Out-Law News 6 min. read

Competition Appeal Tribunal gives first judgment under Subsidy Control Act 2022

HDR view of Durham Castle and cathedral

The Competition Appeal Tribunal (CAT) has handed down judgment on the first application for review of a subsidy decision under the Subsidy Control Act 2022, dismissing the application made by a local business against a Durham County Council decision on the basis that it did not involve the grant of a subsidy

Dr Totis Kotsonis, a subsidy control law expert at Pinsent Masons, said: “This is a landmark case for the UK’s new subsidy control regime which demonstrates the UK’s bespoke regime in action. The CAT’s decision is well-argued and indeed, persuasive. It is also of interest to note that, although most probably, the approach under EU state aid rules would have been different, the conclusion is likely to have been the same. Ultimately the CAT’s decision might also point to a legislative loophole which could, under certain circumstances, allow public authorities to escape subsidy control oversight.”

Waste collection services provider Durham Company Limited, trading as Max Recycle, brought the application against Durham County Council (the Council), which is the sole waste collection and waste disposal authority for County Durham. The Council has various legal duties in relation to waste including household and commercial waste collection, which it elects to perform itself rather than outsource.

The Council shares vehicles and employees between its household and commercial waste operations. Max Recycle argued that this allowed the Council to charge less for its commercial waste collection services than it otherwise would or could have charged had they run the commercial waste collection operation as an independent operation. This, Max Recycle argued, amounted to a subsidy to the commercial waste operation from the household waste operation, the latter being funded through council tax and other public funding.

Whilst the CAT was willing to accept that the Council charges for providing commercial waste collection services did not reflect the full economic cost of providing that service on a standalone basis, and that a net advantage flowed from the Council’s household waste collection operation to its commercial waste collection operation, the CAT did not accept that this amounted to a subsidy.

Kotsonis Totis

Dr. Totis Kotsonis

Partner, Head of Subsidies, Procurement, Trade Agreements and Trade Remedies

UK public bodies may now be more attracted to the idea of delivering certain services in-house where economies of scale could be achieved by combining common costs with other services, confident that they are not unlawfully granting subsidies to themselves

The CAT held that, under the Subsidy Control Act 2022, a person cannot be at once a “public authority” granting a subsidy and an “enterprise” receiving that same subsidy. A public authority could not grant a subsidy to itself. As the Council did not provide either of the waste collection services through a subsidiary or other separate entity, there was no separate “enterprise” for the purposes of the Subsidy Control Act 2022 on which a subsidy could be conferred.

This is different to the EU law approach where the general prohibition on state aid involves the use of state resources to grant a selective advantage to an “undertaking”, a concept which does not require that the entity in question has a distinct legal personality so that the same entity may be acting as an undertaking in relation to one activity but not in relation to another. The CAT considered that, were it to have adopted this so-called “functional” approach, this would have required it to try and distinguish between the activities of the Council as a “public authority” and its activities as an “enterprise”, a task which was subjective and potentially arbitrary. However, seeking to draw such distinction was not necessary for the purposes of the Subsidy Control Act 2022.

Kotsonis said: “The CAT’s decision highlights an important distinction between EU state aid rules and UK subsidy control legislation. However, make no mistake, the conclusion under EU state aid rules is unlikely to have been any different, albeit the route to that conclusion would have been. For example, it is already an established principle under EU law that in so far as a public entity exercises an activity which cannot be separated from the exercise of its own public powers, that activity is not economic in nature and as such it is not subject to state aid regulation. The facts in the Durham case easily lend themselves to this type of analysis. Indeed, the CAT noted that, had a functional approach to its analysis been necessary, this type of consideration would have led to it reaching the same conclusion.”

“In any event, given that the ruling has now confirmed that under UK subsidy control legislation, the same entity cannot be a ‘public authority’ and an ‘enterprise’ at the same time, UK public bodies may now be more attracted to the idea of delivering certain services in-house where economies of scale could be achieved by combining common costs with other services, confident that they are not unlawfully granting subsidies to themselves. In certain cases, such arrangements may amount to a means of avoiding subsidy control regulation, although this would very much depend on the specific facts,” he said.

In this regard, Kotsonis said it is also relevant to note the CAT’s conclusion that, even if it were wrong and it was possible for a public authority to grant itself a subsidy under domestic subsidy control legislation, on the basis of the facts in this case, no subsidy would have been granted. This is because the advantage conferred on the Council’s commercial waste operation was the ability to charge prices that were lower than the true economic cost of providing the service, and lower prices would only benefit the consumer, not the Council. The CAT stated that “[o]nly if the ‘enterprise’ charges the full amount will it be obtaining an economic advantage”.

Although the CAT’s conclusion as regards the absence of a subsidy was sufficient for the purposes of dismissing the claim in this case, the CAT went on to address the question of whether the Council’s disputed 2023 “subsidy decision” was in fact a decision capable of being challenged under the Subsidy Control Act.

Max Recycle had challenged the Council’s 31 March 2023 decision, which set the level of charges for commercial waste collection services. For its part, the Council had argued that its approach to charging for commercial waste collection services was determined in 2020. Accordingly, to the extent that this involved a subsidy, the Council argued its 2020 decision amounted to the setting up of a subsidy scheme, under which commercial charges were merely reviewed on an annual basis. By implication, it argued the 31 March 2023 decision could not be challenged because the Subsidy Control Act 2022 did not apply to subsidies that were given under a subsidy scheme that had been set up before the Act came into force.

The CAT disagreed. It considered it relevant that the 2020 decision did not bind the Council as to future commercial charges decisions and that the Council could, if it wished, review the entirety of its approach year-on-year. Therefore, the annual decisions to set the charging rates represented a series of decisions which, while related, were not part of a scheme. Accordingly, the 2023 decision was a “decision” within the meaning of the Subsidy Control Act 2022 which was capable of being challenged – albeit unsuccessfully in this case.

Kotsonis said: “The CAT’s approach to reaching a view on the question of what constitutes a ‘decision’ appears sensible: it held that a subsidy scheme effectively involves the public body establishing a framework pursuant to which further decisions will be made. Where subsequent subsidy grants are made in line with the ‘binding criteria’ of that framework, no new ‘decisions’ are involved.”

Kotsonis added that it is also noteworthy that the application for review in this case was dealt with expeditiously, certainly in comparison to procurement claims. Max Recycle lodged its appeal on 3 February 2023; on 17 February 2023, directions were made for the hearing, which was held on 3 and 4 July 2023, and the judgment was delivered on 27 July 2023. The CAT noted the "important need for reviews of subsidy decisions to be conducted quickly and with a light touch (and with costs commensurate to these objectives)".

On the issue of costs, the CAT initially made a costs-capping order, limiting Max Recycle to £50,000 and the council to £60,000. However, this has been overturned by the Court of Appeal, which held that the CAT had no jurisdiction to impose a costs cap in statutory review proceedings brought under the Subsidy Control Act 2022.

Kotsonis said, though, that the decision in this case has now set a marker as to how the CAT intends to approach subsidy control applications for review. He said its intended approach should be welcomed by all parties likely to be involved in future subsidy control litigations.

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