UK Subsidy Control Bill – a brief summary

In this post, George Peretz Q.C. and Ben Rayment (both of Monckton Chambers), summarise the new Subsidy Control Bill published by the UK Government.

The Trade and Cooperation Agreement (“TCA”) left open significant issues in relation to how its subsidy control provisions would be implemented in the UK.  Published on 30 June, the Subsidy Control Bill fills in significant detail that was previously lacking.  We highlight below some of the key provisions proposed in the Bill.

Scope and definition of “subsidy”

Many of the key concepts simply carry over definitions used in the TCA, albeit in some cases with extra detail.  One important point to note is that the definition of subsidy in cl.2 includes subsidies granted by public authorities which have or are capable of having an effect on competition or investment within the UK and not just on trade and investment between the UK and third countries: that is a recognition by the government that the purpose of the new regime is not just to avoid the United Kingdom being in breach of its international treaty obligations, but also to protect domestic competition and investment against the distortive effects of ill-targeted subsidies.  That recognition is confirmed by the list of subsidy control principles in Schedule 1, which includes those listed in the TCA as well as the principle that: “[s]ubsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.”

A further point in relation to intra-UK situations is that a specific prohibition is introduced in cl.18 on subsidies granted on condition that the enterprise in question relocates all or part of its existing economic activities from one area of the UK to another in circumstances in which it would not otherwise have done so.  Subsidy induced relocations are a potentially sensitive issue, but this is a very narrow prohibition applying only where relocation is an express condition of the subsidy – a situation likely to be very rare.  The government may wish to consider whether this clause needs to include the case where relocation is a likely consequence of the subsidy, as well as where it is an express condition.

Cl.4 essentially carries over from the TCA (and ultimately from EU law) the test as to when a tax measure counts as a subsidy.

Public authority

Also worth noting is the definition of “public authority” in cl.6.  This includes any person who exercises function of a public nature but excludes both the UK Parliament and the devolved legislatures.  At first sight this suggests assistance by means of a primary legislative act does not fall within the definition of a subsidy.  However, that is only the case in relation to a UK Act of Parliament, because para 6 of Schedule 3 (Subsidies provided by primary legislation) applies the subsidy control principles to subsidies provided by means of devolved primary legislation as it applies to subsidies given by public authorities (although it is notable that, in contrast to subsidies granted by public authorities, the Competition Appeal Tribunal is to play no role in such cases: it was presumably felt that a subsidy control challenge to devolved legislation was too sensitive a matter to be dealt with other than in the High Court or Court of Session).

The obligations on granting authorities

The central obligations on public authorities are in cl.12 and cl.33, namely to apply the Schedule 1 subsidy control principles to all subsidies apart from exempt ones (see below), not to grant a subsidy unless they consider that those principles are complied with, and to notify subsidies to a public subsidy database. 

In cases where a subsidy is “in relation to energy or the environment” the granting authority must, under cl.13, also apply the “energy and environment principles” set out in Schedule 2 – though, interestingly, cl.51 provides that it need not do so in relation to nuclear energy (though the usual Schedule 1 principles would apply).

The role of the CMA

As far as institutions are concerned, the “independent body” required by the TCA is to be a Subsidy Control Unit under the Competition and Markets Authority (“CMA”).  Under the Bill the CMA’s role is to produce reports pursuant to mandatory or voluntary referrals by public authorities before they give a subsidy or make a subsidy scheme as well as in relation to post award referrals.  The CMA does not make the final decision: that is ultimately for the granting authority, even if the CMA produces a negative report.

Mandatory Referrals (cl.52) are required where a case qualifies as one of “particular interest” – the criteria for which are to be set out in regulations – or pursuant to a call-in direction by the Secretary of State (cl.55).  Following publication of the CMA’s report the Bill imposes a cooling off period of 5 working days during which the subsidy may not be given or scheme made (cl.54).  However, the public authority can proceed, if it so wishes, against the advice of the CMA: the constraint upon its ability to do so will be whether that exposes it to the risk of judicial review – but there may in principle be cases where a public authority is behaving entirely reasonably in taking a different view to that of the CMA.

Voluntary referrals to the CMA may be made by granting authorities in a case of “interest” (cl.56 – again to be defined by regulations) – though the CMA can refuse such referrals.  It is also possible for the Secretary of State to make a “post-award referral” in cases where it appears that the requirements of the Bill have not been complied with and there is a risk of negative effects on competition or investment within the United Kingdom (cl.60) (oddly, the Secretary of State does not appear to have that power if the possible subsidy only affects foreign countries, though such subsidies could well cause difficulty at international level).

The role 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 (cl.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 – including authorities outside England – to refer subsidies to the CMA.

Judicial review

As for courts, as noted above, the Competition Appeal Tribunal (“CAT”) is given judicial review jurisdiction in relation to subsidy decisions (apart from decisions contained in primary legislation of the devolved or Westminster Parliaments).  It may be noted that the Tribunal would appear from the general wording in cl.70 to have power to look at all grounds that there may be to challenge such a decision, including challenges on grounds of lack of power to make the grant under the legislation under which the relevant authority is acting, or other common law grounds such as procedural irregularity or bias, as well as irrational or legally erroneous application of the subsidy principles. 

In cases where the granting authority takes the view that the measure is not a subsidy at all, or is exempt, then the CAT’s role is likely to be to determine whether the measure falls within the definition of a subsidy or is exempt: since the public authority will typically not have considered the subsidy principles at all in such a case, the finding that it was mistaken in taking the view that the measure was not a subsidy is likely to be determinative. 

In case where the challenge is to the application of the subsidy control principles, interesting questions will include: (a) the extent to which the CAT is generally inclined to scrutinise the granting authority’s reasoning somewhat more closely than it would that of a regulator on the basis that the granting authority is “marking its own homework”; and (b) the extent to which the CAT will scrutinise with particular care cases where the granting authority departs from the approach of the CMA.

Rescue and restructuring subsidies, and prohibited subsidies

Subsidies to “ailing or insolvent” enterprises are provided for at clauses 19 to 26.  The definition in cl. 24 of “ailing or insolvent” is more flexible than under EU State Aid law and potentially more demanding requiring an enterprise to be almost certain to go out of business in the short/medium term, unable to pay its debts as they fall due, or the value of its assets is less than the amount of its liabilities.  However, the details of the definition will be set out in secondary legislation.

Exemptions

Cl.36 of the Bill gives effect, in sterling terms, to the general de minimis thresholds under the TCA specified in Special Drawing Rights (£315,000 and in the case of payments for services of public economic interest £725,000). 

There are further exemptions for national security, financial stability (likely to apply in any repetition of the 2007/08 crisis), and subsidies to compensate for the effect of natural disasters and economic emergencies (such as current Covid subsidies).  One interesting and potentially important exemption is for any subsidy “given in accordance with Article 10 of the Northern Ireland Protocol” (cl.48(2)(a)): that would appear to mean that any subsidy that falls under Article 10 and is permitted under that Article (either by block exemption or individual exemption granted by the Commission) is automatically exempt from UK subsidy control  – a position which is somewhat odd given that such a subsidy could have distortive effects on competition within Great Britain, which is a matter that would not be relevant to the Commission’s assessment under Article 10).

Otherwise, the Bill does not create any “safe harbours” where granting authorities can simply award a subsidy that meets certain criteria without any analysis of its effects and without having to register it on the subsidy database.  There was some demand, in responses to the government’s consultation, for there to be such “safe harbours”.  One possibility is that the government uses its power to create “streamlined” “subsidy schemes” (cl.10) to create what is in effect a safe harbour for subsidies that the government wishes to encourage.  Otherwise, public authorities will have to get used to the fact that grants of subsidy above de minimis level are likely to require some analysis of the subsidy control principles as part of the granting process: in reality, the extent to which that analysis is conducted thoroughly and rigorously is likely to depend on the likelihood of challenge by an interested party or call-in by the Secretary of State.

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