The Subsidy Control Bill

The newly published Subsidy Control Bill 2021-22 (the Bill) is designed to implement the UK’s obligations under the UK-EU trade and co-operation agreement (TCA) and to introduce a system of control of subsidies having effect within the UK.

Practitioners and businesses will need to get to grips with this new system of monitoring, control, recovery and enforcement, which differs substantially from what was in place before Brexit.

TCA obligations

As part of the European Union (Withdrawal) Act 2018, the Northern Ireland Protocol subjected UK subsidies that affect trade in goods and electricity between NI and EU to the full EU state aid regime, including notification.

As to discussions between the EU and the UK on their future trading arrangements, there was a phase in the discussions where it seemed as if the UK would only accept the most loose obligations in respect of subsidies. However, ultimately, to get an agreement with the EU, the UK agreed to a system of control on subsidies whose substantive rules are very similar to the EU state aid system (see News brief “Future UK-EU relationship: the end of the beginning, ” www.practicallaw. com/w-029-3475).

Article 366 of the TCA states that each party shall have and maintain an effective system of subsidy control that ensures that the granting of a subsidy respects certain principles. Under Articles 369 and 370 of the TCA, the UK and EU agreed a system of transparency and consultations around their subsidies. Under Articles 371, 372 and 373 of the TCA, each agreed to have an independent body that is able to adjudicate on subsidies, courts or tribunals that are able to review and adjudicate them, and a system for recovery of aid found to have been granted unlawfully. While the Bill goes beyond the UK’s obligation under the TCA, it is clearly intended to implement the subsidies provisions of the TCA.

It is also important to note that while both the UK and the EU are subject to the specific subsidies provisions of the TCA between themselves, they also remain subject to the World Trade Organization (WTO) subsidies and countervailing measures provisions with respect to other WTO members, and of course any specific subsidies obligations set out in trade agreements with third countries.

Key Bill provisions

On the key definition of “subsidy”, the Bill mostly tracks the subsidy language of the TCA, which in turn generally tracks the EU definition of “state aid”, albeit using a different vocabulary.
Generally, under the Bill, a subsidy is some form of financial assistance that:

• Is provided, directly or indirectly, from public resources by a public authority (clause 6).

• Confers an economic advantage on one or more enterprises (clauses 3 and 7).

• Benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services (that is, it is “specific”) (clause 4).

• Has, or is capable of having, an effect on competition or investment within the UK, or trade or investment between the UK and third countries.

The Bill makes it clear that an effect on third-country trade is not required. This enables control to be exercised over any constituent parts of the UK that might grant subsidies. This position on intra-UK subsidies is sharpened by the prohibition set out in clause 18 on relocation of activities which but for the subsidy would not happen.

In considering whether to grant a subsidy, a public authority must consider the seven principles found in Schedule 1 to the Bill (see below “Schedule 1 principles”).

Referral and review

The Bill then turns to the powers of the Competition and Markets Authority (CMA), which will oversee the granting of subsidies through a mandatory referral system under clause 52. The system will apply to cases of “particular interest”, the criteria for which are to be set out in regulations, or will apply following a call-in direction by the Secretary of State under clause 55.

At the moment, there is little clarity as to these mandatory notifications. Following publication of a CMA report on the proposed subsidy, a statutory five-day cooling off period is imposed on implementing the subsidy. If the Secretary of State considers that the CMA report identifies serious deficiencies in the public authority’s assessment of the subsidy, they can extend the cooling off period. The public authority may choose to proceed notwithstanding the CMA’s report, but the subsidy would potentially be subject to judicial review.

Voluntary referrals can be made by granting public authorities under clause 56 on grounds of “interest”, yet to be defined, but the CMA can refuse these. The Bill also foresees certain monitoring, reporting and advice functions for the CMA.

In terms of review, the Competition Appeal Tribunal (CAT) is given judicial review jurisdiction in relation to subsidy decisions. Under clause 70, the CAT appears to have sweeping powers to review decisions of both the public authority and the CMA.

Challenges of a new regime

This new subsidies regime will require UK practitioners to come to terms with slightly different substantive controls on subsidies than they were used to under the EU state aid rules, new rules governing intra-UK subsidies, and new and complex rules as to the procedures to be followed by UK public authorities when granting these subsidies.

Persons disadvantaged by subsidies granted by UK authorities will also have a different and more diffuse system of remedies available to them as, in principle, they can pursue rights granted to them under the TCA, the Bill, or both. These new rights are complex and evolving and will require practitioners to understand an array of new procedures.

Overall, the main difference in substantive scope between the TCA and the Bill is the addition of the intra-UK elements, such as the impact on intra-UK trade and investment, including clause 18 and principle F of Schedule 1. Substantive differences exist between the TCA and the Bill on the UK-EU aspects, for example, in relation to the definition of subsidies, but at first sight these are relatively minor and their practical import remains to be seen.

Schedule 1 principles:

Under the Subsidy Control Bill 2021-22, a public authority cannot grant any subsidy that does not conform with the principles set out under Schedule 1.

Principle A (common interest). Subsidies should pursue a specific policy objective that address a market failure or equity rationale; for example, social difficulties or distributional concerns.

Principle B (proportionality). Subsidies should be both proportionate and limited to what is necessary to achieve the policy objective.

Principle C (incentives and behaviour change). Subsidies should lead to a change in the behaviour of the recipient and must help to address the public policy objective being pursued.

Principle D (additionality). Subsidies should be targeted to bring about an effect that is additional and should not normally cover normal business costs.

Principle E (alternatives). Alternatives that are likely to cause less distortion to competition and investment in the UK, or trade and investment internationally, must be considered before granting subsidies.

Principle F (minimal market impact). Subsidies should minimise the impact on competition and investment within the UK’s internal market.

Principle G (net positive effect). Material effects on competition and investment in the UK, and on international trade and investment, from the subsidy must be greater than the harmful impact of providing the subsidy.

This article first appeared in the August 2021 issue of PLC Magazine.