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Subsidy Control Bill - The General Principles

In the first in a four-part series David Owens and Edward Reynolds review the Subsidy Control Bill.

In this, our first note, we outline the seven general principles contained in Schedule 1 of the Bill and the comments from the Bill’s explanatory notes, as well as our comments. [1] It is intended to be a useful starting point for anyone who may grant, receive or challenge a subsidy.  When considering whether a particular subsidy would be consistent with the general principles, we recommend also considering whether it would be consistent with the Government’s objectives for the regime:

  • facilitating interventions to deliver on the UK’s strategic interests
  • maintaining a competitive and dynamic market economy
  • protecting the UK internal market
  • acting as a responsible trade partner.

A - Common interest

Subsidies should pursue a specific policy objective in order to:

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(a) remedy an identified market failure, or

(b) address an equity rationale (such as social difficulties or distributional concerns).

“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. Social equity objectives could include providing transport for residents of remote areas.”

BB comment: this is the most important general principle as all the others will flow directly from it.  The key point is for the specific objective to be defined with reasonable clarity against the wording of the definition (Objective).  It will be preferable not to simply cross reference to a report as that may not be specific or clear enough.  If the Objective is consistent with one of the Government’s examples of “strategic interventions” (for example, levelling up or achieving net zero) then that should provider further evidence that it is a policy objective.  Although it now only applies where the State aid rules apply, the General Block Exemption Regulation  (GBER) can be a useful reference point in that it sets out various types of policy objectives.

B - Proportionate and necessary

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

“Subsidies should be the minimum necessary to achieve the desired aim. In choosing a subsidy the body granting the subsidy (“the public authority”) must adopt those causing the least possible disruption in pursuit of the public policy objective.”

BB comment: the scale of the subsidy must be closely linked to the Objective and no more than is needed to achieve it.  This reflects some of the ideas behind the threshold and intensity limits in GBER.  By way of example, if a public authority is providing grant funding for affordable housing, it should consider whether funding 100% of the costs would be proportionate and necessary.

C - Design to change economic behaviour of beneficiary

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

(2) That change, in relation to a subsidy, should be:

(a)        conducive to achieving its specific policy objective, and

(b)        something that would not happen without the subsidy.

“Subsidies must incentivise and lead to a change in the behaviour of the beneficiary. They must help to address the public policy objective being pursued.”

BB comment: this relates to GBER issues around aid having an incentive effect and in our view is particularly important.  It will always be preferable to have robust evidence showing what the change will be and why, for example, extracted from a grant application form or correspondence from the subsidy recipient sent before a decision has been made to grant the subsidy.

D - Costs that would be funded anyway

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

“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.”

BB comment: this goes beyond the incentive effect, and we would also recommend obtaining robust evidence that the proposed subsidy recipient is not legally obliged to deliver the Objective in any event.  For example, if grant will be provided for affordable housing, ensure that it is for additional housing and not what must already be provided.

E - Less distortive means of achieving policy objective

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

“Alternative policy levers that are likely to cause less distortion to competition should be considered before turning to subsidies.”

BB comment: this requires a degree of analysis as to whether non-subsidy approaches might be possible, for example, a loan or equity investment on market terms.  It may well be that only a grant is sufficient to achieve the Objective on the grounds it would not otherwise be financially viable.  This should be clearly documented.

F - Competition and investment within the United Kingdom

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

“Public authorities should assess the material competition effects which are likely to arise from providing the subsidy. This is a domestic test to ensure that a subsidy does not unduly favour one firm to the detriment of a competitor or new entrants to the UK market, or unduly reduce competition within the UK market.”

BB comment: this is one of the key changes in the subsidy control bill, and it will be interesting to see how it fares during the bill’s passage through Parliament.  Subject to that, we would note that the wording of the principle does not prohibit a subsidy which has negative effects on competition, but only requires it to be minimised.

G - Beneficial effects to outweigh negative effects

Subsidies’ beneficial effects (in terms of achieving their 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.

“Public authorities will need to assess the material effects on competition and international trade or investment and judge whether the benefits of the subsidy are greater than the harmful impacts of providing the subsidy.”

BB comment: the wording of this principle is clearer than the equivalent in the UK-EU Trade and Cooperation Agreement (TCA), and is also permissive in the sense of using “including in particular”.  This makes the exercise easier in that all beneficial effects in relation to achieving the objective can be listed and compared to all negative effects.  We consider this to be the most important principle and the one most likely to catch the attention of the European Commission when it scrutinises compliance with the TCA.

Conclusion

The general principles build on those included in the TCA, and so public authorities should already have some experience of how to apply them.  We welcome the explanatory notes and government statements around the subsidy control bill as they provide more clarity about how to ensure subsidy is consistent with the general principles, which could be improved further once guidance is issued under the bill.  Our main recommendation is to consider to a reasonable but not excessive level of detail whether a proposed subsidy will be consistent, remembering that legal challenge is by way of judicial review.  We will consider in a later note what would have to be shown to bring a successful challenge. 

David Owens is a partner and Edward Reynolds is an associate at Bevan Brittan.

[1] Please note that it does not cover the energy and environmental principles.

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