New UK Subsidy Control Rules Consultation Closes March 31, 2021

February 11, 2021, Covington Alert

On February 3, 2021, the UK Government’s Department for Business, Energy & Industrial Strategy announced plans to consult on the creation of a new national subsidy control system. This is an important Consultation as State Aid Rules were one of the three final issues that held up the agreement of the EU-UK Trade and Cooperation Agreement (TCA).

In this alert, we set out background to the Consultation and highlight the key sections of note.

The final version of the TCA defines a ‘subsidy’ using a four-part test, specifying that any UK subsidy should avoid a significant negative effect on trade and investment between the UK and the EU. The TCA also require the UK to ‘establish or maintain an operationally independent authority or body with an appropriate role in its subsidy control regime.’

One of the reasons that the new Regime was so contentious is that the UK Government views an effective Subsidy Control Regime as fundamental to delivering on its Election Campaign and Manifesto commitments to meet public policy goals that would not be met otherwise. These goals include levelling up economic growth in the regions, tackling climate change, and supporting the UK’s post-pandemic economic recovery. In support of this objective, the Government seeks views on whether there should be tailored provisions for subsidies for the development of disadvantaged areas, R&D, transport and skills investment.

In its introduction to the Consultation, the Government stresses that the new Regime, whilst encouraging local authorities and devolved administrations to take localized decisions, must avoid subsidy races which might distort competition between the UK nations. Equally, the Government is clear that its intention is to create a light touch approach to low-risk or low-value subsidies on the basis that the risk they distort the market is limited.

The Government is also clear that it does not seek a return to ‘a command and control system of economic management’; that it will not use a new Subsidy Control regime to prop up failing businesses; and that any new Regime will prohibit particularly contentious subsidies – like export and local content subsidies. Instead, the Government views the potential new Subsidy Control Regime as a means of encouraging a dynamic, and outward-looking economy through offering flexible and tailored financial support to incentivize social benefits, research and support start-ups, small businesses and new industries. The Government is clear that unless one of those aims is achieved, a subsidy is unlikely to be granted.

The proposed Subsidy Control Regime leaves open a number of practical and technical legal considerations that will require further clarity as the regime develops.

The Consultation consists of 42 questions across a range of areas. The key sections are summarized below:

1. The Government seeks views on whether its four key goals for the Subsidy Control Regime are correct:

• It must facilitate strategic interventions to support government priorities.
• It must take account of the economic needs of the UK’s individual nations.
• It must protect the UK’s market economy.
• It must ensure that subsidies in the UK are given in line with the UK’s international commitments including those in the UK-EU TCA.

2. The Government seeks views on whether its definition of a subsidy is adequate:

• The subsidy must constitute a financial contribution provided by a ‘public authority’.
• The subsidy must confer a benefit which would not be available under commercial terms.
• The subsidy must be specific to an enterprise, sector, industry, or region.
• The subsidy has, or could have, a harmful or distortive effect on trade or investment.

3. The Consultation seeks views on the proposal that there should be a number of exemptions to ensure that the lowest risk and most time-critical subsidies can proceed quickly. Proposed exemptions include:

• Low value subsidies (325,000 Special Drawing Rights (SDR), approximately £340,000 and below), on the basis they are rarely distortional.
• Exceptional circumstances relief (compensation for drought, flood, severe storms or wildfire or other exceptional non-economic occurrences such as compensating businesses for the immediate economic impact of a pandemic).
• Temporary subsidies to address a national or global economic emergency.
• Services of Public Economic Interest (SPEI). Examples include social housing or rural public transport services, subject to a potential ceiling of 750,000 SDR (approximately £790,000) over a three-year period.

4.  The Government seeks views on whether it is correct to prohibit certain forms of subsidy.  Those categories include:

• Export subsidies, which are conditional on the exporting performance of the recipient.
• Subsidies contingent upon the use of domestic over imported goods or services.
• Unlimited state guarantees to enterprises.
• Subsidies granted to “ailing or insolvent enterprises” (defined as enterprises highly likely to fail in the short to medium term in the absence of subsidy), where there is no credible restructuring plan to restore the business in question to long-term profitability.

5. The Government seeks views on whether it should place conditions on certain subsidies:

• Restructuring subsidies for financial institutions may only be allowed in specific circumstances to ensure the continued stability of the financial system.
• Subsidies granted to an air carrier for the operation of routes must meet a public interest test.
• Subsidies granted in the context of large cross-border or international cooperation projects need to demonstrate societal benefit in another country, beyond the UK.

6. Finally, the Government seeks views on the powers and duties of the enforcement authority, in particular:

• Whether the authority should be responsible for explaining the regulatory framework to public and private bodies and should be responsible for updating and maintaining any relevant guidance.
• Whether the authority should focus on large scale issues, for example through scrutinizing the operation and effectiveness of the system ‘as a whole’.
• Whether the authority should have a role in providing advice on individual subsidy awards or schemes before they are awarded.
• Whether the authority should provide a review of certain subsidy awards, for example, following a complaint.
• Whether the authority should be given powers to enforce elements of the regime and take action against unlawful or improperly granted subsidies.

The Consultation, closes on March 31, 2021. Our UK Public Policy and Competition teams work together seamlessly to help clients respond to UK Consultations. Contact Thomas Reilly and James Marshall for more information.