The Subsidy Control Principles

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 the process for assessing subsidies against the subsidy control principles.

The Subsidy Control Principles

So you’ve applied the relevant tests and concluded that the financial assistance you are providing/receiving is a subsidy. What are the next steps?

All subsidies (assuming they are not prohibited) must be designed to comply with, and assessed against the subsidy control principles set out in Schedule 1 of the Subsidy Control Act 2022 (SCA) unless:

•  the subsidy meets one of the exemptions in Part 3 of the SCA; or
• the subsidy falls under an existing scheme or a Streamlined Route.

Where a subsidy meets the criteria for a Subsidy or Scheme of Interest (SSoI) or Subsidy or Scheme of Particular Interest (SSoPI), or it is related to the energy or environment, there are additional steps to follow. We will set these steps out in later briefings.

It is for the public authority granting the subsidy to make the assessment.

The subsidy control principles are:

• Principle A: Subsidies should pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns).
• Principle B: Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
• Principle C: Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change, in relation to a subsidy, should be conducive to achieving its specific policy objective, and something that would not happen without the subsidy.
• Principle D: Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
• Principle E: Subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other, less distortive, means.
• Principle F: Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition and investment within the United Kingdom.
• Principle G: Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including in particular negative effects on competition and investment within the United Kingdom, and international trade and investment.

The Government guidance provides that: “The subsidy control principles help to ensure that public authorities design subsidies in such a way that they deliver strong benefits and good value for money for taxpayers, minimise any negative effects on competition and investment in the UK, and help the UK meet its international obligations.”

How should the subsidy control principles be applied?

The guidance provides a four step process for applying the principles (along with detailed commentary which all public authorities should review and consider) as follows:

• Step 1: Identify the policy objective, ensure it meets a market failure/equity concern, and determine whether the subsidy is the right tool to use.
• Step 2: Ensure that the subsidy is designed to create the right incentives for the beneficiary and bring about a change.
• Step 3: Consider the distortive impacts that the subsidy may have and keep them as low as possible. 
• Step 4: Carry out the balancing exercise.

The depth of the analysis undertaken will depend on the nature of the subsidy. If the subsidy falls within the criteria for a SSoI or SSoIP, for example, there are more extensive assessment requirements. Public authorities should document their assessment process, including all evidence, analysis and conclusions reached using the template assessment form provided by the Government.

Commentary

The subsidy control principles are a relatively new concept, having been introduced in the UK-EU Trade and Cooperation Agreement (TCA) following the UK’s departure from the EU. The principles in the SCA largely mirror those set out in the TCA, save for Principle G which places an emphasis on the potential distortive effect of subsidies within the UK, as well as on international trade and investment.

Public authorities’ assessment of subsidies against the principles is an important aspect of the new regime. It is the element of the regime which is most likely to be scrutinised and challenged going forwards, particularly as public authorities will, in most cases, be required to publish information regarding subsidies on a UK website as part of the transparency requirements. As such, public authorities should properly consider and implement the Government guidance, which is thorough and useful, and ensure the assessment process and all conclusions are fully documented.

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 .