Opportunities presented by the new public subsidy regime
A Thinking Business Publication
As of 1 January 2021, EU state aid law ceased to apply in Great Britain for new subsidies granted from that date. Since then the UK has been in a transitional period to introduce the post-Brexit subsidy control regime. A major milestone came when the Subsidy Control Act received royal assent in April 2022 and the transition period will end on 4 January 2023 when the Subsidy Control Act and related statutory guidance comes fully into effect. A major difference introduced by the UK subsidy regime is that local authorities are required to self-assess whether the financial assistance they grant is consistent with key subsidy principles, and they must publish information about most of their subsidies via a new database.
Paul McDermott is a partner at Trowers & Hamlins who specialises in advising on public sector commercial transactions (including subsidy control and public law), and he says the new system will provide public bodies with more flexibility to support businesses through a difficult economic period.
“The old state aid system broadly said that things were not allowed unless there was a regulation that said an authority could give money, to support research and development in local business parks, for example,” says McDermott. “Under the new system, there are questions that public organisations have to ask themselves, such as why they are giving the money, is this the most efficient way to give money, does it affect trade with EU countries and does it affect competition in the UK. But at the end of that process, in order to give the subsidy the giver has to conclude that the benefits of giving the subsidy outweigh any negative impact. There is a lot more focus on measured decision making and positive outcomes.”
The UK government will also now have more flexibility to set its own priorities in relation to the types of things that should receive public money, whereas the EU regime was much more prescriptive and was based on common European objectives.
Victoria Thornton, who also specialises in the provision of advice on public sector commercial transactions at Trowers & Hamlins, says: “In the past it might have been harder for a public authority to justify a life sciences centre unless it was also located in a designated area, otherwise it might not have ticked some regulatory boxes. Now, we might have a different approach because there may be a national strategy/policy to support life sciences irrespective of location. So, while there won’t be more cash, it is likely that a wider range of things might be eligible for funding than did previously.”
Thornton adds: “This is good news for businesses, and they should have their eyes and ears open for when government bodies start announcing funding programmes.”
The downside of that increased flexibility and shift of decision-making power is that things are less clear, leaving many public authorities concerned about falling foul of the new subsidy regime. A new Subsidy Advice Unit will be established within the UK’s Competition and Markets Authority to have oversight of the regime, and it will be responsible for both advising public authorities on more complex issues and overseeing the new legislation.
“The problem at the moment is the public sector is getting used to this system and some authorities are currently nervous about making decisions and giving higher risk/value subsidies and support,” says McDermott. “We have signed off on projects and funding definitely hasn’t stopped because of the change, but it is early days.”
The new rules introduce transparency requirements relating to the award of subsidies that mean authorities will have to publish certain information about their decisions in a searchable database available to the public. The transparency rules apply to most subsidies exceeding £100,000 and will capture a lot more than the previous EU notification requirements, making decision-makers more accountable and meaning information is more widely available to third parties that may have an interest in the impact of a subsidy.
The legislation also gives the Competition Appeal Tribunal the power to hear appeals by interested parties based on judicial review principles, but such appeals need to be brought forward quickly, usually within a month of the information becoming public.
There are also positives for local authorities, argues McDermott: “The real positives for the public sector are that it opens up opportunities for them to diversify what they fund/support, because there is more scope. It will just take a bit of time for them to get comfortable with the new regime, and there will be more form filling as they are being asked to provide much more information than they did under state aid.”
Thornton points to an example of a recent mandate for a local authority that is looking to provide more affordable workspaces, because they believe a lack of those is hindering their rural economy. “Before, there would have been a rigid regulation and formula about if and how much they could give to something like that,” says McDermott. “Now, they are more in control about setting a policy and satisfying themselves that giving support complies with the subsidy control principles and if so that they are not giving too much money”
The question now is whether court cases will emerge as a result of challenges to public authority decision-making, and if so, whether those will serve to provide more clarity for authorities on how to work under the new regime.
McDermott says: “During the transition phase there has not been a single court case about what any of these rules mean, so there is no legal decision around about how the principles should apply in practice. That is why public authorities are nervous, but the future tribunal cases will only come if people challenge decisions.”
Under the previous EU state aid legislation, challenges to decisions could be made up to a decade after funding was given, but now that local authorities have to publish the details of their funding allocations, there is only a month for people to challenge those subsidies. That will provide a lot more certainty around commercial investment and transactions.
Thornton says: “If you are a business and you are concerned that your competitors are receiving an unfair subsidy, you have to write to the local authority responsible within 28 days to ask them to explain why they feel it is lawful. They then have 28 days to respond, and then you have another month to decide whether you are going to bring a challenge. It will be easier to challenge decisions than it was previously, because there will be a UK based tribunal process, but the timeframe to challenge is very short.”
There is now a learning curve to go through for both businesses and local authorities, but the rule changes are being broadly welcomed, particularly as a means for authorities to provide more support to business should the UK head into recession.
McDermott concludes: “Businesses don’t really need to worry about this change, though they might expect public bodies to perhaps ask them for more information than they did previously when they apply for public funds. Everyone will have to adjust and the process will be a little more nuanced, but the flexibility that is coming should benefit everyone.”