UK consults on new domestic subsidy control regime

Out-Law News | 05 Feb 2021 | 9:08 am | 4 min. read

The grant of subsidies by public authorities across the UK should be subject to regulatory control that also takes into account the potential distortion of competition in the UK’s internal market, according to new proposals outlined by the UK government.

The government's plans, which are open to consultation until 31 March, aim at developing further the subsidy control framework that recently took effect in the UK following the finalisation of the EU-UK Trade and Cooperation Agreement (TCA). That framework seeks to maintain a level playing field between businesses in the UK and those in the EU market, while the new proposals specifically seek, among other things, to address concerns about the potential competition distortive effects of subsidies within the UK.

Kotsonis Totis_March 2020

Dr. Totis Kotsonis

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

The regulation of subsidies with actual or potential harmful effects on competition in our own internal market would seem to be vital in seeking to protect domestic competition and ensuring a level playing field that encourages businesses to innovate and be more efficient

"A UK-wide subsidy control regime will ensure that subsidies do not unduly distort competition within the UK’s internal market," according to a statement issued by the Department for Business, Energy and Industrial Strategy (BEIS) alongside the new consultation paper. "For example, it will ensure that a Welsh firm is not unfairly undercut or disadvantaged by a subsidy decision in England, and vice-versa. It will also mean that big companies cannot play off the regions, nations, towns, and cities of the UK against each other in a competition to benefit from taxpayer subsidy – protecting the dynamic and competitive market economy across the UK."

Under the government’s proposals, public authorities across the UK should have the freedom to design and award subsidies that serve public policy objectives but subject to considerations which also include the need for a subsidy to be designed in a way which seeks to “minimise any harmful or distortive effects on competition within the UK internal market".

Dr. Totis Kotsonis, who specialises in subsidies at Pinsent Masons, the law firm behind Out-Law, said: "Key here is the recognition that our domestic subsidy control regime should be capable of managing the risk of public subsidies distorting competition in our own internal market. Although the UK-EU Trade and Cooperation Agreement incorporates some robust subsidy control commitments, these are exclusively concerned with limiting the risk of the grant of subsidies by either party giving rise to a material effect on trade or investment between them. The TCA is not concerned with situations where the harmful effect of a subsidy is exclusively domestic."

"At the same time, the regulation of subsidies with actual or potential harmful effects on competition in our own internal market would seem to be vital in seeking to protect domestic competition and ensuring a level playing field that encourages businesses to innovate and be more efficient and where the state’s ability to intervene in competitive markets by using taxpayers’ money is kept to a limited set of circumstances and only after an assessment which weighs a subsidy’s potential harmful effects against the public interest benefits which the grant of a subsidy will help obtain," he said.

In line with TCA commitments, an independent body for subsidy control is to be set up. The government is seeking views on the precise role for, and functions of, the new body.

"There is no doubt in my mind that this role sits naturally with the Competition and Markets Authority," Kotsonis said. "In addition to being our competition regulator with relevant in-house expertise, under the UK Internal Market Act 2020, the CMA now also has responsibilities which include monitoring the effectiveness of the internal market. Although I appreciate there might be concerns about the ability of the CMA to take on yet another regulatory role, it seems to me that this issue can be dealt with appropriately by bolstering further the regulator’s resources rather than seeking to set up a new authority or giving subsidy control powers to some other body."

Where subsidies granted are within the scope of the new regime and above 'set values', public authorities will be under a legal obligation to make a series of disclosures in relation to the subsidies awarded

In line with the UK’s international commitments, including the TCA, only support measures that satisfy four criteria will be classed as a 'subsidy' for the purposes of the domestic subsidy control regime.

First, the measure must constitute a financial contribution provided by a public authority. The financial contribution could be "a grant, loan or loan guarantee or other form of financial assistance, such as forgoing of revenue that is otherwise due", BEIS said. Second, the award of the subsidy "must confer a benefit on persons supplying goods or services in the course of a business, which would not be available under commercial terms".

The subsidy would also have to be "specific", meaning that it "benefits a particular enterprise, or enterprises in a particular sector, industry, or region", and further have had, or could have, "a harmful or distortive effect on trade or investment within the UK or internationally".

The government plans to make certain types of subsidies exempt from the new subsidy control regime, such as "where they are required for the purpose of defence or safe-guarding national security". It is further considering whether to and how it might exempt fisheries and agricultural subsidies from the scope of the new subsidy control regime, and whether to exempt subsidies in the audio-visual sector too.

Where subsidies granted are within the scope of the new regime and above "set values", public authorities will be under a legal obligation to make a series of disclosures in relation to the subsidies awarded.

"This would include, but not be limited to, details of the subsidy instrument, amount, date granted, granting authority, and the purpose of the subsidy," BEIS said. "Where a subsidy is provided under the terms of a scheme, rather than as a one-off subsidy, public authorities will also need to provide information about the categories of beneficiary, the terms and conditions of eligibility for subsidy and the basis for the calculation of the subsidy (including any relevant conditions relating to subsidy ratios or amounts)."

However, BEIS is considering introducing a less bureaucratic process for the grant of 'low-risk' subsidies, and is seeking views on what types of subsidies would fall within this category.

BEIS confirmed that any changes to the subsidy control regime would only take effect when new legislation providing for them comes into force, and that it "will not apply retrospectively to subsidies awarded in the interim".