Can the UK's new subsidy control regime live up to the rhetoric?

Astutely targeted state subsidies can be used to attract companies from abroad and nurture the business champions of tomorrow. But does the reality match the rhetoric?

This is a big issue for all public service organisations across the UK, from central government departments to combined authorities, through to district councils. It affects the way they may provide public funding interventions towards business activities. This can range from large industrial grants to multinational manufacturers, to support for local small businesses, or urban regeneration projects in regional areas where councils want to intervene to deliver new housing, managed workspace or leisure facilities.

As before with the EU regime, the public funding of essential public services, like the police, the NHS and fire services, are non-subsidy items that are outside scope, but anything that is carried out in competition with normal market operators is covered.

The Subsidy Control Act 2022

The UK's new subsidy control regime entered into force on 4 January 2023 via the Subsidy Control Act 2022, after a short period of an interim regime based solely on the EU/UK Free Trade Agreement. The new regime is markedly different from the EU's state aid regime. Whereas the EU regime regards all measures as unlawful unless specifically exempted (either through the notification process or more commonly under ‘block exemptions’) the UK now has a system of subsidy regulation where awards are considered compliant, unless successfully challenged by way of judicial review, which must happen quickly after a mandatory public transparency notice.

However, in many ways the new regime is more burdensome. For instance, a policy choice has been made that the UK subsidy control regime should not only seek to provide assurance to international partners that subsidies are properly regulated, but also help to manage the UK's internal market. This decision has led to a definition of subsidy that is wider than the equivalent concept of state aid in EU law, meaning more measures are caught by the rules. For example, projects that only have a potential effect on competition in local areas in the UK are now caught, whereas they might previously have escaped from EU rules. It has also led to the judgement of lawfulness of a subsidy being governed by a set of imprecise principles, rather than the EU's clearer maximum costs and percentages of subsidy allowed for a different type of activity approach.

The principles require public authorities to engage in an assessment of the market impact of proposed subsidies and places them under an obligation to create an audit trail. This must demonstrate what steps have been taken to minimise the impact of their proposed measures on the UK's internal market. This can be a challenge for smaller, less well resourced, public authorities.

The greatest impact though is increased legal uncertainty. Whereas EU state aid law has developed over 40 years, the new regime starts without any such history. The Government has sought to provide some assurance on this point by publishing a 207 page statutory guidance document. However there is a concern that some organisations might be too nervous to accept public funds until the Courts have clarified the application of the new law, in particular, the grounds on which such funding might be recovered. 

Advantages

The great advantage of the new regime is its greater adaptability to any range of circumstances and the removal of the need to obtain European Commission approvals for the largest awards. What happens in the coming months as the new regime takes effect will offer a much better view on the practicality of the new rules and how favourably they are working for the benefit of the UK economy. 

Those who staunchly advocated the benefits of Brexit will be looking for situations where the new rules permit more than was allowable under the EU's state aid regime. Already there have been various projects which would have been caught up in the EU's notification system, where approval was needed from Brussels before significant sums could be committed. Likewise, under the EU system for smaller awards it was in practice necessary to stick to the confines of block exemptions, but now public bodies have more freedom to design measures to meet their needs.

Two pinch points

Those who work with the subsidy control rules will probably measure its success by whether the new regime is demonstrably easier to navigate. There appear to be two pinch points undermining the argument at this time.

Firstly, so far, there are only limited UK block exemptions (now called ‘streamlined routes’) meaning public authorities are forced to engage in detailed principles assessments even for rather modest and previously routine awards.

Secondly, all awards of £10 million and over (as well as several other categories of award) are now required to be reviewed by the Competition and Markets Authority prior to award, unless somehow covered by legacy arrangements in place prior to the new law coming in. This adds delay to many awards, which under the EU regime would have quickly proceeded under block exemptions.

The solution for these two problems would appear to be for the UK to develop a comprehensive set of its own block exemptions, involving practitioners to ensure that the main problem areas are covered. By doing so, the UK would allow more routine projects to go ahead without difficulty, while retaining flexibility for the bigger and more controversial awards.