Background
Following the UK’s exit from European Union, the EU state aid rules no longer apply directly to subsidies granted in the UK. The UK-EU Trade and Co-operation Agreement (UK-EU TCA) imposes certain restrictions on each party in the grant of subsidies, as do the UK’s free trade agreements (FTAs) with other countries and the WTO’s rules on subsidies. However, these obligations potentially presented difficulties for parts of government considering subsidies, as they are contained in a number of different agreements with differing rules. In February 2021, the government launched a consultation on a new subsidies regime, the results of which have fed into the current proposals.
The Government stated in its announcement on the Bill that the new system will be “designed to be more flexible, agile, and tailored to support business growth and innovation, as well as maintain a competitive free market economy and protect the UK internal market”. The principal difference from the EU state aid regime, which required subsidies to obtain up-front clearance from the European Commission unless they fell within a block exemption, is that the Bill proposes a regime whereby governmental bodies granting subsidies self-assess their proposed subsidy against a set of broad principles, with only certain types of subsidy requiring mandatory advice from the UK Competition and Markets Authority (CMA).
Key points on the Bill
The key points of the proposed new regime are:
1. Definition of subsidies. A ‘subsidy’ is a type of financial assistance which meets the four limb test contained in the Bill; that is, the financial assistance: (a) is given from public resources (directly or indirectly); (b) confers economic advantage on one or more parties; (c) benefits one party over other parties in respect of goods or services; and (d) has an effect on competition in the UK or internationally, or has an effect on investment between the UK and another country.
2. Principles. Public authorities are required to consider seven main principles (set out in schedule 1 to the Bill) and nine additional energy and environment principles (set out in schedule 2 and applying in relation to certain types of subsidy in those sectors) when considering whether to grant a subsidy. Public authorities are not permitted to give subsidies that are contrary to the principles. The principles are fairly high level and include matters such as the benefits of the subsidy outweighing the negatives, and the subsidy being designed to achieve a legitimate policy objective while minimising any negative effects on competition. Save for the principle relating to subsidies which may distort competition within the UK, the other six principles mirror the subsidy principles agreed in the UK-EU TCA.
This approach is a departure from the European state aid regime where subsidies (referred to as ‘state aid’) are presumed unlawful unless de minimis, covered by a block exemption or approved by the Commission in advance.
3. Exemptions from the regime. Certain subsidies will be exempt from the regime, including if they are de minimis or exempt. Exemptions include responses to emergencies like natural disasters, economic emergencies, and national security, among others.
4. Prohibition or requirements of certain subsidies. The subsidies that are prohibited in the Bill (for example, giving unlimited guarantees or assisting firms where there is no credible restructuring plan) are based on the international obligations of the UK (under WTO rules and other FTAs). This is the case except for the prohibition on subsidies that require businesses to relocate from one part of the UK to another as a result of a subsidy, which is intended to ensure regions of the UK do not seek to attract business from another part of the UK by offering subsidies.
5. The CMA’s role. The CMA is responsible for reviewing referrals made by public authorities. This is a new function for the CMA, because the Commission was responsible for state aid matters prior to Brexit. The Bill proposes a new Subsidy Advice Unit within the CMA – this will require additional resources for the CMA. It is proposed that the CMA will consider three types of referral:
a. Mandatory pre-award referral. Public authorities will have to request a report from the CMA on a “subsidy, or subsidy scheme, of particular interest” or a subsidy or scheme which the secretary of state has directed the public authority to refer to the CMA before it is given or made.
b. Voluntary pre-award referral. Public authorities may request a report from the CMA on a “subsidy or scheme of interest”, which will provide them with support for their application of the principles to their proposed subsidy.
Note: “subsidy, or subsidy scheme, of particular interest” and “subsidy or scheme of interest” will be defined by additional regulation, details of which have not yet been published.
c. Post-award referral. The secretary of state may make a post-award referral to the CMA within a period of 20 working days beginning with the day on which the subsidy or scheme was published on the relevant database (or if information about the subsidy or scheme does not need to be published on the database, the date on which the subsidy or scheme was given or made).
6. Enforcement. Interested parties can apply to the Competition Appeal Tribunal (the CAT) to review subsidy decisions. As with the CMA, this is a new function. The CAT’s review of a subsidy decision will be on judicial review grounds and not a full review.
7. Subsidy database. The Bill envisages that the secretary of state will set up a subsidy database for transparency.
What’s next?
The Bill requires parliamentary approval, which is likely to take several months. The government expects the new regime will come into effect in 2022.
In the meantime, we expect there to be a lot of debate, nationally and internationally, on the new Bill and the proposed new legal framework in the UK.
Until the Bill is enacted, the subsidy principles in the UK-EU TCA, WTO rules and FTA provisions will continue to apply. It has been reported that the first legal challenge has been launched in the UK High Court, challenging a grant of tariff-free access to the UK market for certain overseas sugar as breaching the principles contained in the UK-EU TCA.
Client Alert 2021-189
