Out with the old and in with the new…Brexit, the new subsidy control measures, and what they mean for your charity.

It seems longer than a few weeks ago that we were told issues around fishing and state aid were the remaining sticking points to any post Brexit transition period free trade agreement between the UK and the EU. Well, those issues having been unlocked through the EU/UK Trade and Cooperation Agreement (“TCA”), the rules governing state aid between the UK and EU member states were replaced on 31 December 2020 by “subsidy control measures”. This article aims to provide an overview of the subsidy control measures brought into effect by the TCA on 31 December 2020 and what this means for charities, particularly those which are publicly funded, or those which disburse public funding (e.g. through grants).

Out with the old…state aid rules (pre 31 December 2020) – Article 107 - 109 of the Treaty of the Functioning of the European Union (“TFEU”)

Under the previous regime applicable in the UK (and which continues to apply across the EU), the TFEU prohibits public authorities within member states from granting “state aid” that may distort competition and trade in the EU.

State aid, in this sense, refers to any advantage granted by public authorities through state resources, on a selective basis, to any organisations that could potentially distort competition and trade in the EU.

‘Advantage’ is broad and can include anything which an organisation engaged in economic activity could not get on the open market. This includes grants, loans, tax breaks, and the use or sale of a state asset for free or at less than market price.

The previous regime applicable in the UK could therefore capture public funding given to UK charities and other non-profit making bodies.

What did the old regime require?

Where the above applied, the ‘giving’ body had to seek approval from the European Commission to proceed unless the proposed aid fell within an exemption which was automatically deemed compatible with the Treaty and therefore could be lawfully given. The exemptions included:

1. De minimis aid - being aid equal to not more than EUR 200,000 given to an organisation over any three year period; and
2. The General Block Exemptions - being 26 measures which can be used to provide lawful state aid without going through the normal notification and approval processes with the European Commission.

Clawback provisions under the TFEU

Under Article 108 of the TFEU, if following formal investigation, the European Commission declares a state aid measure as being incompatible with the internal market, it will require the member state who gave the aid to recover it from the beneficiary (this is called a recovery decision). Recovery decisions can be immensely detrimental to the beneficiary who received the aid, especially where a charity / non-profit organisation has already spent the state aid (which could run into the millions of pounds) on the project for which it was given in the first place.

…and in with the new. Subsidy control measures (post 31 December 2020)

The TCA sets our measures between the UK and the EU which are designed to replace the state aid rules referred to above. The measures apply to a “subsidy”. Many of the TFEU provisions on state aid previously applicable in the UK are mirrored in the TCA, including a ‘subsidy’ (TCA Art 3.1) being akin to ‘state aid’ and defined as follows:

• firstly, a subsidy must constitute a financial (or in kind) contribution such as a grant, loan or guarantee; 

• secondly, the financial contribution must be provided by a ‘public authority’, including, but not limited to, central, devolved, regional or local government (this includes grant giving bodies that are funded by the public purse, including lottery funds);

• thirdly, the award of the subsidy must be specific in so far as to confer a benefit on the recipient in the sense of an economic advantage over others that is not available on market terms; and

• finally, the subsidy must cause, or could cause, a distortion in or harm to competition, trade or investment between the EU and the UK.

This means that, as under the state aid rules, public funding given to UK charities and other non-profit making bodies could be caught by the subsidy control measures.

Under the TCA, the de minimis amount of subsidy that can be given to any one organisation over a three year period (and therefore which falls outside of the subsidy control measures) has increased significantly from EUR 200,000 (under the state aid rules), to around EUR 380,000 (under the subsidy control measures).

The Principles

Under the new rules, the TCA obliges the UK to establish a subsidy control system that ensures that the granting of a subsidy (as defined above) respects all of the following principles in order to ensure the overriding aim[1]; namely that a subsidy does not, or could not, have a material effect on trade or investment between the UK and the EU (“Principles”):

1. Principle 1: subsidies pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale such as social difficulties or distributional concerns (“the objective”);

1. Principle 2: subsidies are proportionate and limited to what is necessary to achieve the objective;

1. Principle 3: subsidies are designed to bring about a change of economic behaviour of the beneficiary that is conducive to achieving the objective and that would not be achieved in the absence of subsidies being provided;

1. Principle 4: subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy;

1. Principle 5: subsidies are an appropriate policy instrument to achieve a public policy objective and that objective cannot be achieved through other less distortive means; and

1. Principle 6: subsidies’ positive contributions to achieving the objective outweigh any negative effects, in particular the negative effects on trade or investment between the UK and the EU.

Guidance and assistance for grant giving bodies

The government has published technical guidance on the new scheme, which under section 48 of the UK Internal Market Act 2020, public authorities are required to have regard to when providing subsidies. We believe this places more onus on publicly funded grant givers in assessing the subsidy control position of the grants they are making.

A checklist for the Principles set out above is annexed to the government's technical guidance at Annex 2. It is suggested that public authorities should complete this checklist for every subsidy they make, to help them determine whether an individual subsidy respects these Principles.

Keeping a record of subsidies for transparency and review

For transparency and reviewing purposes, there is new emphasis on recording decisions with regards to subsidies, and the Department for Business, Energy and Industrial Strategy (BEIS) is in the process of developing a transparency database where public authorities will be asked to register information on the subsidies they award. This means that it will be important for publicly funded grant givers to record each grant made from a subsidy control point of view (which the completion of the checklists referred to above will assist with). The information, which should be recorded, includes:

1. the legal basis and policy objective or purpose of the subsidy;

1. the name of the recipient of the subsidy when available;

1. the date of the grant of the subsidy, the duration of the subsidy and any other time limits attached to the subsidy; and

1. the amount of the subsidy or the amount budgeted for the subsidy.

Grant givers should record this information for each grant made so they have the information readily available for when the transparency database is operational. In grant programme guidance grant givers should make sure that grantees are aware that they will undertake this data collection activity, and may publicise the information referred to above to comply with subsidy control obligations.

Enforcing the subsidy control measures: What if a subsidy does not meet the Principles?

It has been left to the UK and the EU to decide themselves how best to implement the new schemes in national law and, at this stage, not much additional information is available, leaving much of the detail as to how this will work in practice, to be determined..

The TCA requires the UK to establish ‘an operationally independent authority or body with an appropriate role’ as part of the new regime. Whilst it was previously thought this would be the Competition and Markets Authority there is now no indication from the government as to who that authority or body should be. To add to the uncertainty, there is currently no requirement in the TCA for the relevant authority or body to have specific enforcement powers, including any specific powers to make recovery orders – similar to the powers of the European Commission under the state aid rules. The government has committed to consulting on the new UK domestic subsidy control regime, so no doubt there will be much more to follow on this front over the coming months.

Without recovery orders, what are the likely routes to challenging a subsidy?

In the alternative to recovery orders, the principal remedy provided under the TCA is to ensure that the UK’s ‘courts or tribunals’ are competent to do the following:

(i) review subsidy decisions by granting authorities;

(ii) impose remedies that are effective including suspension and prohibition; and

(iii) award damages.

In light of the above, the position appears to be that any legal challenge to a subsidy should be pursued by way of judicial review proceedings. This may change when formal proposals are advanced for the new domestic UK subsidy control regime (which may include the establishment of an authority or body with specific recovery powers).

World Trade Organisation and Free Trade Agreements

In addition to the subsidy control measures set out above, UK public authorities are also required to comply with similar obligations under various World Trade Organisation Agreements (which apply to goods) and some Free Trade Agreements (such as that with Japan). Having established a level of independence outside of the EU, as the UK seeks to complete more Free Trade Agreements, and/or to join more trading blocs, around the world, it will be interesting to see what impact they will have on the ability of UK public authorities to support particularly industries, sectors and organisations (including charities) operating within the UK.