UK subsidy control regime: The year ahead 

United KingdomScotland

As reported in our previous Law-Now here, in June 2021 the UK Government began its formal process of implementing legislation to replace the EU State aid rules by introducing the Subsidy Control Bill to Parliament (Bill). With the second reading taking place in the House of Lords on 19 January 2022, shortly followed by a raft of policy and illustrative legislative documents published by BEIS, we take stock of where we are now and what to expect in the coming year.

1. Where are we now?

The Bill

The second reading in the House of Lords (HoL) saw a lively debate on some of the fairly fundamental aspects of the Bill. Concerns were raised about the lack of detail as to how the Bill will work, for example, the lack of clarity on the difference between a ‘subsidy of interest’ and ‘subsidy of particular interest’ and the concepts of a ‘subsidy scheme’ and a ‘streamlined subsidy scheme’. As practitioners in this area will know, clarity - and ultimately a comprehensive framework of supporting guidelines - detailing these concepts will be critical to all parties that need to navigate and operate under the new regime.

In response, BEIS has published further illustrative subsidy documents including guidance, regulations and worked examples on 25 January 2022 (see below). The Bill is currently progressing through Committee Stage in the HoL which involves a detailed line-by-line examination and approval of the clauses and schedules of the Bill.

BEIS Guidance

On 31 December 2020, on the eve of the end of the Brexit transition period, BEIS published guidance on the UK’s international subsidy control commitments. This was intended to provide comfort on the steps public authorities should be taking when assessing the award of a subsidy after the end of the transition period. This guidance was updated on 24 June 2021 with a helpful Q&A section and various decision trees. As of today, this still remains the only UK Govt guidance currently in existence that public authorities can address when awarding subsidies post 31 December 2020.

While the BEIS illustrative documents issued earlier this week are primarily for the purposes of assisting Parliament in scrutinising the Bill, they are also designed to help businesses, public authorities, and others with an interest in the developing UK subsidy regime. They essentially provide a vital early insight into the UK Govt’s thinking on the practical application of the new regime as it will unfold. This includes: a policy statement and draft regulations on subsidies/schemes of interest and particular interest (SSo(P)I) – essentially those which may be ‘called in’ to the new Subsidy Advice Unit within the CMA. It also includes a policy statement and worked examples on ‘Streamlined Routes’ which will essentially reformulate and replace the previous ‘block exemptions’ under the EU regime, permitting the award of a subsidy on the basis of meeting a certain set of strict criteria. The BEIS additional documents can be found here.

By way of overview, these additional documents provide some indication on the Government’s practical thinking on how public authorities intending to grant subsidies or establish schemes will undertake their analysis and practical application. For example, the policy statement provides criteria and potential threshold ranges for SSo(P)Is designed to capture those subsidies which pose a substantial risk of negative effects on domestic competition and investment or international trade (see paras. 8 and 9). However, the draft Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022 indicate by the use of square brackets that these figures are yet to be agreed and finalised.

Interestingly, it is proposed that subsidies awarded to the same enterprise will count towards the monetary SSo(P)(I) thresholds for voluntary or mandatory notification only where they are related to the same project, cost or activity within the last three financial years. This proposed system is much more focused and less restrictive, aimed only at notification of subsidies for same project. It is designed to be efficient, cut red tape, and avoids the EU ‘catch all’ scenario. It therefore generates less obligation for mandatory notification. This means that in theory one entity could receive subsidies for several different projects and would not need to publish these where they are all under the relevant threshold.

In addition, the Bill makes provision for Streamlined Routes to offer public authorities a way to award subsidies more efficiently, essentially replacing the previous EU block exemption framework under a different name. Streamlined Routes will be designed to achieve specific objectives and support UK-wide priorities such as ‘Levelling Up’ and transitioning to a Net Zero economy. BEIS has also published its policy statement and draft regulations in respect of Streamline Routes, which makes clear that the UK Government is the only body that will be able to establish Streamlined Routes. However, public authorities will also be able to develop their own individual schemes which would apply in parallel, and the authority can then decide which route it wishes to choose for a given award. Assuming that the Streamlined Routes are ultimately explained in sufficient detail, effectively cover a wide range of potential subsidy awards, and are practical to apply, it is hoped that public authorities will make use of this in preference to other options like individual schemes or ad hoc subsidy awards. Clear benefits to such a route would include reduced administrative burden, increased legal comfort and certainty for all involved.

However, the Bill also clearly requires that all Streamlined Routes must be laid before and approved by Parliament. This means that if the Streamlined Route is modified in any way, it must be laid before Parliament again for approval – which could of course take a significant amount of time. Modifications are likely, particularly in the beginning as the new UK subsidy regime beds in and develops over time However, given that the EU block exemptions were also set out in legislation and were in place for years at a time without approval, it is expected that such a process in the UK’s new regime will ultimately be workable and effective. The key will be getting the first set of Streamlined Routes well drafted and practical to apply.

2. What’s next?

The Bill continues to make its way through the House of Lords – after Committee Stage ends this second week of February, the Bill will advance to Report Stage and its third and final reading in the HoL. It will then reach the final stage of Royal Assent and formally become an Act of Parliament. But that is far from the end of the story, for the devil as always is in the detail. Even once the Bill becomes law, the BEIS policy statement makes clear that engagement on Streamlined Routes will continue and, essential accompanying secondary legislation will also need to be laid before Parliament. The Government recognises that these will also need to be reviewed and updated as appropriate.

The Bill will also establish the Subsidy Advice Unit within the CMA, which will come into effect once the Bill receives royal assent. Where a voluntary or mandatory subsidy referral is made, the Subsidy Advice Unit will evaluate an authority’s assessment of compliance for a subsidy or scheme and produce reports on it, although and importantly these reports will not be legally binding on public authorities. Even where a given the report confirms issues with the subsidy, it is still ultimately for the public authority to decide whether to grant the subsidy or not. The CMA has already begun recruiting for subsidy specialists to fulfil this function in anticipation of its launch. However, this really is just the beginning of a long and evolutionary process. The interesting part will be when public authorities and potential beneficiaries start to work within the framework of the new regime once it is ultimately finalised and enters into force.