The Subsidy Control Bill - potential impacts for grant makers…and recipients

This article aims to summarise the most important parts of the Subsidy Control Bill (the “Bill”) following its publication on 30 June 2021.

Following the UK’s departure from the EU, the EU state aid regime ceased to apply to the UK and the UK became subject to subsidy control commitments set out in the UK-EU Trade and Cooperation Agreement (“TCA”) and through its membership of the World Trade Organisation (“WTO”). The Bill itself largely follows the structure of the subsidy control regime found in the TCA, as it aims to satisfy the UK’s international obligations. However, it does include some notable differences that are summarised below.

The Bill was introduced into Parliament at the end of June with the intention that it is to be introduced into law in the Spring of 2022. Further guidance is expected to be published before its introduction that we hope will clarify how it will operate in practice, particularly for grant making organisations that are largely or wholly funded by public money.

Definition of “Subsidy”

The Bill’s definition of “subsidy” (i.e. what constitutes financial assistance which is caught by the regime) follows the structure that can be found in the TCA, with one significant and important difference. In order for financial assistance to be regarded as a subsidy, it must satisfy the four parts of section 2 of the Bill. That is that the financial assistance:

1 - Is given, directly or indirectly, from public resources by a public authority (see below);

2- Confers an economic advantage on one or more enterprises (see below). The benefit to the enterprise must be on terms that are more favourable than those available on the market;

3- Is specific in that it benefits one or more enterprises over one or more other enterprises. This applies to enterprises involved, and advantages in, both the production of goods and the provision of services; and

4- Has or is capable of having an effect on:

a.     competition or investment within the United Kingdom or

b.     trade or investment between the United Kingdom and a country or territory outside the United Kingdom.

This differs from the provisions found in the TCA, by going further with the inclusion of subsidies that not only have an effect on competition or investment between the UK and countries outside of the UK, but an effect on competition or investment within the UK, aiming to protect the UK’s internal market. Any publicly funded grant making body should be mindful of this addition as it means that thought must be given to the impact that any grants may have on competition or investment within the UK - something they have not had to consider previously. It could potentially result in a greater number of grant payments made by such bodies falling within the subsidy control regime.

“Public Authority”

To fall within the definition of a subsidy, the Bill states that a subsidy has to be assistance given directly or indirectly from public resources by a “public authority”. Public authority is defined in section 6 as a “person who exercises functions of a public nature” but excludes the legislative bodies of the devolved nations. This would therefore include organisations such as the National Lottery Community Fund.  

Section 2(3) states that financial assistance given by a person that is not a public authority, is to be treated as “given from public resources by a public authority if the involvement of a public authority in the decision to give financial assistance is such that the decision is, in substance, the decision of the public authority”. Section 2(4) then goes on to state that “the factors which may be taken into account when considering the involvement of a public authority in the decision of a person to give financial assistance include, in particular, factors relating to (a) the control exercised over that person by that public authority, or (b) the relationship between that person and that public authority”.

It remains to be seen how this may apply to non-public organisations, such as charitable grant givers, that are wholly or substantially funded by a public authority, and/or whose sole members are public authorities. Whilst the terms of the relevant funding/governance arrangements often place significant controls on the non-public organisation, they are usually strategic rather than operational controls. This means that non-public organisations will use the funding they receive to make onward grants to other organisations with often little, to no, day to day involvement from their public authority funder/member in the decision making process for each individual grant. Indeed, the non-public organisation’s ability to demonstrate its independence from its public authority funder/member is a key governance requirement of such bodies, particularly if they are charities.  

When asked recently, the Subsidy Control Team at the Department for Business, Energy and Industrial Strategy were unable to provide clarity on this point. However, further guidance should be issued by the Secretary of State prior to the implementation of the Bill that may address these questions.

“Enterprise”

Also worth noting is the definition of “enterprise” used in the Bill and how this may provide for some organisations such as charitable organisations, to circumvent the subsidy control regime. enterprise means a person who is engaged in “economic activity”. However, interestingly, section 7(2) of the Bill provides that an activity is not to be regarded as an economic activity if or to the extent that it is carried out for a purpose that is not economic.

There is the possibility that if a charity uses public authority funding to carry out charitable activities which further its charitable objects (but in doing so does not carry out any trading activities (including primary purpose trading)), it could be argued that the activities should not be regarded as economic.

We await further guidance to be provided by the Secretary of State in the hope that this provides further clarity.

The Principles

The Bill imposes a duty on a public authority to consider the seven subsidy control Principles before deciding whether to give a subsidy (documenting, with rationale against each Principle, whether it thinks the proposed subsidy meets the Principles or not). If a public authority concludes that a subsidy is not consistent with the Principles, it must not give the subsidy.

The seven Principles as listed in Schedule 1 to the Bill are:

A. Common interest – a subsidy should pursue a specific policy objective to remedy an identified market failure, or address an equity rationale.

B. Proportionate and necessary – a subsidy should be proportionate to their specific policy objective (see above) and be limited to what is necessary to achieve the policy objective.

C. Designed to change economic behaviour – a subsidy must encourage a change of behaviour of the beneficiary and be conducive to achieving the policy objective.

D. Costs that would be funded anyway – a subsidy should not normally be used to fund costs the beneficiary would have funded in absence of the subsidy - it should be used to fund additional costs that would not have occurred without the subsidy. On the face of it, this Principle implies that a subsidy should not normally be used to fund core costs.

E. Least distortive means of achieving policy objective – a subsidy should be an appropriate policy instrument for achieving the policy objective and that objective cannot be achieved through other, less distortive, means.

F. Competition and investment within the UK – a subsidy should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.

G. Beneficial effects to outweigh negative effects -  a subsidy’s beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including in particular negative effects on: (a) competition or investment within the United Kingdom; and (b) international trade or investment.

Database and Transparency requirements

The Bill introduces a “subsidy database”, that is to be accessible to the public (section 32). Under section 33, public authorities will have an obligation to ensure that any subsidy given by them is recorded on the subsidy database within six months of the confirmation of the decision to give it (or, if the subsidy is in the form of a tax measure, within one year beginning with the date of the tax declaration). Public authorities are also under a duty to maintain the entry on the database for six years, or for the duration of the subsidy if longer.

The entry is to include information listed in section 34 of the Bill and includes, but is not limited to, information such as the power under which the subsidy is given, the policy objective pursued by the subsidy, the recipient of the subsidy, the date the decision to give the subsidy is made and the duration of the subsidy.

Section 41 of the Bill provides an exemption to the requirement to record the above information on the subsidy database for subsidies given to enterprises that:

• undertake “Services of Public Economic Interest” (SPEI), of less than £14.5 million; or
• undertake certain specific SPEIsi, including hospital care, child care, long-term care and social housing (regardless of the size of the subsidy).

Any organisation that awards subsidies needs to ensure they have processes in place to capture the relevant information, record it on the database, and maintain the quality and accuracy of the information recorded throughout the duration of the subsidy.

Exemptions to the regime

There will be a small number of subsidies that will be exempt from the subsidy control regime, including minimal financial assistance (section 36) that equates to less than £315,000 over a rolling three year period (when aggregated with other similarly exempt subsidies received over that period), and financial assistance given to Services of Public Economic Interest (SPEI)  (section 38) that equates to less than £725,000 over a rolling three year period (when aggregated with other similarly exempt subsidies received over that period).

The procedure to be followed by a public authority granting exempt subsidies is detailed in section 37 for minimal financial assistance and section 39 for SPEI financial assistance, and requires the public authority to give the recipient both a “minimal financial assistance notification” (“Notification”) in advance of the subsidy and a “minimal financial assistance confirmation” (“Confirmation”) at the time the subsidy is given.

The Notification must include:

1. An explanation that the authority is proposing a subsidy by way of minimal financial assistance;
2. The gross value of the assistance given; and
3. A request for written confirmation from the recipient that the total amount will not exceed the £315,000 limit.

The Confirmation must state that:

1. The subsidy is given as minimal financial assistance;
2. The date on which it is given; and
3. The gross value of the assistance given.

Subsidies of interest and subsidies of particular interest

The body with responsibility for overseeing the subsidy control regime will be the Subsidy Advice Unit that will sit within the Competition and Markets Authority (“CMA”). They will provide advice to public authorities in respect of specific subsidies.

The Bill sets out a separate process for certain types of subsidies that may cause greater negative effects: subsidies “of interest” and subsidies “of particular interest”. The criteria as to whether a subsidy falls within these categories has yet to be published and the responsibility for setting this criteria in secondary legislation falls on the Secretary of State.

These types of subsidies will require more extensive analysis when a public authority gives consideration to the seven Principles and, in the case of subsidies “of particular interest”, the public authority will be under a duty to refer it to the CMA for further review.

Enforcement

The Competition Appeal Tribunal (“CAT”) will be responsible for the judicial review of the award of subsidies. The Bill amends the CAT Rules with new time limits specifically for appeals relating to subsidies. An application to appeal against a subsidy being given must be brought within one month beginning with the date of either a pre-action information request, the post award referral report or the date that the party bringing the appeal first became aware of the subsidy decision (the transparency date).

The definition of an “interested party” (which can appeal against a subsidy) includes the Secretary of State, but also “a person whose interest may be affected”. However, it is yet to be confirmed how narrowly the CAT will apply this definition. It is assumed that this would include parties who may have applied for a subsidy from the relevant public authority, but who were unsuccessful at the expense of other applicants.

Should the CAT review the decision and conclude that the application is not to be dismissed, it has the power under section 72 of the Bill to grant relief in the form of a mandatory order, a prohibiting order, a quashing order, a declaration or an injunction. The CAT also has the power to grant a recovery order in respect of a decision to award a subsidy that did not comply with the Principles, but where the subsidy has already been paid to the recipient.

The Bill also creates a right of recovery for a public authority that has given a subsidy should the recipient use the subsidy for purposes other than the purposes for which the subsidy was originally given. The public authority can enforce this right as if it was created by a contract between the public authority and recipient upon the granting of the subsidy. Notwithstanding this, we assume that many public authorities will continue to include clawback rights (for breach of the subsidy control regime) in their contracts with a recipient under which a subsidy is given.  

Looking ahead

There is the potential for the Bill to have numerous practical effects and consequences on publicly funded/controlled grant making charities and other organisations (and their grant making processes and procedures), when it comes into force next Spring. However, the extent of those effects and consequences remains to be seen. It is hoped that further guidance will be published by the Secretary of State to help such organisations tailor their grant making processes and procedures accordingly to ensure that they meet their obligations under the UK’s new subsidy control regime.