Seven months on from the Subsidy Control Act 2022 coming into force, and with the new UK regime now in full swing, we can take stock of how the new regime has been working and reflect on the lessons that can be learned from its implementation so far.
In particular, over that period we have seen:
- The first challenge under the Act, against Durham County Council, which we recently wrote about here;
- Ten reports by the Competition and Markets Authority's new Subsidy Advice Unit (SAU), including one to Birmingham City Council with key lessons for other authorities that we have considered in detail below, with more referrals pending;
- A decision by the English High Court on aid to Bulb (currently under appeal); and
- Updated statutory guidance.
The new regime
The Act came into force on 4 January 2023, bringing in a detailed 'domestic' UK subsidy control regime to replace the previous EU State aid system (other than for certain subsidies with a direct impact in Northern Ireland). Not satisfied with implementing the UK's obligations under the UK-EU Trade and Cooperation Agreement, the Act extends beyond those baseline requirements to the regulation of purely local subsidies. The Act also established the SAU within the Competition and Markets Authority, and tasked it with providing independent advice and guidance on subsidies and schemes that have a greater potential to lead to distortion and negative effects on domestic and international trade, competition or investment.
The Act establishes a category of subsidies, and subsidy schemes, known as subsidies or schemes of particular interest ("SSOPI"). These must be referred to the SAU for evaluation. A subsidy falls into the category of a SSOPI if it is:
- (i) over £10 million by itself, or (ii) over £1 million and would cumulate to above £10 million with other related subsidies given to the beneficiary within the previous three financial years;
- granted to a recipient in a listed "sensitive sector" and is (i) over £5 million by itself, or (ii) over £1 million and would cumulate to above £5 million with other related subsidies given to the beneficiary within the previous three financial years;
- a permitted restructuring subsidy (i.e. a subsidy granted to an ailing or insolvent business that has a credible restructuring plan where the authority is satisfied that the subsidy contributes to an objective of public interest); or
- over £1 million and explicitly conditional on the recipient relocating (but not subject to the general prohibition on such subsidies because it meets the conditions for an exemption).
Certain other subsidies and schemes that are designated as being "of interest" (e.g. less than the £10 million thresholds noted above, but over £5 million) can be voluntarily referred to the SAU.
The SAU's report to Birmingham City Council
In June 2023, the SAU accepted a request from Birmingham City Council to assess a proposed subsidy to be given to Stoford Digbeth Ltd ("SDL"). The Council proposed to award SDL a grant of £14.3 million to fill a "viability gap" associated with converting a disused building into (i) a modern studio and office space for the BBC and (ii) retail space. As this proposed subsidy was over £10 million, it qualified as a SSOPI so had to be referred to the SAU.
The Act gives the SAU 30 working days to consider a referral by a public body – in this case to review the Council's assessment of the SDL subsidy against the subsidy control requirements – and to publish a report detailing its findings. The SAU's role is solely to advise referring authorities – it cannot prohibit the making of any subsidy or scheme. It is for the public authority to decide whether to proceed with a subsidy or scheme once it has received the SAU's advice.
The SAU reviewed the proposed subsidy and the Council's assessment, and made the following key observations in its report:
- the policy objective could have been more focussed and linked to the specific aims of the subsidy;
- the assessment could be strengthened by demonstrating that the Council considered alternative options to meet the policy objectives, as well as addressing the identified viability gap for the project (and by demonstrating that the Council had not uncritically relied on information on those alternative options provided by SDL itself);
- the assessment could be improved by providing additional evidence and analysis used to select the most likely counterfactual (i.e. what would have happened in the absence of the subsidy);
- the proportionality assessment could include more detail and evidence to demonstrate that the calculation used to identify the viability gap meant the subsidy was proportionate and the minimum necessary to achieve the objective;
- the assessment of competition and investment could be strengthened by providing more detail on the identity of relevant competitors, on the potential impact on competition of SDL's entry into the market and being more specific on the distortions to competition and investment; and
- the balancing test could be clearer on the negative impacts identified and how they were weighed against the positive impacts from the subsidy.
The SAU also found that the amount required, and the approach taken to regenerating the building, were effectively pre-determined by the enterprise zone scheme of which the development was a proposed part. That may have undermined the Council's consideration all of the alternative ways of achieving its policy objective, because it did not appear to have considered alternatives outside the enterprise zone initiative.
The report is consistent with the other reports published by the SAU since it started receiving referrals under the Act. Other reports have similarly noted weaknesses in (1) the identification of the market failure or social inequity that is the basis for intervention, (2) the proper consideration of alternative means of achieving the policy objective, (3) the proportionality of the scale of the intervention and (4) the evidence base considered and set out by the public authority.
The Durham case
The first challenge brought under the Act was heard by the Competition Appeal Tribunal in July, following earlier hearings around the capping of parties' costs (a decision by the CAT to cap the challenger's costs at £50k and the Council's at £60k was overturned by the Court of Appeal on 26 June). The Durham Company Limited (trading as Max Recycle) is challenging as unlawful the Council's use of revenues from household waste collection to support its own commercial waste collection service, to the detriment of Max Recycle's own offering. A previous case brought under EU State aid rules was thrown out by the High Court in 2020.
The Tribunal decided that a public body cannot subsidise itself, and you can read our snap analysis of that part of the decision here. It marks a significant shift in the way that subsidies given to an authority's own "in-house" trading activities are treated.
The Tribunal also found that, had it not found that the Council could not subsidise itself, it would still have found that no subsidy arose for three reasons:
First, the financial assistance provided through the Council's provision of services at below market cost to its commercial waste collection service did not provide the service with an "economic advantage". That was because, put briefly, the economic advantage in the ability to charge less to users of the Council's commercial waste collection service would only arise if the Council actually did charge less, but it could not because other public law duties would not permit it to.
Second, the Council's commercial waste collection service could not properly be construed as an economic activity because it is primarily based on a statutory duty driven by environmental and public health concerns, rather than an economic purpose. This suggests that purpose matters as much as anything else: if an activity is primarily a matter of statutory duty, it may not be an economic activity when done by a public body even though it will be an economic activity when others do it. This part of the judgment may be significant when considering subsidies given to, for example, local authority ALEOs set up to deliver leisure or cultural provision.
Third, the apportionment of costs between one Council service and another did not, in any event, give rise to a financial advantage.
The Bulb case
On 31 March the High Court rejected three judicial review challenges, brought by Scottish Power, EOn and British Gas, to the UK Government's decision to sell the business and assets of defunct energy supplier Bulb to Octopus Energy (a sale that was supported financially by the Government). Because that took place before the Act came into effect, the challenge was brought on the basis that the Government had acted in breach of the Trade and Cooperation Agreement (and so contrary to section 29 of the European Union (Future Relationship) Act 2020).
While the challenges were refused by the High Court, it nonetheless had some criticism of the subsidy from which lessons can be taken for future challenges under the Act. In particular, State aid case law and analysis undertaken under the State aid regime can be useful, but cannot be relied upon without clearly linking them to the requirements of the Act (or, in the Bulb case, the TCA). Furthermore, an unwillingness of the market to provide a loan to fund Bulb before it went into administration was not "market failure" but rather the market working as a rational market ought to. The latter point illustrates that authorities should not treat the concept of "market failure" (which is one of the bases for giving a subsidy under the Act) as synonymous with market forces producing a socially or politically undesirable outcome, notwithstanding that that is often how the term is used.
Updates to statutory guidance
At the end of June the statutory guidance on the Act was updated to (1) provide further detail on the requirements for uploading information to the UK subsidy control database, as set out in the Subsidy Control (Subsidy Database Information Requirements) Regulations 2022, and (2) provide additional guidance on how to calculate the value of subsidies, as set out in the Subsidy Control (Gross Cash Amount and Gross Cash Equivalent) Regulations 2022.
The new regime continues to bed down and further developments can be expected. It is of course early days yet, and public bodies awarding subsidies are still getting used to the broader freedom of action they now have when granting subsidies compared to the old State aid regime, as well as to the accompanying level of self-assessment and evidence building that is now required.
The key lesson so far, from the SAU's reports and the challenges we have seen, appears simple: be alert to decisions giving rise to public subsidies, and do not treat the assessment as a box ticking exercise – an appropriate amount of time must be put into getting it right.
The new regime may be more permissive, but with that greater power comes greater responsibility.
If you would like to discuss how the Act affects your organisation or project please contact Jamie Dunne, Charles Livingstone or your usual Brodies contact.
