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    The Subsidy Control Regime: A Year and a Half on

    Muhammad Saley
    Post by Muhammad Saley
    June 24, 2024
    The Subsidy Control Regime: A Year and a Half on

    This note looks at the first year and a half of the UK’s new subsidy control regime.

    Summary of the regime

    It may be useful to start with a quick recap of the regime.

    The Subsidy Control Act 2022 (“the Act”) came fully into force on 4 January 2023 and put in place a domestic subsidy control regime following the UK’s exit from the EU.

    When considering whether to grant financial assistance to enterprises (i.e. entities engaged in economic activity), public authorities must ensure that such assistance complies with the Act.

    Following the requirements of the Act will, in most cases, ensure compliance with the UK’s international subsidy control obligations, but public authorities will nonetheless need to be aware of these obligations and consider their application on a case-by-case basis.

    The UK’s subsidy control regime (as set out in the Act) is a largely permissive one, particularly when compared to the EU State aid rules, which are largely prohibitive in nature. Under the EU rules, which applied in the UK whilst the UK was a member of the EU, State aid is generally prohibited unless notified and approved by the European Commission, or unless otherwise exempted; whereas, under the UK’s subsidy control regime (save for those subsidies that are prohibited outright), where public authorities consider that a subsidy complies with the Act, it can be granted without the need for ex ante approval.

    Under the Act, there are a number of potential routes to compliance, including:

    • grounding the measure on a “no subsidy” basis;
    • undertaking an assessment of the subsidy against the subsidy control principles;
    • relying on one of the exemptions (e.g. minimal financial assistance);
    • designing the subsidy in accordance with one of the Streamlined Routes (akin to the General Block Exemption Regulations under the EU State aid regime).

    Although the potentially most distortive subsidies must be referred to the Competition and Markets Authority’s Subsidy Advice Unit (“the SAU”), the SAU is not a regulator with powers of approval or investigation; rather, its reports are non-binding and advisory in nature.

    The Act places transparency obligations upon public authorities and also provides a statutory review mechanism, by which a decision of a public authority to award a subsidy or put in place a subsidy scheme may be challenged by interested parties in the Competition Appeal Tribunal (“the CAT”) on judicial review grounds.

    The first year and a half of the new regime

    As one might have expected, the first year and a half of the new regime has been a bit of a bedding-in period.

    Subsidy control practitioners have been busy providing training on the new regime and advising public authorities on how to ensure compliance with the substantive and procedural requirements of the Act.

    From a perusal of the UK’s subsidy database, it is clear that public authorities have, over the past 18 months, provided a large number of subsidies to enterprises across a wide range of sectors, in order to meet specific public policy objectives. However, notwithstanding this, it is noteworthy that there has – to date – only been one challenge brought under the Act, namely the case of The Durham Company v Durham County Council [2023] CAT 50.

    The lack of challenges has meant that the CAT has not yet been able to develop case law in relation to the Act and, whilst the judgment in the Durham case provides some helpful insights as to how the CAT may approach subsidy challenges, we are still somewhat in the dark as to:

    • how the judges will interpret their new jurisdictional mandate;
    • how cases will be dealt with by the CAT more generally, including case management, preliminary issues, and possible applications for interim relief; and
    • how far the CAT will rely on EU State aid jurisprudence when determining applications for review brought under the Act.

    We are also not clear how the High Court might consider challenges brought to decisions to award subsidies under subsidy schemes (in circumstances where such challenges cannot be brought under the statutory review mechanism).

    As to the wider operation of the regime, the first year and a half has shown us that the SAU is likely to have a key role to play when it comes to the ongoing development and effectiveness of the regime.

    The SAU has been busy since its inception, with a number of referrals of subsidies of particular interest having been made to it under section 52 of the Act. Whilst the SAU’s role is, as noted above, an advisory one, its reports have been helpful in providing guidance to public authorities on how they can strengthen their subsidy control principles assessments.

    In fact, in a recent blog, the SAU identified some key themes that public authorities should take note of when it comes to such assessments. Although this advice was given in the context of subsidies of a particular interest that have been referred to the SAU for evaluation, it nonetheless has wider read-across to the work of public authorities more generally.

    In particular, when it comes to the assessments undertaken by public authorities against the subsidy control principles, the SAU encouraged public authorities:

    • to explain the policy objectives and market failures in relation to the proposed subsidy in a clearer manner;
    • to strengthen the competition and investment analysis;
    • to ensure that the balancing exercise brings together the positive and negative impacts of the subsidy, and explains why the benefits outweigh the negatives; and
    • to ensure that the analysis in any assessments is underpinned by economic evidence, with relevant supporting evidence being referenced throughout.

    This is helpful guidance to which public authorities should have regard when considering measures against the subsidy control requirements set out in the Act.

    Why have there been so few challenges?

    With the advent of the new regime in early 2023, many might have expected a number of challenges to have been brought in the CAT by now.

    This has not, however, been the reality, most likely because the regime is still in its infancy, but possibly because of the following additional factors:

    • First, the time limit for bringing claims is very restrictive, with claimants having only one month from the date the subsidy is published on the subsidy database (or from when the claimant knew or ought to have known about the subsidy) to decide whether to bring a challenge to a subsidy award and to prepare an application for review.

    • Secondly, and relatedly, the process for challenging subsidy schemes is restrictive, such that, once the time limit has passed to bring a challenge against the scheme itself, neither the scheme nor an individual subsidy granted under the scheme can be challenged before the CAT.[1]

    • Thirdly, the standard of review (i.e. judicial review) may be disincentivising claimants from bringing challenges to subsidy decisions. This is because judicial review claims are often difficult to succeed in, as the court or tribunal is only permitted to review the lawfulness of the decision on public law grounds, rather than to undertake a merits review by which it would be able to examine the rights and wrongs of the decision and potentially substitute its own decision for that of the public authority.

    • Finally, claimants may not always be aware of subsidies that have been granted in breach of the subsidy control requirements. For example, where a public authority grounds a measure under the commercial market operator principle (i.e. on the basis that it has been given on market terms), it will not be required to place any information regarding the measure on the UK’s subsidy database, such that a claimant may not be alerted to the possibility of being able to bring a challenge against the measure.

    What next for the regime?

    The forthcoming period will be an interesting one for the subsidy control regime.

    It is expected that there will be further challenges in the CAT, which will help develop the case law and play a role in clarifying the application of the regime more generally.

    The SAU has recently consulted on its approach to its monitoring functions under the Act, by which it is required to monitor and review the effectiveness of the Act and the impact of the Act on competition and investment within the UK. The SAU’s monitoring report is not due for two years, but evidence-gathering work will likely commence this year.

    The SAU will also, through its evaluation of those measures referred to it under the Act, continue to assist and guide public authorities on the best approach for assessing compliance of subsidies against the subsidy control requirements set out in the Act.

    It is, therefore, very much “watch this space” when it comes to how the regime will develop going forward.

    That said, public authorities must, when considering providing financial assistance to beneficiaries, continue to be alive to the need to ensure that they undertake careful consideration of the subsidy control requirements, so that their decisions are able to withstand scrutiny, meet their public policy objectives, and provide value for money for the taxpayer.

    [1] A challenge to an award of a subsidy under a scheme could arguably still be brought by way of an ordinary claim for judicial review in the High Court (for example, where a claimant alleges that the beneficiary was not eligible under the scheme, or where there has been some other public law breach in the granting of the subsidy).

    Disclaimer: This content is provided free of charge for information purposes only. It does not constitute legal advice for any specific case or cases and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed, or accepted by any member of Chambers or by Chambers as a whole.

    Muhammad Saley
    Post by Muhammad Saley
    June 24, 2024