After leaving the European Union, the UK is no longer subject to EU rules on public subsidies. At the end of April 2022, the British Parliament approved the Subsidy Control Act 2022, which establishes a new structure for the granting and control of public subsidies. The law is expected to take effect in the fall of 2022. This blog post outlines its key provisions.
Introduction
As the United Kingdom (UK) has left the European Union (EU), the UK has control over how all UK public grants are awarded and controlled. The UK's desire to shape public subsidies was a topic of debate during the 2016 Brexit referendum and has become a major talking point in post-Brexit trade talks with the EU. While the UK argued that the EU's "state aid" rules were too onerous and wanted to introduce more flexible rules, the EU wanted to ensure a "level playing field" to prevent British companies from receiving subsidies which, according to the EU , they unjustifiably distort competition. As part of the Trade and Cooperation Agreement (TCA) between the EU and the UK[1]Great Britain therefore agreed to introduce rules to control public subsidies.[2]
In June 2021, the UK government tabled legislation in Parliament setting up a new subsidy control regime.[3]Parliament has already approved thisSubsidy Control Law 2022(SCA) and received Royal Consent on April 28, 2022. The SCA is expected to be fully enforceable in the fall of 2022.[4]
The SCA creates a legal framework that allows UK authorities to make grants. Local authorities, public bodies and delegated governments in Scotland, Wales and, in certain cases, Northern Ireland,[5]they can decide whether they can give subsidies to companies that pursue national policy goals. Unlike the EU state aid system, which places central review with the European Commission, this decision does not need to be approved centrally by national authorities when a UK local authority decides to award a grant. As explained below, the UK Competition and Markets Authority (CMA) is required to give an opinion on some proposed subsidies, but this is exceptional and its opinion is advisory only.
The SCA also aims to bring UK law into line with the UK's international obligations, in particular the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures (WTO).[6]and ATJ.
What is a subsidy?
The definition of "subsidy" mirrors the definition of "state aid" in EU law. A grant is financial support (in kind or in cash) with four elements:[7]
- It is awarded by an authority with public funds.
- It confers an economic advantage ("benefit" condition) on one or more "undertakings" (ie persons or undertakings engaged in an economic activity).
- It is specific because it benefits one or more companies over others (the “selectivity” condition).
- Affects or may affect competition or investment in the United Kingdom or trade and investment between the United Kingdom and any other country.
General principles
SCA requires government agencies to consider seven principles before deciding to award a grant:
- Subsidies must have a specific policy objective to address a market failure or to address an 'equity principle' (eg a social issue).
- Subsidies must be proportionate and limited to what is necessary to achieve your objectives.
- Subsidies must change the beneficiary's economic behavior and that change must lead to the achievement of the purpose of the subsidy.
- Grants must not cover costs that the beneficiary could have financed without the grant.
- Subsidies must be the least distorting means of achieving a policy objective.
- Subsidies must be designed to minimize negative impacts on competition or investment in the UK.
- The beneficial effects of subsidies must outweigh their negative effects on UK competition or investment and international trade.
Separate principles also apply to energy and environmental subsidies.
Prohibited Subsidies
The UK government press release announcing the introduction of the Subsidy Control Act states: “[t]The system will not be a return to the failed approach of the 1970s, when the government tried to manage the economy, "pick winners" or rescue unsustainable companies.“.[8]
In line with this approach, the SCA establishes additional conditions for granting rescue and restructuring aid to companies and airlines in difficulty or insolvency.
The SCA also prohibits unlimited guarantees, subsidies conditional on export performance, and subsidies that require the use of domestic rather than imported goods or services. These provisions are in line with the UK's international obligations, such as those under the SMC and the WTO TCA.
At national level, the SCA prohibits conditional grants on the relocation of companies in the UK. This reflects the general principle that subsidies should be designed to minimize negative effects on competition or investment in the UK.
Optimized rules and exceptions
The SCA allows the governmentSimplified subsidy system🇧🇷 If the granting authority complies with the requirements (to be defined) of the Simplified Grant Scheme, grants can be considered as compliant with the CAS without individual assessment. This system is similar to the EU block exemption of certain subsidies.
Certain grants do not require approval. What "de minimis' (of negligible effect) and do not require approval. Additionally, grants do not need to be approved when awarded in response to a national or global economic emergency or to compensate for damage caused by natural disasters or other exceptional events. There are also some exceptions for subsidies related to homeland security or nuclear energy.
The role of the CMA and the recommender system
The SCA establishes a “financial advice center' within the CMA and the CMA has a duty to review the effectiveness of the SCA and its impact on competition and investment in the UK.[9]
mandatory recommendations🇧🇷 The SCA requires granting agencies to request a report from the CMA before granting a grant.of special interest🇧🇷 The SCA does not define the precise scope of “special interest” concessions, but it is defined in secondary legislation.[10]These subsidies are expected to be defined by monetary caps, with lower caps for specific sectors that could potentially include production of basic iron, steel and ferroalloys, aluminum, copper, automobiles and motorcycles, ships and floating structures, aerospace and spacecraft. , and electricity
Private interest funding can only be awarded after the CMA has completed the mandate procedure. The CMA must publish a report on the proposed grant within 30 working days. This period may be extended by written agreement between the CMA and the Competent Authority. The CMA report is not binding. After the CMA publishes the report, the agency must wait five business days before granting a grant.
The government may also instruct a public body to request a report from the CMA before awarding a proposed grant.
voluntary recommendations🇧🇷 In addition to the mandatory referral system, an agency may voluntarily request a report from the CMAprior toaward of a scholarshipof interest“.[11]For such “interest” grants, the CMA has the power to issue a non-binding report on the proposed grant. Authorities may decide to grant interesting subsidies before the CMA has produced or published its report.
Recommendation after award🇧🇷 The Secretary of State may also award a grant to the CMAlaterthe scholarship was awarded. This must be done within 20 business days of granting or granting the grant. The Secretary of State may issue post-award reprimands if it considers that the grant is not in line with the principles of the SCA or that there is a risk of having an adverse effect on competition or investment in the UK. The CMA must publish its non-binding report within 30 business days.
Execution - CAT Judicial Review
Review of concession decisions.The Secretary of State, or any interested party potentially affected by a subsidy, may appeal to the Competition Court of Appeals (CAT) for judicial review of a subsidy decision made by an agency (there is no review of CMA reports). Stakeholders may be competitors of a grant recipient or represent individuals whose interests may be affected.[12]
The CAT can issue a collection order that allows or requires the agency to recover the concession. Questions of law arising from a CAT decision can be appealed to the Court of Appeal (or Court of Session in Scotland).
Time limit.Requests for judicial review must be filed within one month of the "transparency date", i.e. entry of grant information into SCA's central grant database or when applying for the first time"knew or should have known' about the decision.
This one-month period is in contrast to the position under EU state aid rules, where it is possible for the European Commission to investigate alleged illegal subsidies for up to 10 years after the aid is granted.
International Compliance
One of the stated aims of the SCA is to ensure that the UK meets its international obligations in relation to the granting of grants. Specifically, the ATT allows the EU or the UK to take unilateral "corrective action" if they believe that a subsidy provided by the other party is having a material adverse effect on trade or investment between the UK and the EU.[13]The ATT also allows the EU or UK to challenge subsidies through simplified arbitration.[14]
Finally, the EU is currently developing legislation (the External Aid Regulation[quince]), which would allow it to neutralize the distorting effects of foreign subsidies on competition and investment in the EU internal market. Until now, subsidies granted by governments outside the EU have not been audited in the EU. The EU is currently proposing that the European Commission be empowered to scrutinize financial contributions made by public authorities from a non-EU country to companies doing business in the EU. Earlier drafts of the foreign subsidy regulation suggested that when the European Commission was reviewing the impact of a foreign subsidy in the EU, it would check whether the non-EU country had a rigorous subsidy verification system in place. The latest draft does not contain equivalent wording, but we expect the European Commission to take practical account of how the non-EU country provided the subsidy. At this time, it is still unclear how the future Foreign Aid Decree and the FMG will interact.
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WilmerHale has extensive experience advising on state aid/subsidies at both EU and national level, as well as advising on international implications (eg WTO rules). For more information, she should contact Cormac O'Daly, John Ratliff, Frédéric Louis, Georgia Tzifa, Edouard Bruc or Su Şimşek. The post was first published here: https://www.wilmerhale.com/insights/client-alerts/20220803-a-new-uk-subsidy-control-system
[1]verhttps://eur-lex.europa.eu/legal-content/ES/TXT/PDF/?uri=CELEX:22021A0430(01)&from=ES; yhttps://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/982648/TS_8.2021_UK_EU_EAEC_Trade_and_Cooperation_Agreement.pdf
[2]See Articles 363 to 373 of the TCA.
[3]verhttps://www.legislation.gov.uk/ukpga/2022/23/contents/enacted.
[4]The exact date will be determined in minor legislation in due course. The UK government has recently launched a Legislative Guidance Consultation, which explains the provisions of the SCA and provides advice to authorities and potential grant recipients. To seehttps://www.gov.uk/government/consultations/statutory-guidance-on-the-subsidy-control-act-2022.
[5]The 2019 agreement on the UK's withdrawal from the European Union contains a specific protocol on Ireland/Northern Ireland (since Northern Ireland shares a land border with the EU). Pursuant to Article 10 of the Protocol and its Annexes 5 and 6, EU State aid rules apply to a limited extent in Northern Ireland. To seehttps://eur-lex.europa.eu/legal-content/ES/TXT/PDF/?uri=CELEX:12019W/TXT(02)&from=ES🇧🇷 The UK government has recently proposed legislation (the Northern Protocol Bill, 2022) that would replace certain provisions of the Protocol, including state aid, as a matter of UK domestic law. To seehttps://bills.parliament.uk/bills/3182.
[6]verhttps://www.wto.org/english/docs_e/legal_e/24-scm.pdf.
[7]All references to grants also include grant schemes where multiple grants are awarded.
[9]CMA recently published draft guidance and a draft policy statement on how its Grants Advisory Unit will operate. To seehttps://www.gov.uk/government/consultations/draft-guidance-and-draft-policy-statement-for-the-cmas-subsidy-advice-unit.
[10]On March 25, 2022, the British government launched a public consultation on the matter. To see:https://www.gov.uk/government/consultations/subsidies-and-schemes-of-interest-and-particular-interest🇧🇷 The consultation period ended on May 6, 2022.
[11]This term is, in turn, defined in secondary legislation.
[12]For example, a local authority where people in the area of that authority could be adversely affected.
[13]See section 374(3) of the TCA.
[14]See sections 374(9) and 739(2) TCA. Furthermore, the EU or the UK could go to the WTO instead of using the ATT procedures. This happened in March 2022 when the EU complained about a low carbon energy subsidy scheme in the UK; to seehttps://www.wto.org/english/news_e/news22_e/ds612rfc_30mar22_e.htmand the EU's announcement in early July 2022 that the dispute had been resolvedhttps://policy.trade.ec.europa.eu/news/eu-and-uk-agree-way-forward-wto-dispute-concerning-uks-green-energy-subsidy-scheme-2022-07-01_en.
FAQs
What is the subsidy control act uk? ›
It enables public authorities, including devolved administrations and local authorities, to give subsidies that are tailored to their local needs, and that drive economic growth while minimising distortion to UK competition and protecting our international obligations.
What is an example of subsidies in the UK? ›Examples of recent subsidies awarded
Retail, Hospitality and Leisure business rate relief. Discretionary Rate Relief. COVID-19 Business Grant Support.
The Subsidy Control Act 2022 provides a new framework for the provision of subsidies within the United Kingdom which will build on the provisions in the subsidy control chapters of the Trade and Co-operation Agreement, which have applied in the interim of the UK's exit from the EU.
What are the principles of subsidy control act 2022? ›Subsidy control principles
The principles are: 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)
Under the Subsidy Control Act 2022, a subsidy means any financial assistance given directly or indirectly through public resources by a public authority that confers a specific economic advantage on one or more enterprises, with respect to the production of goods or the provision of services, and which is capable of ...
Who benefits the most from a subsidy? ›Producer Impact of a Subsidy
Therefore, producers are made better off by the subsidy. In general, consumers and producers share the benefits of a subsidy regardless of whether a subsidy is directly given to producers or consumers.
On 4 January 2023, the new UK subsidy control regime under the Subsidy Control Act 2022 (the "Act", available here) came into force. This completes the overhaul of the UK's approach to subsidies following Brexit and the UK's decision to diverge from the EU's State aid regime.
What are 3 examples of subsidies the government offers to farmers? ›WHAT ARE THE DIFFERENT TYPES OF AGRICULTURAL SUBSIDIES? The US farm subsidies system includes insurance programs, risk mitigation, environmental conservation incentives, disaster aid, marketing assistance, research and development services, and more.
What are the subsidy control principles? ›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.
What are the three types of subsidies? ›There are several definitions and types of subsidies. They range from financial transfers to opportunity costs, direct and indirect, overt and covert.
What are exemptions from subsidy control act? ›
General exemptions: emergencies
Subsidies given to compensate for the damage caused by natural disasters or other exceptional circumstances (such as rare and unforeseeable events like a pandemic) are not subject to the subsidy control requirements.
A subsidy typically supports particular sectors of a nation's economy. It can assist struggling industries by lowering the burdens placed on them or encourage new developments by providing financial support for the endeavors.
What are the pros and cons of subsidies? ›Some advantages of subsidies include inflation control and moderation of supply and demand, while disadvantages include a potential increase in taxes on citizens in subsidizing countries.
Who benefits from subsidies? ›Governments seek to implement subsidies to encourage production and consumption in specific industries. When government subsidies are implemented to the supplier, an industry is able to allow its producers to produce more goods and services.
What is the most subsidized industry in the United States? ›It all depends on your total income for the year, including income from your new job. If your total income still ends up being in line with the estimate you provided when you applied for your subsidy, you won't have to pay that money back.
How long does it take for a government subsidy to be approved? ›This process usually takes 7 days. How long it takes FLISP to pay out will depend on whether you need the subsidy for the deposit or not. If you need it for the deposit, the subsidy will be paid out within five working days of the deed being lodged at the Deeds Office.
What is the effect of a subsidy? ›A subsidy is a payment made to firms or consumers designed to encourage an increase in output. A subsidy will shift the supply curve to the right and therefore lower the equilibrium price in a market.
Who is hurt by subsidies? ›In the domestic sector, consumers, taxpayers, and small farmers are hurt by agricultural subsidies. Brian Riedl, Senior Fellow at the Manhattan Institute, describes the effects of agricultural subsidies, writing: “They burden American families with higher taxes and higher food prices.
Do subsidies cause inflation? ›Subsidies have to be financed by the government, and therefore they may cause larger deficits, thus contributing to the inflationary process.
Does subsidy increase welfare? ›
Key Takeaways
National welfare falls when a large country implements an export subsidy. National welfare in the importing country rises when a large exporting country implements an export subsidy. An export subsidy of any size will reduce world production and consumption efficiency and thus cause world welfare to fall.
The Subsidy Control rules apply to awards of financial assistance made by public authorities to businesses and any other organisations engaged in economic activity.
What is the main purpose of subsidies on? ›Formally, subsidies comprise all measures that keep prices for consumers below the market level or keep prices for producers above the market level or that reduce costs for consumers and producers by giving direct or indirect support.
Who benefits from a subsidy? ›A subsidy is an incentive given by the government to individuals or businesses in the form of cash, grants, or tax breaks that improve the supply of certain goods and services. With subsidies, consumers are able to access cheaper products and commodities.
Which type of government subsidy does not have to be paid back? ›A Federal Pell Grant, unlike a loan, does not have to be repaid. The maximum Federal Pell Grant award is $6,895 for the 2022–23 award year (July 1, 2022, to June 30, 2023).
What happens when subsidies are removed? ›Subsidy removal, without spending of the associated savings, would increase the national poverty level. This is due to the consequent rise in inputs' costs which is higher than the rise in selling prices of most firms and farms.
Is a subsidy a government regulation? ›Subsidies are a commonplace feature of government programs, and can be found in regulatory programs as well as in budget expenditures and in the tax code.
What is subsidy with example? ›It is a part of non-plan expenditure of the government. Major subsidies in India are petroleum subsidy, fertiliser subsidy, food subsidy, interest subsidy, etc. It is a place where shares of pubic listed companies are traded. Subvention refers to a grant of money in aid or support, mostly by the government.
What type of policy is a subsidy? ›What Is a Government Subsidy? Government subsidies are financial grants extended by the government to private institutions or other public entities, in order to stimulate economic activity or promote activities that are in the public good.
What does the effectiveness of a subsidy depend on? ›The effect a subsidy has on the market depends on the elasticity of supply and demand within the target market.