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UK subsidy control replaces EU state aid rules

Author: ICAEW Insights

Published: 10 Feb 2023

A post-Brexit regime for UK government subsidies began on 4 January. Any suggestions that it is lighter-touch than the old EU state aid rules should be taken with a pinch of salt, experts warn.

The second round of the government’s Levelling Up Fund announced last month awarded £2.1bn shared between more than 100 projects around the country including Eden Project North visitor attraction in Morecambe, a new AI campus in Blackpool and a new rail link in Cornwall.

Unlike previous grants, the funding is based on a new post-Brexit system to regulate the award of subsidies to business, which the government claims empowers public authorities to deliver support in a quicker, fairer, and simpler way. 

Specifically, the new UK subsidy control regime, which kicked in on 4 January this year, signals a change in the way subsidies are assessed in the UK, moving away from rigid notification and approval mechanisms and instead adopting a principles-based and self-assessment focused approach to compliance (see below). 

While the new regime does not, by any means, represent a sweeping away of EU state aid rules as previous government announcements have perhaps suggested, it does represent a more flexible approach to subsidy control. It also includes a higher de minimis threshold, which is set at £315,000 over three financial years compared to the EU's de minimis criteria of €200,000 (roughly £170,000).

The new UK regime has fewer exemptions than its EU predecessor, which streamlines the process. It also gives public authorities the ability to award subsidies through so-called "streamlined routes". Currently there are three schemes in place, for: research, development and innovation; energy usage; and local growth.

However, the combination of a principle-based regime, the different levels of compliance requirements and the obligation for self-assessment presents some important considerations for public bodies, not least a potential increase in administration, more immediate uncertainty and a greater risk of non-compliance. 

Public authorities can be challenged, for example, by competitors if it is felt that an unfair subsidy has been provided. If a public body has not followed the principles or lacks the evidence that it has done so, it is at greater risk of litigation. At the same time, it is uncertain how many cases may be referred for review, which may lead to delays.

Dave Nanda, senior economist at PwC said: “The new UK subsidy control regime is not as detailed, has much fewer exemptions, and a higher de minimis threshold compared to the EU state aid regime it replaced. However, having fewer rules does introduce greater immediate uncertainty and more onus on self-assessment by public bodies.

“In the new UK subsidy control regime, public bodies can’t confer an economic advantage as a consequence of granting public funding. They need the evidence that their actions are not distorting competition in case of legal challenge.” 

Tim Briggs, a partner at law firm Herbert Smith Freehills, said any government suggestions that this is a simpler, more light-touch regime should be taken with a pinch of salt: “It imposes additional burdens and obligations on the economy and market participants than was required under the Trade and Co-operation Agreement (TCA) made between the UK and EU.

Any public authority looking to award a subsidy must self-assess whether the subsidy principles are being complied with. Certain types of subsidy need to be referred to a new body, the Subsidy Advice Unit (SAU), part of the Competition and Markets Authority (CMA), for review.

“The SAU effectively checks their homework and publishes a report on it,” Briggs explains. “It's quite a challenge for public authorities, because they need to form their own views that will be subject to the scrutiny of the CMA. There's a lot of work to be done in terms of putting together the notification that you need to give to the CMA and demonstrating that you've properly assessed the principles in a way which the CMA is likely to be comfortable with.”

Legal certainty is key, Briggs says: “Both the public authority and the recipient will want to be sure that either the scope for challenging the decision to grant the subsidy is low or the opportunity to do so has expired. 

“Above all else, subsidy recipients want to know that, having worked so hard to persuade the public authority to part-fund a project, they can get it through the CMA without the conditions attached to that subsidy being substantially rewritten so that the commercial deal is at risk of unwinding.”

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