Policy paper

Overview of the subsidy control regime – a flexible, principles-based approach for the UK

Published 30 June 2021

Overview

Now that we have left the European Union, we are no longer bound by bureaucratic and burdensome EU State aid rules, except in limited circumstances under the terms of Article 10 of the Northern Ireland Protocol. For the first time, the UK has the freedom to design a domestic subsidy control regime that reflects our strategic interests and particular national circumstances.

The Subsidy Control Bill, introduced before Parliament in June 2021, provides the framework for a new, UK-wide subsidy control regime. This regime will enable public authorities to deliver subsidies that are tailored and bespoke for local needs to deliver government priorities such as levelling up and achieving net zero carbon, as well as supporting the economy’s recovery from coronavirus (COVID-19).

Our new system has been designed to be flexible, agile, and tailored to support business growth and innovation, promoting competition and investment to the UK in the process.

All parts of the UK will benefit from this new subsidy control regime. The new system provides a coherent framework to protect UK competition and investment. Through this regime, public authorities throughout the UK will be empowered to award bespoke subsidies, tailored to their local needs.

What is a subsidy?

A subsidy is a financial contribution using public resources which confers a benefit on the recipient. This could include, for example, a cash payment, a loan with interest below the market rate or a loan guarantee. Subsidies are administered by all levels of government in the UK including central government, devolved administrations and local authorities, as well as other types of public authority.

Subsidies should be given in the public interest, to promote a social good or address economic issues. For example, a subsidy could incentivise businesses to undertake research and development that increases economic productivity and wider prosperity, or to increase the uptake of low carbon technology.

However, without proper controls, subsidies could potentially cause economic harm or distortive effects, for instance, by giving unfair advantage to one enterprise over their competitors.

What will the Subsidy Control Bill 2021 do?

The government has designed a subsidy control regime that strikes the right balance between enabling the benefits that can be derived from subsidies, while limiting the most harmful impacts.

The regulation of harmful and distortive subsidies is a matter which is reserved to the UK Parliament. The Bill will set out a new UK-wide regime that will apply to all public authorities.

This regime will:

A) For the first time, empower local authorities, public bodies, UK government departments and devolved administrations to design subsidies that deliver strong benefits for the UK taxpayer.

B) Enable public authorities to deliver subsidies that are tailored and bespoke for local needs to support the UK’s economic recovery and deliver UK government priorities such as levelling up, achieving net zero and increasing UK research and development (R&D) investment.

C) Provide certainty and confidence to businesses investing in the UK, by protecting against subsidies that risk causing distortive or harmful economic impacts to competition and investment throughout the UK.

D) Contribute to meeting the UK’s international commitments on subsidy control, including its international commitments at the World Trade Organization and in free trade agreements.

How will this be achieved?

The new subsidy control regime will achieve its objectives through:

• a clear, proportionate and transparent set of principles and rules that make clear which subsidies are permitted and prohibited, and under what circumstances
• providing tools that enable public authorities to make a proportionate assessment of their proposed subsidy
• oversight and enforcement mechanisms that incentivise compliance with the rules and hold public authorities to account when they do not comply

What are the principles of the regime?

The 7 main principles are the foundation of the new regime. They entail that:

Principle A

Public authorities will need to consider, explain and assess the policy objective behind the subsidy to ensure there is a benefit to wider society in providing the subsidy.

Principle B

Subsidies should be both proportionate and limited to what is necessary to achieve the policy objective.

Principle C

Subsidies must incentivise and lead to a change in the behaviour of the beneficiary. They must help to address the public policy objective being pursued.

Principle D

Subsidies should be targeted to bring about an effect that is additional to any that would occur in the absence of the subsidy. They should not normally cover everyday business expenses.

Principle E

Alternative policy levers, that are likely to cause less distortion to competition and investment in the UK, or trade and investment internationally, should be considered before turning to subsidies.

Principle F

Public authorities should design the subsidy in a way that minimises the impact on competition and investment within the UK. This will require them to assess the effects which are likely to arise from providing the subsidy. This is a domestic test to ensure that a subsidy does not unduly favour one firm to the detriment of a competitor or new entrants to the UK market, or unduly reduce competition within the UK market.

Principle G

Public authorities should assess the material effects on competition and investment in the UK, and international trade and investment, and decide whether the benefits of the subsidy are greater than the harmful impacts of providing the subsidy.

Our regime will ensure that public authorities will have the freedom to act swiftly to provide support where it is most needed. There will be exemptions from some or all of the requirements for subsidies below a minimal financial assistance threshold, and certain subsidies to respond to economic emergencies and natural disasters.

Limited additional principles will apply to specific categories of energy and environment subsidies, in line with the UK’s international obligations. There will also be prohibitions on certain categories of subsidies that are damaging.

How can public authorities award subsidies?

The great majority of subsidies can be granted as long as they can demonstrate compliance via one of two self-assessment routes: either by undertaking a proportionate assessment of compliance against the main subsidy control principles, or through streamlined routes. Subsidies that have a higher likelihood of having distortive effects on UK competition and investment and international trade (‘Subsidies of Interest’) will be encouraged to carry out more extensive analysis as part of their assessment of compliance. A very small number of subsidies with the highest likelihood of having distortive effects (‘Subsidies of Particular Interest’ or, exceptionally, by the Secretary of State using a call-in power) will be required to have this assessment of compliance reviewed by a new body, the UK Subsidy Advice Unit, before their subsidy can be granted.

The two self-assessment routes and the processes for Subsidies of Interest and of Particular Interest are set out below.

Baseline route

The baseline route will be for public authorities to undertake an assessment against the main principles to consider the benefits and potential distortive impacts of the subsidy. Authorities can choose to award individual subsidies or to create schemes via this route. Once a scheme has been created, subsidies within it can be awarded without any further assessment of compliance.

Streamlined routes

We will also create streamlined routes for subsidies at low risk of distorting competition, trade and investment; that promote the government’s strategic objectives; and which we assess to be compliant with the principles of the regime. This will be even simpler than the process of assessment against the principles as public authorities will only need to demonstrate that they meet the compliance criteria for the streamlined route. Parameters for these routes will be published and laid before Parliament in due course.

For some subsidies that are more likely to cause negative effects, it is proportionate to give greater scrutiny of compliance with the principles. These subsidies will be categorised as ‘Subsidies of Interest’ or ‘Subsidies of Particular Interest’. Criteria for these subsidies will be set out in secondary legislation in due course. We anticipate there will be a very small number of subsidies in each of these categories.

Subsidies of Interest

Public authorities awarding Subsidies of Interest will be encouraged to undertake more extensive analysis as part of their assessment of compliance with the principles. There will also be an option for the public authority to request that the new UK Subsidy Advice Unit reviews their assessment of compliance and provide non-binding advice on how that assessment and the design of the subsidy might be improved. The Subsidy Advice Unit will be established within the Competition and Markets Authority.

Subsidies of Particular Interest and called-in subsidie

For Subsidies of Particular Interest, as part of their assessment, public authorities will be required to undertake more extensive analysis and seek advice from the Subsidy Advice Unit on their assessment before the subsidy can be awarded. A short “cooling off period” of 5 working days will apply once the Subsidy Advice Unit has reported on a subsidy of particular interest following which the public authority will be able to proceed to give the subsidy.

There may be subsidies that sit outside of the Subsidy of Particular Interest category but threaten to distort competition and investment within the UK. For these subsidies, the Secretary of State can also require that the public authority receive advice from the Subsidy Advice Unit and wait for a short cooling off period (under the same process as for subsidies of particular interest) before it can grant the subsidy in question.

The Secretary of State can also require that the Subsidy Advice Unit undertakes a similar review of the assessment of compliance for a subsidy which has already been granted.

Support for public authorities

Guidance will be produced to help public authorities comply with the obligations set out in the regime. There will be a statutory duty for public authorities to have regard to this guidance.

As they do now, public authorities will be required to upload information to the transparency database about their schemes and subsidies, if the subsidy is above a specific threshold (except for those subsidies exempt from the transparency requirements such as those given as minimal financial assistance).

How will the regime be enforced?

The regime will be enforced through the UK tribunal system, with interested parties being able to apply to the Competition Appeal Tribunal (CAT) for a review of a subsidy decision. Challenges will need to be made within a short period of time following the publication of the subsidy on the transparency database.

The CAT will apply the same principles as the court does on an application for judicial review and will have the same remedies available to them as under those proceedings. The CAT will also have the discretion to make a recovery order if a subsidy is found to have contravened the subsidy control requirements. The government anticipates challenges will only occur in exceptional circumstances as we expect high levels of compliance with the regime.

From when will the new regime apply?

The Subsidy Control Bill is subject to Parliamentary process and requires Royal Assent before it can become law.