Subsidy Control – Anniversaries and Updates

January 2025 saw the second anniversary of the UK’s domestic Subsidy Control regime which is governed by the Subsidy Control Act 2022 (‘SCA’). In short, the SCA – which came into effect on 4 January 2023 – sets out the framework for giving subsidies and was put into place to satisfy the UK’s commitments for an effective system of subsidy control under the Trade and Cooperation Agreement between the UK and the EU post-Brexit, replacing the previous EU State aid regime in the UK.

Under section 79(6) of the SCA, when giving a subsidy or making a subsidy scheme, public authorities must have regard to the Statutory Guidance (so far as applicable to the authority and the circumstances of the case). In practice, this means that public authorities need to apply the requirements of the Subsidy Control Act 2022 through the lens of the Statutory Guidance.

The latest (fourth) edition of the Statutory Guidance – a 264-page explanatory document – was published on 29 January 2025 and includes several minor amendments as well as some substantive changes. Picking up on a couple of the substantive changes, public authorities may find it helpful to consider the following reflections:

Meaning of “enterprise” carrying on “economic activity”

Changes have been made to Chapters 2 and 15 to clarify when a recipient will not be considered an enterprise (as it is not engaging in economic activity), and so there is a “no subsidy” situation. Paragraph 2.18 now reads:

“Where an entity is operating pursuant to a public function in relation to activities where there is no market present, the purpose will not be economic in nature. However, the mere fact of operating with the intent of providing some benefit to the public does not automatically mean an entity is not engaged in an economic activity”

Additional commentary or case examples on how to apply paragraph 2.18 would, however, be welcome. Perhaps this new wording is an attempt to capture some of the Competition Appeal Tribunal’s (“CAT”) brief commentary in the Durham Company Limited (trading as Max Recycle) v Durham County Council [2023] CAT 50 judgment on section 7(2) of the SCA (“that an activity is not to be regarded as an economic activity if or to the extent that it is carried out for a purpose that is not economic”) – however, if so, this is arguably not in line with the interpretation the CAT seems to make.

Helpfully, paragraph 15.16 has now been deleted, correcting an error that had stated where an organisation (recipient) provides goods and services for free, that they are not engaged in economic activity and are not an enterprise (and therefore “no subsidy”). It is well understood that offering goods or services on a market does not require that there is a charge for such goods or services and this is consistent with the definition of “economic activity” in s.7(1) of the SCA which makes no reference to the charging for goods or services stating that it “entails offering goods or services on a market” – a subsidy can very much arise where goods or services are offered for free.

Ringfencing

The Chapter 3 section on ringfencing has also been updated. Ringfencing is a practical, long-established measure that recipients of subsidies can take to separate subsidy funds and demonstrate that the subsidy received will only be used for the specific purpose for which it is given. The additional guidance in paragraph 3.104 states that when using ringfencing measures that these should be commensurate to the size of the subsidy and gives a list of examples which are useful prompts for those looking how to properly and practically manage their subsidy arrangements:

• Establishing separate legal entities for different activities. This ensures that financial resources and liabilities are distinct and managed independently.
• Implementing distinct accounting systems for different activities. This involves maintaining separate financial records to track income, expenses, and assets for each activity.
• Creating independent operational structures, such as separate management teams and operational processes, to ensure that activities are managed independently.
• Developing and enforcing internal policies that clearly define the boundaries between different activities. This includes setting rules for resource allocation and usage.
• A contractual restriction that the funding should be used for a particular purpose.
• Regularly monitoring and auditing activities to ensure compliance with ringfencing policies. This helps identify and address any instances of cross-subsidisation.

Coordination Failure

A new paragraph 3.47 has been added to Chapter 3, adding the concept of a “coordination failure” into the “market failure” strand of Step 1 of the subsidy control principles assessment. Step 1 requires that public authorities only give a subsidy if it pursues a specific policy objective which remedies a market failure or addresses an equity concern. A “coordination failure” is an example of a market failure on the following basis:

“Imperfect information might lead to coordination failure. This occurs when two or more parties are unable to align their actions to achieve a mutually beneficial outcome. This could be because not all the parties have the same information or mechanisms to deliver more optimal outcomes. Coordination failure can be understood through the example of electric vehicles. In the UK, motorway service areas sometimes do not provide charging points for electric vehicles because there is not enough demand to use them. However, motorists in the UK often do not buy electric vehicles because there are not enough charging points. Here there is a coordination failure if all parties would have benefited from investing in electric vehicles, but did not because they did not know whether the other parties would also invest. Subsidies could be used to correct this and help the market move towards a more desirable outcome.”

A footnote to this new paragraph 3.47 flags the risk that where public authorities are designing subsidies to address “coordination failure”, they need to ensure these do not incentivise collusion between enterprises, and a steer towards the Competition and Markets Authority guidance on collusion is given.

Feedback in the reports from the Subsidy Advice Unit on subsidy control assessment referrals to date picks up on the theme that assessments at times lack a sufficiently clear iteration of the specific policy objective and how it ties with a specific type of market failure and/or equity concern – so the addition of “coordination failure” (with a definition and description) is helpful both in substance and as a general reminder to public authorities that their assessment needs to be precise and specific in pinpointing and explaining how the subsidy in question pursues a specific policy objective which remedies a market failure or addresses an equity concern.

Other changes

Further substantive changes to the Statutory Guidance are:

• Clarification of when a subsidy control scheme is deemed to be ‘made’ (Chapter 3)
• New examples of how subsidy awards of Minimal Financial Assistance and Services of Public Economic Interest Assistance cumulate together (Chapter 7).
• Clarification of the steps to take during the cooling-off period after the Subsidy Advice Unit has issued a report (Chapter 11).
• Redrafting of the chapter concerning transparency obligations to reflect enhancements to the transparency database (Chapter 12).
• Removed paragraph concerning the provision of free goods and services (previously paragraph 15.16, Chapter 15).

One final thought is that while the Statutory Guidance states that it is not meant to be exhaustive, nor a statement of the law, it does seem likely that at some point, by virtue of the section 79(6) SCA obligation, questions of interpretation and use of the Statutory Guidance will arise (to a greater or lesser degree) in legal challenges of subsidy awards and judgments made in the CAT. To-date there has been one fully heard claim in the CAT since the new subsidy control regime came into force, with a second ongoing.

The first was the Durham case (mentioned above), which was successfully defended by Durham County Council. Max Recycle alleged that Durham County Council had taken a decision to subsidise its own commercial waste collections by allowing that part of its operations to use the employees and assets of its household waste collections at below market price, with the CAT ultimately finding that there was no subsidy given. The second claim – yet to be heard – has been brought by property developer Aubrey Weis against a decision of Greater Manchester Combined Authority to make loans to two special purpose vehicles as part of the Greater Manchester Housing Investment Loan Fund. We will see in due course what learnings can be gained for the subsidy control regime once this has been heard.

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