Getting to Grips with Subsidy Control

Following Brexit and the transition rules established under the EU-UK Trade and Cooperation Agreement, the UK Government has been introducing new rules for subsidy control to replace those which applied while the UK was in the EU

Part of the Subsidy Control Act 2022 (the Act) was activated in April 2022, but 4 January 2023 saw the full set of new domestic subsidy rules finally come into force in the UK.

The full Act has introduced some important changes into the way subsidies are awarded.

These are to introduce:

• The Subsidy Advice Unit (SAU), a new body to review certain subsidies and monitor the effectiveness of the operation of the Act and its impact on competition and investment within the UK.

• An additional principle, requiring subsidies to be designed to achieve the relevant public authority's specific policy objective (i.e. A clearly targeted subsidy) while minimising any negative effects on competition or investment within the UK.

• A reduction in the timeframes to three months for uploading details of most subsidies to the Department for Business, Energy & Industrial Strategy (BEIS) transparency database.

• A reduction to one month for the time within which to challenge a proposed subsidy award from the date that the subsidy information is uploaded to the transparency database.

The changes to the timeframes are important, not just for those giving or receiving subsidies, but also for those organisations who are not benefitting from the relevant subsidy and believe that it creates an unfair advantage in the relevant market.

New regime

If a proposed subsidy payment meets the four requirements set out in the Act, namely it:

• Is given from public resources by a public authority.

• Confers an economic advantage.

• Is specific, benefiting one or more enterprises over one or more other enterprises.

• May affect competition, investment or trade within the united kingdom or between the UK and another country.

The parties will need to consider if that subsidy payment is compliant with the Act. This generally occurs where:

• An exemption applies – the subsidy is below £315,000 or below £725,000 where supporting a service of public economic interest.

• The subsidy is compliant with the seven subsidy control principles set out in Schedule 1 of the Act (see Box).

In most cases, where the granting authority is satisfied that the subsidy is compliant with the Act, it simply uploads details of the relevant subsidy to the transparency database within three months of it being awarded. However, if the subsidy meets the definition of a ‘subsidy of particular interest’ the proposed subsidy must be referred to the SAU before it can be awarded. A subsidy of particular interest is a subsidy that is:

• Not related to a sensitive sector but will total over £10 million.

• Related to a sensitive sector and will total over £5 million.

Martin Fleetwood is a Consultant at Addleshaw Goddard’s Transport practice. The Rail Team has over 30 lawyers who advise clients in both the private and public sectors across a wide range of legal areas. As well as contractual issues, the team advises on operational matters, franchises, concessions, finance, regulatory, property, employment, environmental and procurement issues.

Disclaimer: This article is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

The Seven Subsidy Principles

A compliant subsidy should show the following:

• Common interest.

• Proportionate and necessary.

• Designed to change economic behaviour of beneficiary.

• Costs that would be funded anyway.

• Least distortive means of achieving policy objective.

• Competition and investment within the United Kingdom.

• Beneficial effects to outweigh negative effects.

• A restructuring subsidy i.e. provided to restructure an ailing or insolvent enterprise.

Note that related subsidies paid to the beneficiary are also included when calculating these totals. BEIS holds the list of sensitive sectors, the identity of which are subject to a periodic review. The eight sectors presently covered are not specifically related to rail, but there are indirect links, such as covering manufacturers of basic iron, steel and ferro-alloys, the manufacture of motor vehicles and the production of electricity. Any party in the rail sector which plans to take advantage of a subsidy in the future should check the sensitive sector list to ensure that it has not been expanded to cover the purpose of that subsidy.

There is a set timetable from the point that the granting authority officially refers the proposed subsidy to the SAU. Under it:

• The SAU has five working days to confirm whether it has all the information it needs (referral complete) or if further information is needed.

• The SAU must issue a report within 30 working days (subject to extensions); after confirming that the referral is complete.

• A five day ‘cooling off period’ must elapse from the date of the report before the subsidy can be granted.

The SAU report includes an evaluation of the public authority's Assessment of Compliance and may include comments on the authority's compliance with the Act. However, the SAU's role is only advisory and it does not approve or block the subsidy. The public authority decides the basis on which to grant the subsidy and can depart from the SAU's advice. However, in departing from the SAU report and advice the public authority is likely to weaken its position against an application for a judicial review by a third party against the public authority's decision to award the grant. While not fatal, departure from the report casts doubt on the authority's decision-making activities.

Once a submission is made, a third party can engage with the SAU on its review. However, given the short statutory timescale, third parties will typically need to provide their views within ten working days of the initial referral to be factored into the SAU's evaluation. If information from the third party gives the SAU cause for concern, it can stop the statutory clock and ask the public body for additional information before completing the review.

Early engagement

With the Act requiring public authorities and recipients of larger subsidies to engage with the SAU in a more formal and structured process before any subsidy is granted, it is advisable for the parties to pull together the information required for the report to the SAU as soon as practicable. The 30-workingday review period only begins once the SAU is satisfied that all relevant information has been included in the submission.

The SAU is available for pre-referral discussions with a public authority intending to offer a relevant subsidy. While the SAU will not provide any advice on the subsidy itself during this pre-referral phase it will help the public authority to identify the information it needs to support its referral.

Streamlining applications

The Act permits the Government to specify certain categories of subsidy schemes which have streamlined routes and only need to comply with a set of limited terms and conditions (including those relating to eligible costs, subsidy ratios and maximum award amounts), similar to the previous EU General Block Exemptions. The three streamline services published to date relate to:

1. Research, development and innovation –including subsides for feasibility studies, experimental development projects and SME innovation support.

2. Energy usage – allowing subsidies for energy demand reduction projects, green heat network projects and related green skills training.

3. Local growth – focussed on SME subsidies for business development projects, employment of workers with disabilities and disadvantaged workers.

These routes are intended to reduce the burden on both local authorities and subsidy recipients, permitting and enhancing the provision of such grants. Within the rail sector all three schemes could have an application, although the fact that each scheme has a maximum award value for participants may restrict their benefit.