National Funding submissions – Getting subsidy control right.


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DLUHC is busy assessing local authority applications for levelling up fund (LUF2). 

Initial feedback is that for some projects, applicants have struggled with their subsidy control analysis. Notably about whether an activity is "non-economic" or "economic" and if it is the latter completing the subsidy control matrix (the subsidy matrix) (this is the section of the application/submission in which an authority must evidence they have applied the subsidy control principles set out in the Subsidy Control Act 2022 (the Act)).

I am not totally surprised about these teething problems as there has been a significant subsidy law change since the original LUF round in 2021. The Act has been passed and DLUHC is using the draft statutory subsidy control guidance to assess applications. Councils should treat this useful tool as a mandatory step in undertaking a subsidy analysis – even before it is formally adopted.

The definition of what is a subsidy is similar (though not identical) to that of state aid. Providing favourable terms of funding to an 'enterprise' to undertake an activity which involves buying and selling goods or services on a market is more than likely a subsidy. An enterprise would include a council which received LUF funds to build offices to let. While this might be permitted it would be necessary to apply the subsidy matrix and conclude it was actually permitted.

Alternatively, if a council was applying a LUF grant to build its own offices, or a shared one public estate centre it is unlikely to be treated as an enterprise (even if it rented out space to other public bodies) as it would be acting for a "non-economic" purpose. As such no subsidy would arise.

Subsidy control differs significantly in how it is applied compared to the previous state aid system. Under state aid all support for economic activity was prohibited unless there was an express exemption which permitted such support. Councils are therefore used to searching for regulations and decisions which would enable them to provide support.

Subsidy control is fundamentally different. It is a more permissive system (at least for now) which instead of requiring authorities to find a pre-specified exemption requires them to apply the subsidy matrix and conclude that on balance, giving a subsidy to further a particular public policy objective outweighs any negative implications for either intra UK competition/investment or international trade and investment. 

This more nuanced approach can be a little daunting as each authority is required to apply the subsidy matrix and the outcomes may differ depending on local policy objectives and market failure.

The Act is also concerned about a subsidy's impact on competition and investment within the UK. State aid was only concerned about this if it also had a potential impact on trade with other EU countries. Ensuring that your local policies are updated to reflect your potential awards of subsidy is an important element of the new approach. As is consideration of the impact of a subsidy to a local enterprise on competitors at local, regional and where appropriate national level. To assist authorities we have produced a series of Bitesize subsidy control webcasts including one on applying the subsidy principles.

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