The UK’s new State aid regime

On 30 June, the UK Government published the long-awaited Subsidy Control Bill (the 'Bill') – a framework to establish a UK State aid regime – in line with its obligations under the EU-UK Trade and Cooperation Agreement.

The system is intended to allow quicker and more flexible financial support to UK businesses, avoiding the 'burdensome red tape' of the EU regime.  While, substantively, the legal definition of a subsidy will remain consistent with the EU concept of State aid, the new UK regime marks a new era of post-Brexit national policy. Coupled with the upcoming National Security & Investment Act, the proposed 'call-in' powers under the Bill signal a departure from the philosophy of cross-market competition and a move towards increased protectionism and the promotion of national champions.  The regime will be enforced through the UK tribunal system by way of a judicial review-style application to the Competition Appeal Tribunal.

The Bill establishes seven core principles setting out the circumstances in which subsidies are permissible:

1. 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.
2. Subsidies should be both proportionate and limited to what is necessary to achieve the policy objective.
3. Subsidies must incentivise and lead to a change in the behaviour of the beneficiary, and must help to address the public policy objective being pursued.
4. 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.
5. 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.
6. Public authorities should design the subsidy in a way that minimises the impact on competition and investment within the UK.
7. 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.

In addition to covering those subsidies that may affect trade or investment between the UK and other countries, the proposed system includes a principle to protect the UK internal market.  This is intended to prevent the relocation of employees and economic activity within the UK as a result of 'subsidy races' between public authorities competing to attract the same business, a growing threat stemming from increasingly devolved regional government.

Public authorities will be responsible to self-assess whether there is a subsidy and whether it complies with the subsidy control principles.  The rules envisage four routes through which different categories of subsidies may be granted:

• A streamlined route for subsidies that are at low risk of distorting markets.
• A 'baseline route' (the default route) where public authorities self-assess whether there is a subsidy and whether it complies with the subsidy control principles.
• A more extensive analysis for Subsidies of Interest, being those that are more likely to affect competition, trade or investment.
• The highest level of scrutiny will be reserved for Subsidies of Particular Interest, which are those subsidies at highest risk of distorting markets.

These last two categories will be defined under secondary legislation at a later date.

The UK's Competition & Markets Authority (CMA) will play a significant role in the new regime, with a new Subsidy Advice Unit division offering guidance to public authorities with respect to Subsidies of Interest and Subsidies of Particular Interest (the latter category being subject to mandatory referral to the CMA).  While the CMA is not empowered to approve, prohibit or enforce, its ability to review certain categories of subsidies may therefore be regarded effectively as a notification and approval process.

The regime intends to accommodate a number of exemptions from the subsidy control requirements, including (i) de minimis subsidies (financial assistance of less than 325,000 SDR (approx. £335,000) over three years - a significant increase on the EU’s €200,000 limit), (ii) subsidies required for safeguarding national security, (iii) subsidies granted to address natural disasters or national or global economic emergencies, and (iv) subsidies of less than 750,000 SDR (approx £775,000) over a three-year period granted to providers of Services of Public Economic Interest (i.e., subsidies provided to deliver public services such as the post office network, which largely reflect the EU definition regarding services in the general economic interest).

The legislation marks a departure from the EU State aid regime, which incentivised subsidies to be designed to fit within the scope of any applicable block exemptions. The extent to which the new UK system is indeed quicker, more flexible, and less burdensome remains to be seen, but further guidance can be expected in due course to help public authorities navigate the uncertain waters on receiving and awarding subsidies.