Alexander Rose and Jonathan Branton discuss the latest updates made to the Subsidy Control guidance published by Department for Business, Energy and Industrial Strategy (DBEIS).
DBEIS has on 24 June 2021 updated its Subsidy Control guidance (previously issued on 31 December 2020) now including a set of FAQs which will be useful for public bodies applying the new rules and businesses applying for public funding.
The UK's new Subsidy Control regime came into effect at 11pm 31 December 2020. Under the new independent regime public sector organisations will need to make assessments of how subsidies comply with the relevant rules. DBEIS previously published guidance on 31 December 2020 when the new rules came into effect (see previous commentary here). This has now been updated on 24 June 2021.
The key change is the inclusion of FAQs which read:
UK-EU Trade and Cooperation Agreement frequently asked questions
Article 363 Definitions
How should public authorities determine when a group of companies constitutes a single economic actor?
A company with subsidiaries or branches should be regarded as a single economic actor, and the level of subsidy should be assessed at group level, unless the subsidiaries are effectively autonomous of the group and cannot rely on it for resources/financing.
In relation to what is meant by a ‘subsidy’, Article 363 (1) (b) suggests that a ‘subsidy’ means financial assistance which arises from the resources of the Parties that is used to provide goods or services, or to purchase goods or services. However, if the goods or services are provided or purchased at a market rate, is this still a ‘subsidy’?
If financial assistance is provided on a commercial basis, or goods or services that are required by the state are purchased at a market rate then there will be no subsidy.
Under Article 363 (2)(c) can a measure be considered non-specific if the exemption is justified by ‘objective criteria’?
A measure may be justified as non-specific if it is available to all enterprises who are in the same legal and factual position on the same terms. This provision is designed to provide clarity on how levy schemes can be designed to fall outside the scope of the TCA.
Article 364: Scope and exceptions
Does Article 364 (3) provide cover for Covid measures?
Subsidies granted to respond to Covid can be granted under Article 364(3) where they meet the relevant conditions e.g., that they are temporary. Such subsidies are excluded from the commitments on prohibited subsidies and subsidies subject to conditions. Furthermore, they cannot result in retaliatory measures.
Existing Covid-19 schemes that were approved under the EU State aid rules can continue, though note that public authorities are no longer bound to follow the limits set out in the EU State aid rules. When public authorities implement new schemes and subsidies, or amend an existing scheme, which could not be done under the terms of EU State aid rules, then an assessment will need to be made against the principles set out in Article 366 This is so that the public authority can satisfy itself of TCA compliance.
Note that only measures that compensate for actual damage caused by a natural disaster or other exception non-economic occurrences are exempt from the application of the principles per Article 364(1), as opposed to general business support to deal with the impact of such occurrences.
In relation to Small Amounts of Financial Assistance below 325,000 Special Drawing Rights (SDR), how do public authorities determine the Sterling equivalent amount?
Public authorities should use the International Monetary Fund SDR convertor
Support below this level is not subject to compliance with the principles under the TCA agreement.
On what basis is the 3-year limit to be calculated – consecutive fiscal years or rolling 3 x 365 days?
Small Amounts of Financial Assistance of less than 325,000 SDR are calculated over a three-year consecutive fiscal period.
How long will public authorities need to keep records on those subsidies under the threshold for De Minimis and Small Amounts of Financial Assistance?
Public authorities must keep records of De Minimis aid granted in the ten years prior to the end of the transition period. The approach for Small Amounts of Financial Assistance will be determined following the Government’s consultation on the future domestic subsidy control regime.
Does any de minimis aid provided to a company in Northern Ireland that has GB ‘partners’ or ‘links’ to GB companies count towards the 325,000 Special Drawing Rights (SDR) ceiling of a beneficiary / single economic actor? (and vice versa)
De Minimis aid and Small Amounts of Financial assistance need to be cumulated and not exceed the applicable thresholds i.e., De Minimis for aid that is in scope of the NI Protocol, and Small Amounts of Financial Assistance under the TCA. Where De Minimis aid is granted, this would count towards the Small Amounts of Financial assistance threshold where companies in receipt of support are a single economic actor. The question of whether aid is in scope of the NI Protocol, needs to be tested in line with Chapter 7 of this guidance.
It should also be noted that any De Minimis Aid and Small Amounts of Financial Assistance will also count towards the limit of 750,000 SDR that can be granted outside the TCA for Small Amounts of Assistance for Services of Public Economic Interest (SPEI).
What is meant by ‘supranational’ level subsidies?
Supranational subsidies include those provided by EU institutions from centrally-managed EU resources (which are not imputable to Member States and therefore constitute State aid under the EU’s State aid regime).
From 1 January 2021, are public authorities allowed to provide subsidies in scope of the TCA to companies that are not located in the UK’s Assisted Areas map?
Yes. The Government is consulting on its approach to subsidies for the development of disadvantaged or deprived areas or regions, but under the TCA subsidies may be granted as long as the principles are met. These areas are not defined, there is no equivalent of the assisted areas map as there is for EU Regional aid, and there are no set limits on the amount of subsidy which may be provided, either as an absolute amount or as a percentage of investment costs. Public authorities should also take note of the UK-EU Declarations of 24 December 2020 [footnote 21] which include a non-binding declaration on subsidy control policies. This provides guidance on subsidies for the development of disadvantaged areas, which states that when determining the amount of subsidy, the following may be considered:
- the socio-economic situation of the disadvantaged area
- the size of the beneficiary
- the size of the investment project
The declaration also provides guidance on the beneficiary’s contribution, which must be substantial. Moreover, the subsidy should not have, as its main purpose or effect, to incentivise movement of the beneficiary from one Party to the other.
Article 366: Principles
What are examples of specific public policy objectives to remedy identified market failures?
Examples might include the failure of the market without subsidy to meet climate goals, deliver business finance to SMEs, or to meet the UK’s objective to increase broadband coverage.
What is meant by ‘equity rationale’ such as social difficulties or distributional concerns?
Equity objectives arise where a subsidy granter seeks to reduce inequalities. This provides a basis on which subsidies may be provided to support levelling up and ensure that disadvantaged groups or regions have increased economic opportunity. This could be through support for example for a particular disadvantaged region or for wage subsidies to incentivise companies to hire the long term unemployed. Another example would be where the state steps in to support public services at the level that is required for citizens, such as rural public transport, where the market fails to do so on a commercial basis.
Rescue subsidies to avoid serious local difficulties arising may also serve an equity rationale, though note that such subsidies need to follow an additional set of conditions in the TCA for rescue and restructuring (Article 367).
Is a record of compliance with the principles required for every individual subsidy under a scheme or is it intended to be completed at “scheme” level?
It should be sufficient to do a thorough compliance check with the principles at scheme level. It will, however, be important to ensure that all beneficiaries and subsidy awards are then completely within the terms of the scheme.
Article 367: Prohibited subsidies and subsidies subject to conditions
What constitutes a reasonable time in the context of a restructuring plan for a company to be restored to viability?
What is meant by a small and medium-sized enterprise (SME)?
Granting authorities should apply the definition of SME contained in the Companies Act 2006.
Small companies are defined in section 382.
Medium sized companies are defined in section 465.
What is meant by ‘significant funds’ in the context of companies needing to make a contribution to the cost of restructuring?
What is meant by social hardship and severe market failure?
Article 369 Transparency
Where will the details of TCA subsidies be recorded?
A UK database is available and information on subsidy awards must be uploaded onto it within 6 months of the award being made.
Does the requirement to upload subsidy information apply at scheme level or per award?
Details of schemes and awards above the values set out below need to be uploaded.
Currently, each subsidy award of £500,000 or more that is provided under a scheme must be entered onto the database. A subsidy award of less than £500,000 under a scheme must also be entered if it would cumulate with other awards for the same costs to an amount of £500,000 or over for a single recipient.
Ad hoc subsidy awards provided on an individual, one off basis outside schemes must be declared if the award would result in the recipient having received more than 325,000 SDR of non-scheme subsidies or de minimis State aid in the preceding three years.
Compensation above 15 million SDR for services of public economic interest must also be declared on the database.
Will details of all grants awarded after 31 December 2020 but provided under schemes previously set up under the Temporary Framework be required to be published?
Details of schemes that were live as at 01/01/2021 have been extracted from the EU’s electronic notification system (SANI) system and uploaded onto the new database by BEIS.
Do subsidies below 325,000 SDR have to be uploaded to the database?
Subsidies below 325,000 SDR over three years are exempt from the transparency obligations under the TCA, they do not need to be uploaded.
Article 371: Independent authority or body and cooperation
When and how will the UK establish or maintain an operationally independent authority or body?
Under the terms of the TCA, an independent authority will have an ‘appropriate role’ in the UK. Our options on the role of the independent body remain open. The exact role, function and powers of the independent body is being considered as part of the wider consultation on the new domestic subsidy control regime.
Article 372: Courts and tribunals
How is an interested party defined for the purposes of the TCA?
The TCA defines an interested party as any natural or legal person, economic actor, or association of economic actors whose interest might be affected by the granting of a subsidy. This could include the beneficiary, competitors of the beneficiary and relevant trade associations.
Article 373: Recovery
Has the TCA changed the period within which a challenge must be brought against aid awards made in the EU (i.e., by the Commission, Member States, or competitors in the European Union)?
No, the TCA has not changed the substance or procedure of the EU State aid regime. Interested parties will still be able to complain to the European Commission if they believe there has been unlawful aid granted in the EU (or for aid in scope of the NI Protocol).
How can public authorities manage the risk of recovery of subsidies?
As previously noted, recovery is a time limited remedy and only applies where subsidies do not follow the TCA principles. Therefore, public authorities should ensure that the subsidy meets the principles, making an assessment using the form provided in the annex to this guidance, which should evidence how the principles are met, and they should also upload the required subsidy information promptly on the UK subsidy database, to minimise the risk of recovery for any potential beneficiaries.
We anticipate that further changes will be made in the coming weeks, for example updating the guidance to refer to the recently launched subsidies database and to explain the implications of the forthcoming Subsidy Control Bill.