The UK Subsidy Control Act 2022 (the "Act") came into force on 4 January 2023 in order to replace the European Union ("EU") state aid regime and satisfy the UK's obligations under the UK-EU Trade and Cooperation Agreement. The Act sets out a framework for public bodies to comply with when awarding subsidies to businesses and provides a means for private challenge of the granting of any such awards.
What Obligations Do Public Bodies have Under the Act?
Subsidy Control Principles
In order to be compliant with the Act, public bodies must, amongst other things, have considered relevant Subsidy Control Principles and arrived at a view that the subsidy is consistent with those principles before making an award (unless it falls outside of the regime).
Examples of the subsidy control principles include:
- Subsidies should pursue a specific policy objective in order to address a market failure or equity rationale.
- Subsidies should be proportionate to their specific policy objective.
- Subsidies' beneficial effects should outweigh any negative effects.
This requirement affords public bodies with significant discretion. The key requirement is for public bodies to go through an appropriate process, rather than having to arrive at any particular conclusions.
Subsidy control database
Public authorities must also upload details of any subsidies granted to a publicly accessible database.
How Do Challenges Work Under the Act?
Basis for challenges
The Competition Appeal Tribunal ("CAT") is the UK's specialist competition and economic regulatory court, which has jurisdiction over subsidy control challenges. An interested party that is "aggrieved by the making of a subsidy decision" (for example, a competitor of a business to which a subsidy has been granted) can apply to the CAT to ask it to review a decision by a public body to grant a subsidy, to ensure that the public body has carried out all of its duties under the Act.
Timing for challenges
Challenges must be brought very quickly - within one month of the subsidy being made public by way of the UK subsidy control database.
Challenges under the Act to date
To date, only one challenge has been brought before the CAT, The Durham Company Limited v Durham County Council (the "Durham Case"). Two additional challenges are also currently in the CAT's pipeline, including one in the public domain related to loans granted by the Greater Manchester Combined Authority ("GMCA").
WHAT DID WE LEARN FROM THE DURHAM CASE?
- The CAT's finding was that no subsidy was granted, as the public authority did not grant the financial assistance to a separate corporate entity – it was providing the "subsidised" services itself.
- While the CAT's reasoning under the Act was different to reasoning which would have been applied under the EU state aid regime, the conclusions likely would have been the same.
- The CAT demonstrated that - at most - EU law on state aid is persuasive, but not binding, when construing the provisions of the Act.
Case management of challenges
It was apparent from the CAT's approach to the Durham Case and subsequent commentary coming out of the CAT that, given the involvement of public bodies, the CAT intends to dispose of challenges under the Act expeditiously and in a cost-conscious manner.
Careful cost management is important in any case, but it will be particularly important in this jurisdiction given the likely size of the parties in many challenges, and the importance of costs not acting as an undue deterrent on those bringing, or those defending, challenges – including considerations for the public purse.
Sir Marcus Smith and Charlotte McLean, Subsidy Control: The First Year, 20 December 2023.
What Role for the Competition and Markets Authority?
The Subsidy Advice Unit
The Act established a Subsidy Advice Unit ("SAU") within the Competition and Markets Authority. However, this body does not have a role in the challenge of subsidies and cannot require changes to, or block, subsidies.
Instead, the SAU's role is to publish independent reports on subsidies or subsidy schemes referred to it by public bodies. Under the Act, subsidies with greater potential to lead to undue distortion and negative effects on competition or investment in the UK (by reference to certain criteria), must be referred. Public authorities must wait until the publication of the SAU's report, and the expiry of a short cooling-off period, before the subsidy is given or made.
WHAT HAVE WE LEARNED FROM SAU REPORTS TO DATE?
The SAU's reports, considered in the round, have thus far been critical of public bodies' approach to subsidy control assessments under the Act.
Common deficiencies with the assessments have included that analysis carried out by the public bodies did not:
- demonstrate consideration of alternatives to meet the relevant policy objective;
- sufficiently reflect the subsidy control principles;
- quantify and weigh up the benefits of the subsidy against negative impacts.
Impact of SAU reports
While the reports themselves are non-binding, it is plausible that an SAU report which is critical of a public body's assessment could help to form the basis of a challenge to a subsidy or scheme in the CAT.
What's next for the UK Subsidy Control Regime?
Appetite for challenge
The President of the CAT noted, at the time of the one year anniversary of the commencement of the Act, that challenges brought under the Act have been sparce. So far, interested parties have not demonstrated significant appetite for private challenge. The CAT has speculated that the reason for this could be that the regime "is undeniably different and new" and "potential applicants are treading carefully and adopting a "wait-and-see" approach".
However, as mentioned in section 2, two challenges are currently in the CAT's pipeline, including a challenge to a loan granted by the GMCA.
The GMCA challenge
The GMCA challenge will explore the extent of the "commercial market operator" principle under the Act, which the GMCA relied upon to conclude that the relevant financial support did not constitute a subsidy.
The commercial market operator principle provides that a grant of financial assistance by a public body will not be deemed to be a subsidy where the financial assistance provided is on terms that could be made available in the market by a private operator that is driven by commercial objectives. The principle is therefore similar to the market economic operator principle under the EU state aid regime.
Where a grant of financial assistance does not constitute a subsidy by virtue of the application of the market economic operator principle, public bodies will not need to comply with their obligations as regards subsidies laid out in section 1. The outcome of this challenge will therefore be significant. Especially as we understand that public bodies appear to be leaning heavily on the commercial market operator principle in providing financial assistance to private parties in these early stages of the regime.
Forward looking conclusions
The consensus amongst practitioners is that the UK regime is very much in its early stages. A significant number of further challenges will need to be brought and resolved before the key legal tenets of the regime are fleshed out and can be approached with certainty.
It remains to be seen whether, in light of tight timelines for any challenge and a review standard that is favourable to public bodies, interested parties will seek to bring the challenges needed to develop the law in this area.
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