Flexibility vs certainty – a calculated trade-off?
The Bill provides a UK system that will regulate when and how a public body can provide financial assistance (subsidy) to businesses, and how non-compliance with the rules can be enforced. The basic building blocks of the system (what counts as a subsidy, who can give/receive a subsidy etc) are familiar from the EU rules, although some terminology is different (“enterprise” instead of “undertaking”, for example). However, the UK is proposing to put in place a regime that as a whole looks different and will operate differently to the EU rules – a regime that the UK Government has said is a ‘clear departure’ from the ‘burdensome red tape’ of the EU State aid rules.
The main distinguishing feature of the regime is that the UK has opted not to follow the EU pre-approval model, meaning that there is no pre-notification system for subsidies. While this may facilitate “flexibility” and “nimbleness”, public bodies and domestic businesses might well value the certainty that derives from upfront confirmation of the lawfulness of proposed arrangements (at least those raising potential subsidy issues).
Also, the Bill does not answer many of the uncertainties as to how the current skeleton regime should be applied and parts of the Bill are (intentionally?) vague and some key concepts are yet to be defined. As BEIS stated in its final impact assessment on the Bill “There are considerable unknowns – because key features of the regime will be defined later in secondary legislation or statutory guidance”.
What does the new regime look like?
Before giving a subsidy an authority has to assess its compliance against certain subsidy control principles. The Bill has added a seventh main principle, covering financial assistance which has or is capable of having an effect on competition or investment within the UK. The new regime will therefore also catch measures that only affect UK competition or investment, something that was not provided for in the EU State aid rules.
Certain types of subsidy are prohibited, including those given on condition that an enterprise relocates to another area of the UK where the relocation would not have happened without the subsidy. No doubt this will be a key issue for the devolved nations and for the Government’s levelling-up agenda to grapple with.
Transparency requirements mean that UK subsidies will be opened up to greater potential scrutiny than before. All subsidies must be published and maintained on a central database accessible to the public free of charge, unless an exemption applies. All modifications to a subsidy must also be recorded unless the modification is ‘permitted’, a concept that includes an increase of up to 25% of the original budget.
There are some exemptions, for example ‘minimal financial assistance’ (equivalent to de minimis aid under the State aid rules) not exceeding £315,000 over the relevant period and natural disasters and other exceptional requirements. There is also provision for the Government to make ‘streamlined subsidy schemes’ to provide for lower-risk subsidies to be given more quickly and easily without needing to be assessed for compliance.
How will the new regime be enforced?
Authorities must refer proposed subsidies of ‘particular interest’ to the Competition and Markets Authority’s (CMA) new ‘Subsidy Advice Unit’ but can decide whether or not to refer a proposed ‘subsidy of interest’. Both concepts are yet to be defined in further regulations but the UK Government overview published with the Bill explains that these are subsidies that are more likely to cause negative effects of which the Government anticipates only a very small number.
The CMA’s function is purely advisory. It cannot take enforcement action or launch an own-initiative investigation. Its reports on subsidies that are referred to it will be non-binding and limited to evaluating the authority’s assessment of a subsidy’s compliance with the rules and taking into account any effects on competition or investment within the UK. The report may also include advice on how the authority’s assessment might be improved and how the subsidy could be modified to ensure compliance. The CMA must report on mandatory referrals but can decide to prepare a report on subsidies voluntarily referred to it.
In certain cases the Secretary of State can call-in a proposed subsidy and direct the relevant authority to refer the subsidy to the CMA. The Secretary of State can also refer to the CMA a subsidy which has already been given.
‘Interested parties’ can apply to the Competition Appeal Tribunal (CAT) for judicial review of a subsidy decision. An interested party is anyone whose interests may be affected by the subsidy (which could include an aggrieved competitor of the recipient), or the Secretary of State. The CAT can also order recovery of an unlawful subsidy (together with interest).
An interested party can make a “pre-action information request” to an authority for information about a subsidy. The authority has 28 days to respond, and must provide information to enable, or assist in, that party determining whether the subsidy is compliant.
Authorities will have a quasi-contractual right to recover a subsidy from the beneficiary if it is used for a purpose other than the one for which it was given.
The UK has used the flexibility under the TCA’s subsidy provisions to establish its own independent, domestic subsidy regime free from the oversight of the EU courts. However, the UK and EU regimes are still bound together by agreed principles and procedural mechanisms which, in practice, may limit the UK’s absolute discretion on subsidy matters.
There are numerous gaps in the regime that need to be fleshed out before we know its final overall shape. That will not happen in the final legislation alone. The Bill provides for further regulation on, for example, the CMA’s information-gathering powers, the content and form of the CMA’s reports on referred subsidies, the information to be included on the subsidy database and when a subsidy will be ‘of interest’ or of ‘particular interest’. The Bill also provides for the Secretary of State to issue guidance about the practical application of the subsidy control principles and requirements.
In terms of the ‘on the ground’ impact of the new regime, there will be a greater degree of visibility of subsidies than we have been used to, including the potentially non-compliant ones. It is possible that we could see more subsidy control challenges in the UK than we did under the State aid rules. A bespoke UK regime looks and feels closer to home than the more remote-seeming EU state aid rules and offers UK companies another way of keeping a check on their competitors, albeit the time scale for applying to the CAT for a review of a subsidy is short and a challenge will carry the usual litigation risk.
Although changes can still be made as the Bill makes its way through the Parliamentary process it gives a clearer picture of the bespoke regime that the UK Government is seeking to have in place by early 2022. Get in touch with us if you’d like to discuss the published Bill and the impact some of the proposals might have on your business. We have a deep understanding of the regulatory landscape as well as extensive experience working inside government and advising on this Government’s policy priorities. Let us help you to engage with the Government throughout the drafting and debating of the Bill to help ensure the competitiveness of UK industry.
Authored by Kathrine Eddon and Matt Giles.