The operative provisions of the Subsidy Control Act 2022 will come into force on 4 January 2023.

While much of the language is new, and the references are different, the Subsidy Control Act is not worlds apart from the system that UK public authorities are currently using. However, it does differ from state aid in some important ways, and public authorities will not want to be complacent or to assume that carrying on as before will be fine.

One of the main differences with the new system is a shift from prior approval to self-assessment and publication after the fact. This gives public authorities more flexibility in giving subsidies, but also less certainty. It also requires public authorities to learn and apply a new skillset - assessing subsidies and schemes against the principles set out in Schedule 1 to the Act.

This blog is an introduction to self-assessment under the Subsidy Control Act, looking at the principles and the practicalities.

Is financial assistance a subsidy – the four tests

Under the 2022 Act, financial assistance will be regarded as a subsidy if it meets the following four tests:

• it is given, directly or indirectly, from public resources by a public authority,
• it confers an economic advantage on one or more enterprises,
• it is specific, that is, is such that it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services, and
• it has, or is capable of having, an effect on-
  • competition or investment within the United Kingdom,
  • trade between the United Kingdom and a country or territory outside the United Kingdom, or
  • investment as between the United Kingdom and a country or territory outside the United Kingdom.

The Principles

Where financial assistance has met the four tests to be considered a subsidy, then public authorities must assess their proposed subsidy against seven subsidy control principles. These can be found in Schedule 1 to the Act as follows:

"Common interest

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).

Proportionate and necessary

Subsidies should be proportionate to a specific policy objective and limited to what is necessary to achieve it.

Designed to change economic behaviour of the beneficiary

Subsidies should be designed to bring about a change of economic behaviour of the beneficiary.

That change, in relation to a subsidy, should be—

• conducive to achieving the specific policy objective, and
• something that would not happen without the subsidy.

Costs that would be funded anyway

Subsidies should not normally compensate for costs which the beneficiary would have funded in the absence of any subsidy.

Least distortive means of achieving policy objective

Subsidies should be an appropriate policy instrument for achieving the specific policy objective and that the objective cannot be achieved through other, less distortive, means.

Competition and investment within the United Kingdom

Subsidies should be designed to achieve the specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.

Beneficial effects to outweigh negative effects

The beneficial effects of a subsidy (in terms of achieving the specific policy objective) should outweigh any negative effects, including in particular negative effects on—

(a)  competition or investment within the United Kingdom;

(b)  international trade or investment"

The first thing that readers will notice is the similarity of these new principles to the six principles set out in Article 366 of the Trade and Co-operation Agreement entered into between the UK and EU (TCA). Principle F – on competition and investment within the United Kingdom (which is not of concern to the EU) – is the only new principle, and the others have only been changed minimally. This will be an encouragement for authorities who have been working with the TCA and building some familiarity. It also gives some indication that the Subsidy Control Act is likely to be interpreted in a consistent manner to the TCA (and so largely consistent with the EU state aid regime). Indeed, there are echoes of the common assessment principles applied by the Commission to aid measures at EU level (such as incentive effect; proportionality; and avoidance of undue negative effects on competition and trade).

Public authorities should also keep in mind the energy and environment principles, set out in Schedule 2 to the Act. These comprise nine more principles which apply to subsidies which are given “in relation to energy and environment”. Although the Act does not give much detail itself on how to interpret these, the Statutory Guidance indicates that the relevant question is whether the policy objective behind the subsidy relates to energy and/or the environment. Some of the energy and environment principles are more specific still – for example, Principle D only applies to subsidies for electricity generation adequacy.

The Practicalities

Knowing the principles is, however, only the first step. Public authorities must then know what to do with the principles in relation to any given subsidy or scheme. Is this a tick-box exercise? An essay in response to each one? The answer, unsurprisingly, is somewhere in between.

The golden rule when it comes to subsidy assessment is proportionality. As the statutory guidance says:

“The depth of analysis conducted needs to be commensurate to the size and potential distortive impact of the subsidy or scheme in question”.

In other words, if you’re injecting large amounts of money into a competitive market in a sensitive sector, you need to mark your homework very carefully. If you’re giving an ad-hoc, non-controversial payment, then the analysis will be much shorter.

The other thing to recognise is that there is lots of overlap between the different principles. The statutory guidance recognises that they are “interlinked”, and so suggests a four-part analysis:

• "Identifying the policy objective, ensuring it addresses a market failure or equity concern, and determining whether a subsidy is the right tool to use
• Ensuring that the subsidy is designed to create the right incentives for the beneficiary and bring about a change
• Considering the distortive impacts that the subsidy may have and keeping them as low as possible
• Carrying out the balancing exercise”

Hopefully these four questions (What’s the goal? Does it work? What are the downsides? Is it worth it?) are less daunting than the principles for public authorities concerned about the administrative task of assessing each subsidy.

Further reassurance can be taken from the fact that most, if not all, of the relative points will (or should) have been considered long before any subsidy is granted. These are, fundamentally, sensible policy questions for public authorities to be asking when they are contemplating investing public money into a given project. There is no need for authorities to duplicate work they have already done in terms of researching and analysing a measure - in many cases it will simply be a case of re-recording these considerations under the heading of “subsidy control”.

For bigger subsidies, (particularly subsidies or schemes of interest or particular interest), local authorities should consider the detailed steps set out in Annex 2 to the statutory guidance. Where a subsidy is being referred to the Competition and Markets Authority (CMA) there is more work for authorities to do, but there is also the knowledge that their work is being checked by the regulator in advance.

Before the operative provisions of the Subsidy Control Act come into force on 4 January 2023, there are several things public authorities can do to help prepare for the new regime, and we are working closely with clients to help them get ready. If you have any questions about the subsidy control principles, or if you’re looking for guidance on how the act will apply to your organisation more generally, we would be delighted to hear from you.

Read our Subsidy Control Act 2022 guide here.

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