Introduction
State subsidy may be provided to a business by an outright transaction such a cash grant or transfer of State assets at undervalue. It can also be provided by waiver of a debt owed to Government such as writing off a loan or providing a tax break.
Common tax breaks we see in operation are to incentivise inward investment into particular geographical areas such as Freeports and Investment Zones. They may also benefit a certain class or type of business to encourage a particular activity such as research and development using R&D Tax Credits (RTC) or angel investment using the Enterprise Investment Scheme (EIS).
A tax break is generally drafted as an exception to a general tax measure, for instance enhanced capital allowances against corporation tax. For Subsidy Control the corporation tax regime, including normal capital allowances, is regarded as the “normal tax regime” and the enhanced capital allowance as the “exception”. If the exception is within the internal objective and features of the normal tax regime (such as the tax base, the taxable person, the taxable event, and the tax rate) such as with ordinary capital allowances then it will not be a subsidy.
An exception is therefore only a subsidy if it isn’t within the normal tax regime and benefits some businesses rather than their competitors.
Tax Reliefs in Freeports and Investment Zones
These include enhanced capital allowances, exemption from business rates, relief from SDLT and NICs. They also include deferrals and reliefs from customs duty.
They are exceptions to their normal taxing regimes of corporation tax, income tax, land transaction tax and customs duties and outside their taxing objectives and features. These exceptions are introduced in their current form well after their normal taxing regimes were initially designed and so unlikely to be regarded as within their objectives and features.
Additionally the exceptions benefit a business in a designated area, as opposed to a competitor not located in the area, and hence provide a particular business with a specific advantage in not paying the tax it would otherwise have to bear. Geographical location was not within the objective of the normal tax regime.
It is therefore reasonable to treat these tax breaks as exceptions which are subsidy to businesses locating in the Investment Zone or Freeport.
English Freeports precede the introduction of the Subsidy Control Act and hence are regarded as “Legacy Schemes” covered by the Trade and Cooperation Agreement between the UK and EU. These contain the parent Subsidy Control provisions to the Subsidy Control Act but without some of its procedural requirements.
Scottish and Welsh Freeports, together with Investment Zones however were introduced more recently and are fully covered by the Act. They are now provided within schemes which have been reviewed by the Competition and Markets Authority. This means that as long as the terms of each scheme are followed, there is no need for a subsidy awarding public authority to review the reasonableness of the subsidy under the Act.
EIS and RTC
RTC provides a direct benefit to a company by incentivising it to undertake R&D projects with higher than normal deductions and loss provisions. Its normal taxing regime is therefore corporation tax. EIS on the other hand provides an indirect benefit to a company by incentivising individual angels to invest in it through income tax reliefs (to the angel). Its normal taxing regime is therefore income tax.
Both reliefs are introduced after their normal taxing regimes were initially designed, and outside their taxing objective, and as a result reasonably regarded as exceptions. Additionally they are selective in implementation as they provide advantages to specific businesses, rather than their competitors. This specificity is no longer geographical in nature, but based on the status of the business and the nature of its activity, and again not envisaged by the normal taxing regime.
It is therefore reasonable to conclude these exceptions involve subsidy to the businesses benefitting from them. Again these are not new schemes and existed before the introduction of Subsidy Control. However it would be difficult to argue these are simply permitted modifications of a legacy scheme (and hence outside Subsidy Control). The EIS has been extended by a substantial period and the RTC has essentially been redesigned. It is therefore prudent to take the view that these are fresh subsidies to be brought within Subsidy Control analysis.
It could additionally be argued that these exceptions are introduced through primary legislation imposing a duty on competent tax authorities to automatically provide the benefit if the detailed requirements in the legislation are met. Technically this would be taken out of Subsidy Control overview as it would be expected that Subsidy Control would be addressed at the time the sponsor tabled the legislation. There is no evidence that this has happened and the EIS extension was introduced initially as a Statutory Instrument, as opposed to Act of Parliament. Again, in the absence of guidance to the contrary, the prudent view is to apply Subsidy Control to these tax breaks to each company benefitted.
Environmental Taxes
Examples of normal taxing regimes here include Climate Change Levy, Landfill Tax, Aggregates Levy and Plastic Packaging Tax. The objective is to incentivise businesses in using renewable fuels, reducing emissions, recycling waste and reducing single use plastics.
Many of the exceptions to these taxes are provided for in the normal taxing regimes and hence it could be argued that they are within the internal objective and features of the regime and hence not involving subsidy.
For instance the Aggregates Levy was introduced to encourage use of recycled aggregates in construction and therefore reduce environmental damage from fresh extraction of aggregates. Certain materials and processes are excepted from the levy as they produce aggregate as a by-product. These exceptions are part of the tax base of the normal taxing regime because they do not damage the environment by fresh extraction. However an attempt to exclude shale mining from the tax base is being withdrawn as it would not have an environmental objective and would therefore likely to be regarded as a subsidy to shale miners.
What happens when a subsidy does arise
Should a subsidy arise then the awarding authority should show that it is reasonable by consideration of the Subsidy Control Principles (and in some cases for environmental tax breaks the Energy and Environmental Principles as well), unless an exemption from doing so applies.
Relevant exemptions may include Minimal Financial Assistance, Service of Public Economic Interest Assistance or Streamlined Subsidy Schemes. They may also include schemes which have been created and, where necessary, reviewed by the Competition and Markets Authority (as with some of the Freeports and Innovation Zones above).
Failure to do so could result in the benefit needing to be refunded by the beneficiary with interest. It should be noted that English Freeports still require consideration of parenting provisions of the Subsidy Control Act included in the Trade and Cooperation Agreement with the EU.
The amount of the subsidy is measured as the present value of the actual tax liability of the business concerned, in comparison with what tax the business would otherwise have paid under the normal tax regime. This calculation is based on standard accounting principles but is separate to (and should not be confused with) the deferred tax and timing difference provisions made within the normal tax regime.
It is important in terms of transparency and publication requirements that the date of the subsidy is ascertained. This is often the date at which the tax return claiming the benefit is submitted to HMRC (for example RTC). However in other cases it may be when the awarding authority enters into a formal agreement with the beneficiary (for instance waiver of business rates). This is important as the date of award of the tax break may precede actual receipt of the benefit by several months, particularly if the declaration supporting the claim is investigated by HMRC.
International aspects
The Subsidy Control regime practised in the EU (State aid) is regularly applied towards a tax harmonisation objective between taxing jurisdictions in the EU. The OECD also pursues this objective through its model tax treaty convention. The idea is to restrict tax haven operations, whether within a haven itself or through haven type exceptions from a normal industrial tax regime. It is unclear whether UK Subsidy Control is to play a role in this, and it would very much depend on how effectively the domestic regime on treatment of tax breaks evolves.
Conclusion
Tax breaks are an increasingly common inward investment incentive used by UK Government. Sometimes the tax break is part of the normal tax regime imposing the tax. An example would be corporation tax and ordinary capital allowances. Such exceptions are not regarded as subsidies to businesses benefitting from them. However other tax breaks, like enhanced capital allowances, can be designed outside of the objectives of the normal tax regime (often at a later date) and would therefore not be regarded as part of it. Such exceptions would constitute subsidy if they benefit some businesses and not their competitors.
Using this analysis, a number of tax breaks commonly seen today are likely to involve subsidy, such as EIS, RTC, Freeport and Investment Zone tax reliefs and some reliefs from environmental taxes. Where a tax break is evidently available to one business and not its competitor, and the reason for the different treatment is extraneous to the objective of the normal taxing regime, the prudent view is to apply Subsidy Control to it.
This article covers an area which is complex and hence not a substitute for detailed legal and accountancy advice. For further information or guidance please contact the author.
For further information, please contact:
Jay Mehta, Hill Dickinson
jay.mehta@hilldickinson.com
