Public authorities must prepare as the new post-Brexit subsidy control regime in force this autumn proves more heavy-handed than expected.
On 28 April 2022, the UK’s Subsidy Control Bill received Royal Assent, becoming the Subsidy Control Act 2022 (the Act).
Although the UK’s domestic subsidy control regime now has statutory footing, most of the Act has not entered into force, meaning the interim regime based on the UK-EU Trade and Cooperation Agreement (TCA) remains applicable. However, change is coming, and the new regime is expected to be operational during autumn 2022.
While key elements in relation to the operation of the new regime are still to be defined, the new regime appears significantly less ‘light-touch’ than initially anticipated. Public authorities may be required to undertake complex legal and economic assessments before granting subsidies, with scrutiny by the Competition and Markets Authority (CMA) of even relatively low value subsidies.
There is also the potential for significant litigation which may lead to recovery of any subsidy found to have been granted unlawfully. Public authorities and subsidy recipients will need to ensure they devote sufficient resources and time to subsidy control compliance to mitigate risks posed by the new framework.
Overview of the new UK subsidy control regime
We provided a detailed overview of the new UK regime in an earlier blog post. Key features of the act are below.
- Definition of a “subsidy” and consistency with “subsidy control requirements”: The basic assessment framework provided for in the Act comprises two stages: The definition of a “subsidy”, which sets the boundaries of the new regime; and the assessment of consistency with the “subsidy control requirements”, which are intended to ensure the impact of the subsidy is positive and distortions are limited.
- Self-assessment: There is no generally applicable “standstill obligation” and requirement for “pre-approval” of subsidies under the Act. Instead, public authorities are to self-assess the compliance of their proposed subsidies against control requirements. This may involve complex legal and economic assessments.
- Streamlined subsidy schemes: The Government will create schemes for certain categories of subsidies it considers at low risk of causing market distortions. If a subsidy meets the specific criteria set out in the streamlined scheme, it will be considered consistent with the subsidy control requirements, without the need for any further assessment.
- Advice from the CMA: Certain categories of subsidies are to be referred to the CMA for non-binding advice on their consistency with the subsidy control requirements – so-called “subsidies of interest” (SOI) and “subsidies of particular interest” (SOPI). These are meant to represent the most potentially distortive subsidies and are subject to voluntary referral and mandatory referral respectively.
- Private enforcement in the Competition Appeal Tribunal: Legal challenges to subsidy decisions are to be brought before the CAT, which will have the power to order public authorities to recover subsidies that have been granted unlawfully.
- Transparency: The Act looks to aid private enforcement of the subsidy control rules through strict transparency requirements, obliging public authorities to publish subsidy information on a central transparency database and provide pre-action information to complainants on their assessment of compliance with the subsidy control requirements.
Amendments to the bill
The Subsidy Control Bill was subject to limited amendments on its passage through Parliament. However, the most significant changes are listed below.
- Greater emphasis on subsidies to remedy socio-economic disadvantage: The Act now specifies “addressing local or regional disadvantage” as a ground that would justify a subsidy under the subsidy control requirements. The Act also permits granting subsidies that lead to relocation of existing economic activities within different parts of the UK where it would reduce social or economic disadvantage. In the bill’s original form, relocation subsidies were prohibited altogether.
- Control by Parliament over streamlined subsidy schemes: The Act introduces further control by Parliament over the Government’s creation of streamlined subsidy schemes and provides for either House of Parliament to annul a streamlined subsidy scheme after it is made.
- Tightening of the transparency requirements: Under the Act, the subsidy value threshold for publishing subsidy information has been reduced from £500,000 to £100,000, while the deadline for publication has been reduced from six months of the decision to grant a subsidy to three months. As a result, information will have to be published in relation to more subsidies and with greater speed. This may have the effect of stimulating more private litigation by complainants who rely on the publication of subsidy information.
- Limitation of the exemptions for nuclear energy: Under the Bill, subsidies in relation to nuclear energy were to be exempted both from the CMA referral process and from the additional subsidy control requirements applicable to energy subsidies. Under the Act, while the exemption from the additional subsidy control requirements has been maintained, the exemption from the CMA referral process has been removed. Given the financial value of such subsidies and the sensitivity of the energy sector, it is expected that the great majority of such subsidies will need to be referred to the CMA.
Although the Act has received Royal Assent, most of it has not yet entered into force, with the interim regime based on the UK-EU TCA still applicable. The Government has indicated the new domestic regime will become operational during autumn 2022, once the relevant legislation and guidelines completing the framework are adopted. These include:
- Guidance on the application of the subsidy control requirements: It is expected the Government will issue extensive guidance on the application of the subsidy control requirements to better enable public authorities to self-assess compliance of their proposed subsidies with the new regime and to prepare referrals to the CMA.
- Definition of SOI and SOPI that are to be referred to the CMA: The Government is consulting on the categories of subsidies to be referred to the CMA and will adopt regulations defining them. As we explained in an earlier blog post, the Government has proposed defining these categories based on subsidy value thresholds set at relatively low levels. For SOPI which are subject to mandatory referral, the general threshold would be £10 million, with a lower threshold of only £5 million in certain sensitive sectors.
- Guidance on public authorities’ duty to provide pre-action information: It is expected the Government will issue guidance setting out details in relation to the content of the pre-action information public authorities are required to provide complainants upon request. The composition of this pre-action information will be fundamental to effective private enforcement, as it will effectively represent the “decision” that would be challenged. It may also inform the extent to which public authorities seek to evidence and substantiate their decision-making in relation to granting subsidies.
More interventionist than expected
While the grant of royal assent to the Act represents an important landmark in the establishment of the UK’s new subsidy control regime, key elements remain undefined and will be clarified only in the coming months.
Chief among them is the definition of the categories of subsidies to be referred to the CMA for evaluation. While the CMA’s evaluation report formally is advisory only and non-binding, it is possible the referral procedure may become akin to an ex-ante pre-approval process. This is because the granting of subsidies which deviate from the CMA’s findings would leave those subsidies vulnerable to being overturned should there be an appeal.
The scope of the CMA referral jurisdiction may also have an impact on the nature of litigation under the new regime as, in practice, it will be considerably more challenging to overturn a subsidy decision supported by a positive CMA evaluation. Indeed, the Government may envisage using the additional scrutiny and evaluation of the CMA referral process as a shield against possible complaints, including those raised by other countries, as subsidies have been a major source of international trade disputes.
One thing does appear likely: the new regime will be significantly less ‘light-touch’ than initially anticipated. The new subsidy control regime looks set to become a key part of the regulatory framework in the UK and a major consideration in many transactions and other commercial arrangements involving public authorities.
For further information, please contact:
Tim Briggs, Partner, Herbert Smith Freehills