The UK’s new domestic subsidy control regime came into force on 4 January 2023, introducing a new way in which subsidies are determined and regulated.
We will be publishing a series of bitesize briefings which seek to explore the nuances and features of the new regime. In this article, we will set out what types of subsidies are prohibited and the circumstances in which a subsidy will be exempt from the subsidy control requirements.
Prohibited Subsidies
The Subsidy Control Act 2022 (SCA) prohibits the provision of the following types of subsidy:
- Unlimited Guarantees: these are any subsidy that would guarantee an unlimited quantity of liabilities or debts, or which would guarantee a finite amount of liabilities or debts but over an indefinite period. Note that an insurance, reinsurance or compensation scheme does not constitute an unlimited guarantee in this context.
- Export Performance: a subsidy that is contingent in law or upon export performance relating to goods or services is prohibited. Exceptions to this are: a subsidy in the form of a short-term export credit insurance (“short term” meaning a risk period of less than two years) against risks that are not marketable risks; or an export credit guarantee or insurance programme that is permissible in accordance with the SCM Agreement (this is a World Trade Organisation Agreement the UK is signed up to).
- Subsidies contingent upon the use of domestically produced goods and services, are prohibited, except those provided in relation to the audio-visual sector.
- Relocation of economic activities: these subsidies are generally prohibited where the subsidy contains conditions requiring the relocation of an enterprise’s existing economic activities and the relocation of those activities would not occur without the subsidy. However, these subsidies may be permitted where the relocation subsidy is for the purposes of addressing social or economic disadvantages provided the following requirements are met:
- the subsidy will reduce the social or economic disadvantage in an area;
- the subsidy results in an overall reduction in social or economic disadvantage within the UK generally; and
- the subsidy is designed to bring about change in the size, scope or nature of the existing economic activities of the enterprise.
- Ailing or insolvent enterprises: rescuing and restructuring subsidies for ailing or insolvent enterprises are not permitted unless certain requirements are met:
- For rescue support, the public authority must be satisfied that:
- the subsidy must be granted during the preparation of a restructuring plan;
- the subsidy contributes to an objective of public interest, by avoiding social hardship or preventing serious market failure; and
- the subsidy consists of temporary liquidity support in the form of a loan or loan guarantee support.
- For restructuring support, the public authority must be satisfied that:
- the enterprise has prepared a restructuring plan;
- the enterprise's owners, creditors or new investors have contributed to the cost of the restructuring;
- the subsidy contributes to an objective of public interest by avoiding social hardship or preventing severe market failure; and
- at least five years have passed since the last time a subsidy was given for the rescuing or restricting the enterprise.
There are also specific prohibitions on subsidies to ailing or insolvent deposit takers and insurance companies.
- Subsidies for insurers that provide export credit insurance
- Subsidies for air carriers for the operation of routes are prohibited unless: (i) the operating route is a public service obligation of the air carrier imposed under EU regulations; (ii) the subsidy would provide benefits to society at large; and (iii) the subsidy is for the opening of a new route to a regional airport which will increase the mobility of citizens and stimulate regional development.
Exemptions
The subsidy control requirements do not apply to the certain types of subsidy. The principle exemptions to note are:
- Minimal Financial Assistance: previously known as the de minimis exemption under the EU State aid regime, a subsidy will be exempt where the total amount of financial assistance given to an enterprise does not exceed £315,000 over the current financial year and two preceding financial years.
There are some procedure requirements to comply with in order to rely on this exemption. Before providing minimal financial assistance, a public authority must give a “minimum financial assistance notification” and on giving the minimal financial assistance, also provide a “minimal financial assistance confirmation”. The enterprise must also keep records of all minimal financial assistance it has received for a period of three years. Public authorities should also note that if the amount of the subsidy is £100,000 or above, it must publish a notice on the transparency database, even though the subsidy falls within this exemption.
- SPEI Assistance: this exemption applies to financial assistance to an enterprise engaged in services of a public economic interest. A subsidy will be exempt where the total financial assistance given to the SPEI enterprise does not exceed £725,000 over the current financial year and two preceding financial years. The same procedural requirements apply as with the Minimal Financial Assistance exemption.
- Emergencies: subsidies to compensate the damage caused by natural disasters or other exceptional circumstances are exempt, as are subsidies given to respond to a national or global economic emergency. This exemption has been designed to cover events such as the banking crisis in 2008.
Other exemptions include:
- Subsidies for the purpose of safeguarding National Security
- Subsidies by on behalf of the Bank of England in pursuit of monetary policy
- Subsidies pursuant to a financial stability direction given by the Treasury
- Legacy and withdrawal agreement subsidies
- Tax measures which are permissible under the UK-EU Trade and Cooperation Agreement
- Subsidies given in the context of a large cross-border or international cooperation project
- Subsidies in relation to nuclear energy
Commentary
The prohibitions and exemptions under the new regime probably appear quite familiar, because they are similar to those under the EU State aid regime. However, the keen eyed among you will note that the exemptions set out in the General Block Exemption Regulation (GBER) (which applied to regional aid, aid for research and development and aid to SMEs among others) do not appear in the SCA or Regulations made thereunder. Instead, the Government is intending to develop Streamlined Routes which public authorities can apply to specific types of subsidy. Streamlined Routes have been designed as a faster way for public authorities to assess low risk subsidies. If the subsidy falls within a Streamlined Route, there is no need to assess it against the subsidy control principles, nor to seek permission and/or get an assessment from the Subsidy Advice Unit prior to granting it.
The Government recently published the draft versions of Streamlined Routes for research, development and innovation; energy usage; and local growth, all of which appear to work in a similar way to the exemptions set out in the GBER. Further details of these routes will be provided in a future article.
If you have any further or specific queries in relation to the Subsidy Control regime, please do get in touch with our Public Sector Team.
