UK Subsidy System

A subsidy is a form of financial support provided by a public authority to an enterprise which gives the enterprise in question an economic advantage that could not have been obtained on commercial terms. The goal of a subsidy is typically to encourage a specific activity or provide support for a specific segment of the economy or to address market failures. The provision of financial assistance can take on various forms, including grants, loans, tax breaks, equity investments, and the utilisation of facilities.

Under the UK subsidy rules, a subsidy is legal if it is compliant with the subsidy control requirements, unless it is specifically prohibited. There are certain categories of subsidy which require a mandatory referral to the Competition and Markets Authority’s (“CMA”) Subsidy Advice Unit (“SAU”), but these are generally limited to high thresholds, and the opinion issued on the legality of the subsidy is not binding on the public authority. This contrasts with the EU’s State aid rules, which generally prohibit government financial assistance unless it has been pre-authorised by the European Commission (“EC”), or otherwise granted under one of the Block Exemptions. In other words, the UK’s rules on subsidies have been developed to adopt a more permissive approach compared to the EU’s rules on State aid.

The UK subsidy legal framework is largely set out by the Subsidy Control Act 2022 (the “Act”), in addition to further details in a range of regulations, guidelines and communications that aim to assist public authorities, enterprises, and their legal representatives in assessing the existence of a subsidy and its compatibility with the Act. The rules are designed to ensure that subsidies are awarded in a fair and transparent manner, and to prevent the distortion of competition within the UK economy and internationally. The UK’s subsidy rules are designed to promote the growth and prosperity of the country’s economy and its citizens, while also ensuring a level playing field for competition.

On November 11, 2022, the Department for Business, Energy and Industrial Strategy (“BEIS”) clarified the scope of the subsidy rules by publishing the final version Subsidy Control Statutory Guidance (the “Guidance”). The Guidance aims at assisting public authorities when giving a subsidy or designing a subsidy scheme. It also explains which subsidies and schemes the government wishes to encourage public authorities to notify in advance.

The subsidy rules apply to any type of financial assistance given to enterprises in any industry that are engaged in economic activity.

Similar to the position under EU State aid rules, the notion of enterprise is broad in UK subsidy law and is not limited to commercial companies. Indeed, the definition of enterprise as laid down in the Guidance concerns entities engaged in economic activity, irrespective of their legal status such as a charity or council. Rather, the determining factor is whether the entity in question carries out an economic activity consisting of offering “products or services on a given market.”

Therefore, public authorities or non-profit organisations may be considered as relevant enterprises if they engage in economic activity. For instance, public or private bodies that operate on a non-profit basis, such as charities, can also constitute an enterprise, where they offer goods and services on a market (e.g., renting out equipment or operating a café or gift shop). The determination of whether financial assistance provided by a public authority is considered a subsidy given to an enterprise depends on the nature of the project being funded, and whether it is related to the economic or non-economic activity.

According to the UK subsidy rules, any financial assistance that meets all of the following four-limbed tests will constitute a subsidy:

1. Given directly or indirectly from public resources by a public authority;
2. Confers an economic advantage on an enterprise (e.g., on more favourable terms than offered on the open market);
3. The financial assistance is specific, such that it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or services; and
4. The financial assistance has, or is capable of having, an effect on competition or investment within the UK, or trade or investment between the UK and another country or territory.

As these conditions are cumulative, if any of them are not fulfilled, the conclusion will be no subsidy and the financial assistance falls outside the scope of the Act. This system ensures that the UK is meeting its domestic and international obligations, including pursuant to the EU-UK Trade and Cooperation Agreement, World Trade Organisation (“WTO”), and Free Trade Agreements. Only when all of the conditions are met will the financial assistance be considered a subsidy, and accordingly must be administered in line with the requirements of the Act.

The Act sets out the procedures and requirements for relevant public authorities to follow and establishes the powers and duties of relevant authorities in overseeing the use and granting of subsidies.

Where financial assistance fulfils the four-limbed subsidy test, the Act makes provision for a number of different routes that can be applied. First, the Act makes provision for “Streamlined Routes” for granting subsidies. Secondly, the Act also makes provision for the use of “Subsidy Schemes”. Whether neither of these options is deemed appropriate, the Act also includes a de minimis rule, which is termed “Minimal Financial Assistance” (“MFA”). Where none of these routes are considered appropriate, a detailed assessment of the seven subsidy principles is required in order for the authority to satisfy itself that it is not awarding a subsidy unlawfully. Information on each route is provided in the subsequent sections below.

It is important to note that, as a general principle, public authorities have a certain degree of discretion when conducting the assessment. The depth of the analysis should be commensurate with the size and potential impact of the subsidy or scheme on the market. The analysis can be less detailed if the subsidy is relatively low in value, or if the design of the subsidy does not have potentially distortive features (e.g., a subsidy below £100,000 is very small and need not be uploaded to the transparency database).  Conversely, the analysis should be more extensive if the subsidy meets the criteria of a Subsidy or Scheme of Interest (“SSoI”) or Subsidy or Scheme of Particular Interest (“SSoPI”). The processes for SSoI and SSoPI are set out below.

The UK Government introduced three Streamlined Routes for use by any UK public authority. These routes essentially represent the equivalent of an EU Block Exemption, offering authorities legal certainty and do not require the assessment of subsidies against the subsidy control principles, provided that they strictly comply with the conditions outlined within the routes. The three routes include:

• Research, development and innovation and Guidance;
• Energy usage and Guidance; and
• Local growth and Guidance.

To assist public authorities in understanding and adhering to these routes, accompanying guidance has been provided for each route and it is strongly recommended that public authorities consult them. Each of the three Streamlined Routes sets out its own project definitions, maximum amounts, subsidy ratios, eligibility criteria and limitation conditions.

Step-by-step assessment for all three Streamlined Routes:

Step 1: Decide on subsidy amount and check if it falls within the Streamlined Route category, considering amount limits and ratios.

Step 2: Review the Route and guidance to confirm eligible enterprises (enterprise size to be determined based on the Companies Act 2006) and costs and adjust project plan accordingly.

Step 3: Calculate permitted subsidy ratios. The subsidy ratio must be applied to all eligible costs that make up a project that the enterprise will be carrying out. The subsidy must be capped at either the maximum award amount or the limit indicated by the subsidy ratio, whichever is lower. For example, if a Route has a maximum award amount of £1 million and a subsidy ratio of 50%, then the maximum subsidy that could be provided to a project with £1.2 million of eligible costs would be £0.6 million.

Step 4: Check if recipient has received other subsidies for the same project and follow cumulation steps if necessary.

Step 5: Award subsidy and follow transparency requirements, including uploading to the subsidy database if over £100,000.

The Act provides not only for standalone subsidies, but also for the establishment of subsidy schemes. A subsidy scheme typically comprises a set of rules, guidelines, and procedures that are established by a public authority to govern the provision of subsidies to eligible recipients in a specified area. These rules and guidelines include information on the types of subsidies that are available, the criteria for eligibility, the application process, the conditions that must be met to receive a subsidy, the amount of the subsidy, and the duration of the subsidy. The public authority must ensure that any subsidies given under a scheme are consistent with the subsidy control requirements by assessing compliance for all possible subsidies in the round.

Public authorities can establish subsidy schemes when awarding multiple similar subsidies for the same activities. Establishing a subsidy scheme as opposed to awarding standalone subsidies can have several benefits. A scheme can provide a more structured and transparent way of granting subsidies, as well as a more efficient and effective way of administering them. Additionally, a scheme can help to ensure that subsidies are targeted and directed towards specific, well-defined objectives and goals, and that they are awarded in a consistent and fair manner. Furthermore, a scheme can also allow for small payments to be made which allows the beneficiary to keep its MFA allowance available for other projects.

A public authority may use the MFA route for the award of a low-value subsidy, subject to the condition that the recipient has not received funding exceeding £315,000 cumulatively in the preceding three fiscal years. There are also several factors to consider before providing an MFA subsidy. Although subsidies given as MFA are exempt from most of subsidy control requirements, the subsidy prohibitions still apply; namely the prohibition on giving subsidies related to goods for export performance and the prohibition on requiring domestic content. Importantly, when deciding to apply the MFA exemption, public authorities should be aware that the MFA is a one-time dispensation, which imposes limitations on the recipient’s eligibility for further MFA subsidies within the relevant period (3 fiscal years).

Services of Public Economic Interest (“SPEI”) (e.g., social housing, transport services in rural areas, etc.) not otherwise supplied under normal market conditions are exempt from subsidy control rules if the subsidy does not exceed £725,000 over a period of three fiscal years.

Nevertheless, the transparency requirements (see below) apply to both MFA and SPEI assistance in all cases where the amount of an individual subsidy exceeds £100,000.

Pursuant to the provisions of the Act, public authorities are generally required to carry out a thorough assessment that adheres to the seven subsidy control principles when deciding to provide an individual subsidy or make a subsidy scheme. Furthermore, in cases where a public authority is unable to provide a subsidy through any of the routes above, it must conduct a seven principles analysis as set out below and record its assessment and compliance.  The seven subsidy control principles are as follows:

1. Subsidies should pursue a specific policy objective in order to remedy market failure (e.g., negative externalities, asymmetric information, etc.) or address equity rationale (e.g., reducing social or economic disadvantage, promoting employment, etc.).
2. Subsidies should be proportionate to the policy objective and limited to what is necessary (appropriate tools, e.g., loans, regulation, direct provision of good or service by the public authority, etc.).
3. Subsidies should be designed to change economic behaviour of beneficiary (as opposed to ‘do nothing’ scenario).
4. Subsidies should not normally compensate costs that would be funded in the absence of any subsidy.
5. Subsidies should be the least distortive means of achieving policy objective (should not prevent markets from being efficient e.g., allowing less efficient competitors to remain in the market, reducing beneficiary’s and its competitors’ incentives to innovate, etc.).
6. Subsidies should be designed to achieve the policy objective while minimising any negative effects on competition and investment within the UK.
7. Subsidies’ beneficial effects outweigh any negative effects on competition and investment within the UK and internationally.

The seven principles analysis are structured with the Guidance as a four-step subsidy control assessment:

1. Step 1: Identifying the policy objective, ensuring it addresses a market failure or equity concern, and determining whether a subsidy is the right tool to use (Principles A and E).
2. Step 2: Ensuring that the subsidy is designed to create the right incentives for the beneficiary and bring about a change (Principles C and D).
3. Step 3:  Considering the distortive impacts that the subsidy may have and keeping them as low as possible (Principles B and F).
4. Step 4: Carrying out the balancing exercise (Principle G).

In regard to subsidies or schemes pertaining to energy and environment projects, public authorities must in addition consider the energy and environment principles set out in the Guidance before deciding to award a subsidy or establish a subsidy scheme.

According to the Guidance, SSoPI and SSoI are more likely to create significant negative effects on competition, investment and trade in the UK or internationally due to the allocation of substantial amounts of funding. Public authorities should follow the steps set out in Annex 2 of the Guidance when making their assessment against the subsidy control principles (i.e., size of subsidy, the nature of costs being covered, timespan, market characteristics, etc.). 

SSoPI have a higher risk of causing undue distortion and negative effects on competition or investment in the UK, or on international trade and investment. SSoPI is a subsidy which is over £10 million or if in a sensitive sector (e.g., steel, aerospace) – over £5 million. Public authorities must mandatorily refer SSoPI to the SAU before they give a subsidy or make a subsidy scheme.

The Guidance on the operation of the subsidy control functions of the Subsidy Advice Unit provides specific timeframes for the referral of SSoPI to the SAU. Generally, there is no established timeframe for pre-referral discussions, and public authority can contact SAU at SAU.@cma.gov.uk to discuss referral application preparation. Referral requests should be submitted through the SAU’s Public Authority Portal. The SAU will have then 5 working days to decide whether to accept the referral. If accepted, the SAU has 30 working days to issue a report that includes an evaluation of the assessment made by the public authority and may also include recommendations for improvements or modifications to the subsidy. This review term is extendable subject to certain conditions. The relevant authority is then subject to a 5 day standstill period following receipt of the report before proceeding any further.

The SAU reports are non-binding in nature for both mandatory and voluntary referrals.

SSoI involves all other subsidies of between £5 million and £10 million, and the referral process is voluntary. SSoIs are seen to have a potential risk of causing undue distortion and negative effects on competition or investment. The SAU will assess the voluntary referral based on its priorities, such as the potential impact of the subsidy, its significance, and the resources required for review. Ultimately, the SAU will determine whether to accept the referral, but is at liberty to refuse such applications depending on other priorities.

The Act prohibits certain categories of subsidies outright due to the greater risk they pose to significantly distort competition. These prohibitions are based on the UK’s commitments under WTO rules (notwithstanding the fourth prohibition which is of a domestic character):

1. Unlimited guarantees (Section 15): any subsidy that would guarantee an unlimited quantity of liabilities or debts; or guarantee a limited amount of liabilities or debts but over an indefinite period;
2. Export performance (Section 16): any subsidy contingent upon export performance, e.g., subsidies to an exporter to cover the price difference between the UK and international market prices (unless it is a UK export finance short-term credit support);
3. Use of domestic over imported goods or services (Section 17): any subsidy contingent on the requirement to use the ‘local content’;
4. Relocation of activities (Section 18): any subsidies requiring the relocation of activities, unless the relocation is within the same area or is for the purpose of reducing economic or social disadvantages; and
5. Ailing or insolvent enterprises (Sections 19-26): any rescuing and restructuring subsidies given to ailing or insolvent enterprises, unless the subsidy consists of e.g., a temporary liquidity support loan and the enterprise has a restructuring plan, etc.

1. Public authorities must self-assess their subsidies/schemes, and be comfortable that they are not awarding subsidy unlawfully.
2. Any subsidies exceeding £100,000 must be recorded in the transparency database within 6 months of award. If a public authority needs access to the portal for uploading awards, they can contact subsidydatabase@beis.gov.uk. The public side of the database is available here: https://www.gov.uk/guidance/view-subsidies-awarded-by-uk-government.
3. Some subsidies (i.e., SSoPI) require a more in-depth assessment by the public authority. This assessment must be evaluated by the SAU (mandatory referral regime).
4. Subsidy decisions can be appealed in the Competition Appeals Tribunal (“CAT”) for judicial review (discussed below).

A party whose interests may be impacted by the award of a subsidy or establishment of a scheme is considered an interested party. The deadline for bringing a challenge is one month from when the subsidy or scheme is uploaded to the database, or from when the interested parties knew or ought to have known.

Note: A subsidy awarded under a scheme may not be challenged in the CAT since it is only the scheme itself that can be challenged.  Individual subsidies given under schemes cannot be challenged for compliance against the principles or other subsidy control requirements, because that compliance should already have been established at scheme level.

Following a successful challenge to the CAT, the authority may grant certain forms of relief similar to remedies available to the High Court (or the Court of Session in relation to Scotland) on an application for judicial review e.g., a quashing order.

A new type of remedy available to the CAT is the recovery order. The CAT can make a recovery order when it finds that a decision to award a subsidy breached the subsidy rules. A recovery order requires a public authority to recover some or all of the subsidy from the beneficiary. It may set out how the subsidy is to be recovered, the amount or order interest. When an order is made in respect of a scheme, the CAT may require that all or some of the subsidies under that scheme be repaid.

It is generally recommended that public authorities seek guidance and assistance on whether a subsidy or scheme complies with UK subsidy regulations before proceeding.

CMS lawyers represent both public authorities and enterprises on all aspects of the subsidy rules. This includes:

• Assessment of the existence of a subsidy and its compatibility (including non subsidy, subsidy, streamlined route, schemes, minimal financial assistance, and the seven principles analysis);
• Assessment and set up of subsidy schemes;
• Assistance assessing the requirements and where applicable notification process to the SAU;
• Assistance in defending subsidy investigations before the CAT;
• Complaints; and
• Litigation before national Courts.

The CMS State Aid Practice Area Group comprises 45 State aid and subsidy law specialists practicing State aid and subsidy law in 20 jurisdictions located in 23 cities in Europe and beyond – all committed to assisting you.

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