classes set out in Chapter 2 of Part 2 of the Bill. Those duties are enforceable by way of judicial review before the Competition Appeal Tribunal (“CAT”), though the CAT will consider such challenges only on a judicial review, and not a merits, basis. Certain kinds of subsidy (to be defined in secondary legislation) will have to be referred to the Competition and Markets Authority (“CMA”) for a report on their compatibility with the principles and prohibitions in the Bill before they are implemented – although the granting authority is not bound by the CMA’s conclusions. Other kinds of subsidy (again to be defined) may be referred by the granting authority or called-in by the Secretary of State to the CMA for a report before they are granted, or can be called-in by the Secretary of State for a report after they are granted.
The Bill raises a number of issues for the devolution settlement. Before turning to those, it should be noted that – because section 52 of the Internal Market Act 2020 (“IMA20”) made the regulation of distortive and harmful subsidies a reserved (or, in Northern Ireland, an excepted) matter – the Sewel Convention does not apply and so legislative consent of the devolved parliaments is not required by that convention. (IMA20 was enacted despite the refusal of legislative consent by all the devolved parliaments, the Sewel convention being a political convention that is unenforceable before the courts.)
The subsidy control principles and prohibitions
The subsidy control principles largely reflect the principles and prohibitions set out in Chapter 3 of Title XI of the Trade and Cooperation Agreement. However, there are some additions with implications for the devolved governments.
First, principle F in Schedule 1 will require all granting authorities to ensure that their subsidies are consistent with the principle that “subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom”. That will require granting authorities in, say, Wales, to consider the effect of the subsidy on competition and investment across the United Kingdom – so that, for example, a grant to a Welsh widget manufacturer would need to consider the impact on competition with English widget manufacturers.
Second, clause 18 contains a specific prohibition on subsidies that are “given to an enterprise subject to a condition that the enterprise relocates all or part of its existing economic activities” and where “the relocation of those activities would not occur but for the giving of the subsidy”. That clause would catch a grant of a subsidy by a Scottish authority to a widget-maker with a factory in Newcastle that required it to move its production to Glasgow. But its practical application, as currently drafted, is likely to be limited, as few subsidies will make relocation an express condition (in my example, the Scottish authority is far more likely simply to insist on production being carried on in Glasgow rather than expressly to require relocation from Newcastle, even though relocation from Newcastle is the inevitable consequence). That is in contrast to comparable provisions in EU State aid law that refer to the effect of a grant or which withdraw exemption from regional aid measures where relocation has recently taken place or will take place within two years (see Article 14(16) of the General Block Exemption Regulation).
The Bill does not, as such, create a framework for “regional aid” as that terms is understood in EU State aid law. But principle A refers to the need for a subsidy to meet “a specific policy objective in order to … address an equity rationale (such as social difficulties or distributional concerns” – a phrase which covers subsidies designed to deal with disparities in wealth and opportunity between different regions. It is also important in that context to note the joint declaration on subsidy control attached to the Trade and Cooperation Agreement, which notes the joint view of the EU and United Kingdom that:
“1. Subsidies may be granted for the development of disadvantaged or deprived areas or regions. When determining the amount of subsidy, the following may be taken into account:
● the socio-economic situation of the disadvantaged area concerned;
● the size of the beneficiary; and
● the size of the investment project.
2. The beneficiary should provide its own substantial contribution to the investment costs. The subsidy should not have as its main purpose or effect to incentivise the beneficiary to transfer the same or a similar activity from the territory of one Party to the territory of the other Party.”
Though that declaration is non-binding and is not written into the text of the Bill, it is nonetheless likely to be read into the principles, given that a large part of the purpose of the Bill is to implement the subsidy control provisions of the TCA.
However, neither the joint declaration not the Bill provide much guidance as to what is meant by “disadvantaged or deprived” (or by “distributional concerns”): and one question which may well arise is whether the question of whether a particular area is disadvantaged or deprived, or in relation to which there are legitimate distributional concerns, has to be looked at on a UK-wide basis or more narrowly. For example, a region may be, on various measures, disadvantaged by English standards, but not (on those same measures) by Welsh standards. It is not at all clear on what basis such questions will be resolved.
One final point to note is that section 4(5)(c) imports into UK law what in EU law is known as the Azores principle (after Case C-88/03 Portugal v Commission [2006] ECR I-7115). That principle deals with a possible argument that might arise if, say, the Welsh Government lowered a tax in Wales below the level of the same or equivalent tax in England: it might then be said that that was a subsidy on the basis that it favours businesses in Wales over comparable businesses in England. However, the Azores principle, as written out in section 4(5)(c), rules that argument out: as long as the Welsh Government is “autonomous institutionally, procedurally, economically and financially as regards the regime” (which is to say that it takes its decisions independently and it bears the fiscal consequences of its decisions i.e. it is not compensated for the lost revenue by additional grant from Westminster) then it is not relevant to compare its taxation with taxation in England (or, more precisely, the English regime is not to be regarded as the “normal taxation regime”).
The powers of the Secretary of State
The Secretary of State has a number of important powers. By regulation, he defines the category of “subsidies of particular interest” that must be referred to the CMA. He may issue guidance on the practical application of the subsidy principles and other matters, to which granting authorities must have regard (clause 79) – guidance to which the CAT is also likely to have regard, though will not be bound by. And as noted above he can issue call-in directions that require granting authorities to refer subsidies to the CMA. Finally, under clause 70(7)(b) the Secretary of State has automatic standing to challenge any subsidy decision before the CAT (standing otherwise being reserved to “interested parties”, defined as persons “whose interests may be affected by the giving of the subsidy” – a phrase that does not obviously extend to devolved government concerned about the impact of a proposed subsidy on its own economy).
The devolved governments have no matching powers. Indeed, there is no requirement in the Bill for the devolved governments to be consulted before the exercise of any of those powers (though the Secretary of State has a general duty to consult all interested parties before issuing guidance).
The result looks distinctly unbalanced. For example, if the Welsh Government decides to grant a subsidy to which the Secretary of State objects (perhaps on the basis of its impact on England), the Secretary of State may be able to refer it to the CMA, and will have standing to challenge it before the CAT. The Secretary of State may also be able to issue guidance that recommends against types of subsidy that the Welsh Government might have in mind – guidance to which the CMA and the Welsh Government have to have regard. On the other hand, if the Secretary of State grants subsidies to businesses in England – or, using his powers under section 50 of IMA20, to businesses in Wales – to which the Welsh Government has objections, none of those possibilities are open to the Welsh Government.
The CMA
As far as the CMA is concerned, it is worth noting that nothing in the Bill provides for the devolved governments to have any say in the appointment of CMA panel members who will, as part of the Subsidy Advice Unit, exercise the CMA’s powers under the Bill: there is no equivalent to the provisions of Schedule 3 to IMA20 that require the Secretary of State to seek the consent of the devolved governments before making appointments to the Office for the Internal Market (the part of the CMA that deals with IMA20 issues).
The devolved parliaments
The definition of “public authority” excludes the UK and devolved parliaments, with the effect that primary legislation is excluded from the main part of the Bill.
However, a provision of primary legislation that provides for the grant of money to particular enterprises, or which imposes tax on some enterprises but not others, may well amount to a “subsidy” under the Bill. That point is dealt with in Schedule 3 to the Bill (“Subsidies provided by primary legislation”), which applies a modified regime to acts of the UK and devolved parliaments.
In relation to the UK parliament – and unsurprisingly, given the doctrine of Parliamentary supremacy – the Bill makes no provision for Acts of Parliament to be affected in any way by the Bill, save that paragraph 9 (which also applies to the devolved legislatures) allows the promoter of a Bill before the UK Parliament (typically the relevant departmental minister) to refer provisions in it that involve a subsidy to the CMA, the CMA’s report being purely advisory. That exception is consistent with the TCA – see Article 372(4), which permits the United Kingdom not to widen the scope of judicial review of Acts of the UK Parliament.
However, paragraphs 6 and 7 of Schedule 3 make it clear that devolved primary legislation may be challenged under the Bill. Perhaps because it was considered unacceptable for such politically charged challenges to be brought before the CAT, in this case the challenge must be brought before the general administrative courts (the High Court in Wales and Northern Ireland, and the Court of Session in Scotland). The court than has available to it all the usual set of public law remedies, including quashing the legislation: it may also order recovery of any subsidy granted.
Despite being placed right at the end of the Bill, these provisions of Schedule 3 are, constitutionally, quite significant. That is because they represent a significant departure from the general position, set out in AXA General Insurance v Lord Advocate [2011] UKSC 46, that judicial review of devolved legislation is not generally possible on the general common law grounds of irrationality, unreasonableness, or arbitrariness. Lord Reed (with whom the rest of the Court agreed) said this at [147]: –
“it must have been [the UK] Parliament’s intention, when it established the Scottish Parliament, that that institution should have plenary powers within the limits upon its legislative competence which were created by section 29(2) [of the Scotland Act 1998]. Since its powers are plenary, they do not require to be exercised for any specific purpose or with regard to any specific considerations. It follows that grounds of review developed in relation to administrative bodies which have been given limited powers for identifiable purposes, and which are designed to prevent such bodies from exceeding their powers or using them for an improper purpose or being influenced by irrelevant considerations, generally have no purchase in such circumstances, and cannot be applied. As a general rule, and subject to the qualification which I shall mention shortly, its decisions as to how to exercise its law-making powers require no justification in law other than the will of the Parliament. It is in principle accountable for the exercise of its powers, within the limits set by section 29(2), to the electorate rather than the courts.”
The “qualification” referred to in that passage was that the Courts could review an Act of the Scottish Parliament on the basis of breach of “fundamental” rights or of the rule of law (see [150]-[153]).
Schedule 3 has to be read against that background. It is, at that point, possibly significant that the Bill does not explain what standard of review should be applied: there is no cross-reference in Schedule 3 to section 70(5) (which provides that the CAT must review decisions by public authorities by applying the same principles as are applied on judicial review or, in Scotland, in the exercise of the supervisory jurisdiction of the Court of Session). It is, though, clear from paragraphs 6 and 7 that some form of review is required – and paragraph 10 expressly gives the court power to order recovery of subsidy. Given the context (and the requirement of Article 372(1) of the TCA that the parties ensure that courts have power to review subsidy decisions) it is likely that the usual judicial review/supervisory jurisdiction standards apply – but there is some scope for argument about how intensive such scrutiny should be.
A further point worth noting about paragraphs 6 and 7 is that it tries to deal with a problem noted by the Supreme Court in its recent judgement in R(SC and CB) v Secretary of State for Work and Pensions [2021] UKSC 26: if you are called upon to adjudicate on Parliament’s reasons for passing legislation (in this case, whether the relevant devolved legislature paid adequate attention to the subsidy control principles) how do you go about working out what those reasons were? As Lord Reed said at [167]-[168]: –
“First, the will of Parliament finds expression solely in the legislation which it enacts. Parliament does not give reasons for enacting legislation: it simply votes on a motion to approve a proposed legislative text. There is no corporate statement of reasons, and the individual members of Parliament do not give their reasons for voting in a particular way. As Lord Hobhouse stated in Wilson, para 143, “[i]t is not part of the duty of any Member of Parliament to provide or state definitively in Parliament the justification for legislation which the legislature is content to pass”. Secondly, the decisions which Parliament takes are not necessarily capable of being rationalised in any event. In the first place, Parliament does not operate only, or even primarily, as a debating chamber. It is also a forum for gathering evidence, and for extra-cameral discussion, negotiation and compromise. Furthermore, the way in which members of Parliament vote will usually, but by no means always, reflect party policy, and may be influenced by the discipline imposed by the party whips.”
In short, the devolved legislatures do not publish a statement of reasons for what they do, and any attempt to discern reasons – in this case, their approach to the subsidy control principles – from debates and extraneous material is fraught with danger.
Paragraphs 6 and 7 deal with that difficulty by attributing the reasoning of the “promoter” of the legislation to the devolved legislature: thus paragraph 6(2) tells us that: –
“the requirements imposed by [Chapter 1 of Part 2] on public authorities to consider and form a view are to be assessed by reference to the considerations and views of the promoter of the proposed devolved primary legislation”.
That is a convenient but quite startling provision, because it enshrines in law what is otherwise a very dubious presumption, namely that the legislature in passing legislation did so for the reasons put forward by the government that (usually) promoted it.
There is a further problem: what happens where the subsidy arises because of an amendment made during the passage of the legislation, at the instance of an opposition or backbench MSP or MS? An example would be an amendment creating exemption from a tax – or changing terms of entitlement – which converted into a subsidy a measure that was not a subsidy when introduced (because at that stage it was a general measure). Who, then, is the “promoter”? If it is the government, one will look in vain to see its reasons for the change. But an individual MSP or MS – with all due respect to their individual brilliance – is unlikely to have gone through the subsidy control principles in a rigorous and thorough way (and, in any event, their reasons cannot be attributed to the MSPs or MSs who also voted for the amendment).
Schedule 3 is therefore replete with important constitutional issues – and deserves careful examination during the passage of the Bill.
Conclusion
The current UK government often makes the point that the removal of EU State aid law lifts what was often a considerable constraint upon the decisions of devolved governments. That point is undeniable – the new regime under the Bill will be considerably more permissive, as it will have no equivalent to the need to obtain prior approval from the Commission before subsidies are granted, or to adapt proposed subsidies so that they fit into particular rigid categories of exemption. However, the Bill gives the UK government considerable power to set the subsidy control agenda, and gives it an ability to subject subsidies by devolved governments to scrutiny which is not reciprocal. The Bill also creates a constraint on the law-making power of the devolved Parliaments that does not apply to the UK Parliament (which is also the Parliament that legislates for England).
The old EU regime bore down equally severely on both UK and devolved governments, whereas the new regime, though more liberal, is also more unequal. Time will tell whether that inequality generates more political friction than did the previous severity.
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