The new regime is expected to come into force in Autumn 2022. Until then, public authorities are required to continue to follow the existing rules on subsidy control (as set out in the UK-EU Trade and Cooperation Agreement (the TCA), the World Trade Organisation rules on subsidies, the Northern Ireland Protocol and free trade agreements with other countries).
The BEIS press release announcing the Subsidy Control Act states that the act will “allow public authorities to deliver subsidies where they are needed without facing excessive red tape, creating a level playing field for subsidies across the entire country”.
In this briefing we look at 4 key elements of the Subsidy Control regime:
- Subsidy control principles;
- Transparency; and
- Referrals and enforcement.
Overall, housing providers (and other organisations that have in the past routinely received subsidy from public bodies) will be glad to hear that the arrangements have a feeling of familiarity about them.
Established concepts, such as the market economy investor and services of public economic interest are specifically recognised in the Act. Moreover, many of the provisions follow the transitional arrangements that have been in place since Brexit and with which public bodies (and recipients of subsidy) have become accustomed to operate within.
That said, only time will tell how confident public bodies are to self-determine their compliance with the subsidy principles. Where they aren’t, we can expect to see voluntary referrals to the Competition and Markets Authority (CMA) for determination. That process is likely to be a protracted affair.
In any event, recipients of subsidy should not be surprised to see the onus placed on them to demonstrate how the subsidy they are seeking complies with the principles.
- Subsidy Control Principles
Schedule 1 of the Subsidy Control Act sets out the 7 Subsidy Control Principles. A public authority must not give a subsidy unless it is of the view that the subsidy is consistent with the Principles. The 7 Principles build on the 6 principles established under the TCA with the addition of a requirement that Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.
The duty to ensure that the Principles are properly applied will sit with the public body providing the subsidy. That said, as mentioned above, recipients are likely to find that public bodies seek to place the onus on the recipient to demonstrate that the subsidy sought is compatible with the Principles.
The Government has published Illustrative Guidance (which will develop as the CMA opines on subsidy schemes that are referred to it) on the practical application of the Principles. The Guidance includes the following 4 steps:
- Identifying the policy objective, ensuring it addresses a market failure or equity concern, and determining whether a subsidy is the right tool to use
- Ensuring that the subsidy is designed to create the right incentives for the beneficiary and bring about a change
- Considering the distortive impacts that the subsidy may have and keeping them as low as possible
- Carrying out a final assessment against the subsidy control principles and making any changes necessary to achieve compliance with these.
The Act sets out certain cases in which the subsidy control requirements do not apply to the giving of a subsidy. In these cases, there is no obligation on the public body to establish that the subsidy is compatible with the Principles.
These include subsidy that constitutes “minimal financial assistance” (similar to the concept of de minimis under the EU State Aid regime) and /or services of public economic interest assistance (similar to Services of General Economic Interest). It is worth noting that minimal financial assistance and services of public economic interest assistance of more than £100,000 will still fall within the transparency requirements (see further below).
The subsidy control requirements do not apply to minimal financial assistance given to an enterprise if the total amount of minimal assistance given to the enterprise does not exceed £315,000 over the elapsed part of the current financial year and the 2 preceding financial years. In order to comply, the public authority must give the entity recipient receiving the subsidy a written statement explaining that the subsidy is given by way of minimal financial assistance and requesting written confirmation from the enterprise that the £315,000 will not be exceeded by the enterprise receiving the assistance.
The subsidy control requirements do not apply to subsidy that constitutes services of public economic interest (SPEI) given to an enterprise if the total amount of SPEI assistance given to the enterprise does not exceed £725,000 over the elapsed part of the current financial year and the 2 preceding financial years. Similar to minimal financial assistance above, the public authority must give the enterprise receiving the subsidy a written statement explaining that the subsidy is given by way of SPEI assistance and requesting written confirmation from the enterprise that the £725,000 will not be exceeded by the enterprise receiving the assistance. In addition, the public authority must be satisfied that the amount of subsidy is limited to what is necessary to deliver the SPEI services having regard to (i) costs in delivering the SPEI services and (ii) reasonable profits to be made in doing so. SPEI assistance must be given in accordance with a written contract or other written legally enforceable arrangement.
In practice, the social housing assistance that housing providers receive from Homes England and the GLA will generally be outside this exemption given the scale of funding generally involved. Funding in this form is likely to form part of a “subsidy scheme” that will have been designed in compliance with the Principles.
Likewise, grants for central Government-backed decarbonisation projects will be brought forward under the “subsidy scheme” provisions in the Act.
Public authorities making subsidies must also comply with Chapter 3: Transparency. The requirement to enter subsidies into the transparency database will apply to all subsidies over £100,000 and to subsidy schemes. The public authority must ensure that the subsidy is entered into the database within the required timescales (3 months in most cases) and maintained on the database for 6 years or the duration of the subsidy/subsidy scheme (whichever is longer). Given the relatively low transparency threshold, the number of entries in the database is likely to be significant and may prove burdensome for public bodies to maintain.
The intention of the transparency database is to afford potentially interested parties awareness of public authorities subsidy decisions. An interested party who is aggrieved by a subsidy decision may then apply to the Competition Appeal Tribunal to review the subsidy decision. Any such application must be within the timescales required by the Act (generally 1 month from entry into the database). The Tribunal has the power to dismiss the application or grant relief. Such relief may include a requirement that the public authority reconsider its subsidy decision and make a new decision or the making of a recovery order essentially requiring the public authority clawback the subsidiary from the beneficiary.
- Referrals and Enforcement
Public authorities must refer subsidies/subsidy schemes of particular interest, or where directed by the Secretary of State to the CMA for reporting (mandatory referrals). In such circumstances the CMA must publish a report on the proposed subsidy/subsidy scheme.
In addition, public authorities may refer subsidies/subsidy schemes of interest to the CMA (voluntary referrals). Following a voluntary referral the CMA must decide whether to prepare a report. The Act sets out the timescales for the reporting process including a cooling off period in respect of mandatory referrals before which the public authority may give the subsidy/make the subsidy scheme.
In addition to reporting on referrals, the CMA is responsible for reviewing and reporting on the effectiveness of the Act. The first 2 reviews will take place approximately 3 and 6 years after the commencement date of the Act with all subsequent reviews at 5 year intervals.
In advance of the regime coming into force, the Government plans to publish further guidance to support public bodies and will bring forward secondary legislation (for example, regulations that will define what is to constitute a “subsidy scheme of interest”). We will provide further commentary in due course.