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 explore how to identify and determine whether a subsidy has arisen.
The starting point for any sort of assessment is to identify whether financial assistance is being provided. Financial assistance is a wide concept and can include (as per Section 2(2) of the Subsidy Control Act 2022 (SCA)):
If financial assistance is being provided, then the next step is to apply the following four limb test to determine whether the financial assistance can be considered a subsidy:
A public authority is a person who exercises functions of a public nature, and encompasses Government departments, executive agencies, local authorities and any other public body which administers public funds. This could include, for example, a company limited by shares which is controlled by and funded by a public authority.
This limb has two elements. The first is that the recipient of the financial assistance must be an enterprise. An enterprise is defined under Section 7(1) of the SCA as a person who is engaged in an economic activity that entails offering goods or services on a market. This is the same definition as “undertaking” under the previous EU State aid regime. Interestingly, Annex 1 of the Government’s guidance in respect of what should be considered a economic activity refers to a number of situations which are embodied in EU case law and guidance. For example, in regards to education, the principle of state funded education not being considered economic activity has been long established in the case of Humbel and Edel (Case C-263/86 [1988] ECR I-5365), and this has been incorporated into the guidance.
Annex 1 of the guidance also incorporates the EU case law in respect of public infrastructure projects as embodied in the case of Leipzig-Halle (Case C‑288/11 P [2012]). This provides that where public infrastructure is not intended to be commercially exploited and made available for public use for free, the provision of access to such infrastructure will not be considered an economic activity.
The second element of this limb is that the financial assistance must confer an economic advantage. An economic advantage will be established if the enterprise is receiving the financial assistance on terms more favourable than that available on the market. Such an economic advantage may be direct or indirect. Under the previous EU State aid regime, we would apply the Market Economy Operator Principle (MEOP) to establish whether the financial assistance is given on market terms. Under the new guidance, this has been re-termed the Commercial Market Operator principle, but it applies in much the same way.
Specificity may be easy to establish if, for example, a grant is being provided to an enterprise for a particular project. In this respect, the recipient enterprise will be receiving a benefit which is specific as no other enterprises on the relevant market will be receiving that benefit. However, it becomes more complicated if a financial measure is being applied to a category of enterprises, or if it is offered to a large number of enterprises, but only certain enterprises actually benefit in practice. The general rule is that if the financial assistance treats certain enterprises more advantageously than others in a comparable position, it will be considered specific.
This is the one limb of the test which is different from the EU law because we now have to consider the effect on competition and trade both within and outside the UK. Generally, if there is a commercial market in the UK or further afield for the relevant goods or services being provided by the recipient of the financial assistance, then there will be seen to be an effect on competition and trade. Again, the guidance incorporates EU case law when listing scenarios where an effect on competition/trade will be absent. Essentially this will be where there is no competitive market (e.g. cultural and heritage activities), or where the market is limited to a very small geographical area.
When the SCA was enacted, there remained ambiguity as to how the four limb test would be applied, particularly as it is largely identical to the EU definition of State aid. The guidance has now shed light on this, and it is interesting that the Government appears to intend for EU case law to be used as an interpretative tool when applying the tests. Once again, this begs the question as to how different the new regime is from the EU State aid regime, because EU concepts and case law are clearly referred to in the guidance (and as it is statutory guidance, it must be considered and applied by all public authorities in their assessment of subsidies). It will be interesting to see how the guidance is applied by the courts going forwards.
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.
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