Kieron Beal QC of Blackstone Chambers takes a deep-dive into the UK’s post-Brexit subsidy contron enforcement landscape, looking at the roles of the CMA, the CAT and where there may, and may not, be flexibility.
Introduction
In the inter-governmental divorce arrangements following Brexit, the UK Government did not wish to keep custody of the EU State aid regime. Regulation 3 of the State Aid (Revocations and Amendments) (EU Exit) Regulations 2020 (SI 2020 No 1470) disapplies the EU State aid regime under the Treaties as it otherwise would have applied through the EU/UK Withdrawal Agreement (‘the WA’). Regulation 5 of those Regulations disapplies the relevant State aid regulations as otherwise would have applied as retained EU law. Accordingly, the EU State aid rules, as set out in the EU Treaties and relevant State aid regulations, no longer apply in the UK, save to the extent that they are retained by the Northern Ireland Protocol (‘NIP’) to the WA.
The NIP maintains a form of visitation rights for EU State aid rules where certain trade between Northern Ireland and the EU is engaged. The application of EU State aid rules under the NIP is confined to trade which is subject to the Protocol (i.e. (i) trade in goods[1] and (ii) in wholesale electricity[2]) between Northern Ireland and the EU with a number of required adaptations.
The Subsidy Control Act 2022 (‘SCA 2022’) represents an attempt by the UK Government to put in place a subsidy control regime that will follow a distinct, UK agenda. The core stated aim has been to enable public authorities to confer subsidies that deliver strong benefits for the UK taxpayer but also support the UK’s economic recovery. The Government wants to use the subsidy regime to deliver its priorities, in particular in the “levelling up” initiative, achieving net zero and increasing UK research and development. In a speech on 29 November 2019, the Prime Minister stated that he wanted the UK’s own subsidy control regime to be “more clear, permissive, speedy and consistent.”[3]
In some respects, subsidy control makes little sense now that the UK is, in principle, not constrained by EU State aid rules outside of the NIP. Why could the Government not simply decide to let public authorities make their own decisions? The answer lies in the UK’s international commitments. It is constrained by rules of the World Trade Organisation (‘WTO’), including the Agreement on Subsidies and Countervailing Measures (Annex 1A to the 1994 GATT Agreement), as well as free trade agreements such as the EU-UK Trade and Cooperation Agreement (‘the TCA’). The TCA requires the UK to have in place an effective system of subsidy control and an independent body to oversee it: Article 366. That agreement – and the agreement to apply the EU State aid rules through Article 10 of the NIP – were part of the compromise solution by which the EU agreed to allow the UK to continue to trade with the bloc on favourable terms and to allow Northern Ireland to remain part of the EU customs territory. Article 3 of the TCA requires both the UK and the EU to implement and give effect to the obligation to maintain an effective subsidy regime in good faith.
A report on the Subsidy Control Bill by the House of Commons library in September 2021 has set out (pp. 13-14) concerns expressed by some commentators, including the Institute for Government,[4] that the interim regime which the UK adopted until the SCA 2022 was ineffective. That regime required the adoption and implementation of the TCA principles via sections 29 and 30 of the European Union (Future Relationship) Act 2020 (‘EUFRA 2020’), but with a heavy emphasis on public authority self-assessment and without any regulator. In particular, there was concern that confining a regulator’s role to an advisory one would produce a regime which would:
- Be less able to cope with subsidy competition between public authorities;
- Less able to ensure transparency of public authority spending on subsidies;
- Might lead to “subsidy races” between the UK’s regional or constituent national governments, which would be advanced on a “beggar-thy-neighbour” basis and produce a zero-sum game for the UK as a whole.[5]
In its Impact Assessment on the Bill, the Government seemingly eschewed a “do the minimum option”, which would have led to the lightest touch regime arguably consistent with the UK’s treaty obligations.[6] But that in part was based on the proposition that there would be no ability to introduce a range of exemptions under the “do minimum option” because the TCA does not directly provide for any. The SCA 2022 has chosen to introduce a number of exemptions from the subsidy control requirements. The “do minimum option” was nonetheless used as a counterfactual for the impact assessment, rather than the maintenance in force of EU legislation such as the General Block Exemption Regulation (‘the GBER’).
In this article I shall consider the practical enforcement of subsidy control in the UK under the new legal landscape. I shall explain why I consider that the new subsidy control regime has, in some places, done the bare minimum to comply with the requirements of the TCA. Indeed, it seems strongly arguable that the SCA 2022 fails to comply with the requirements of the TCA in certain respects. The SCA 2022 does not, in practice, establish a subsidy regulator with anything greater than an advisory role in the UK, despite 69% of respondents to the Government consultation thinking it should have enforcement powers.[7] There are also practical limitations on the likely effectiveness of the domestic UK subsidy regime.
The outcome of the new legislative framework is a trifurcation of UK subsidy control. Three distinct subsidy enforcement regimes now operate within the UK, each subject to separate jurisdictional thresholds.
First, for subsidies capable of falling within the scope of the NIP, the full rigour of the EU State aid regime will continue to apply, including the requirement of advance notification to the EU Commission for subsidies not falling within the scope of the GBER;
Second, for subsidies which have or could have an effect on trade or investment between the UK and the EU, section 29 EUFRA 2020 presently requires compliance with the subsidy control principles found in the TCA. The English Court’s analysis of these principles if likely to draw heavily on WTO guidance, but also will consider the case law of the Court of Justice of the European Union (‘CJEU’) on similar issues. Most commentators have described this as an “interim regime” only, until the SCA 2022 fully enters into force in the autumn. But there is a real issue as to whether this regime applies only to the so-called interim period or is capable of being invoked in those cases where no express consideration is given by the SCA 2022 to any impact on EU/UK trade;
Third, for subsidies where there is an effect on competition or investment within the UK, the core provisions of the SCA 2022 will apply. While the definition of subsidy given by section 2(1)(d) SCA 2022 is wider, in practice the key requirements and/or constraints operating on public authorities and the CMA under the SCA 2022 appear to concentrate on situations where only competition or investment within the UK is affected. As we shall see, there is a real sense in which any impact on EU/UK trade or investment has been swept under the statutory carpet.
This article will address an overview of the interlocking enforcement regimes; a summary of the different roles assigned to the Competition and Markets Authority (‘the CMA’), the Competition Appeal Tribunal (‘the CAT’) and the High Court under the SCA 2022; and an analysis of whether the new system is indeed more flexible and less bureaucratic, as the Government intended, or whether we have swapped one complicated system for another? Or is there a risk of too much leeway being given to public authorities?
The semi-obligatory fictional example
The article will analyse these issues with the help of a fictional example. Melchester Maulers is a rugby union team playing in the Championship – the second tier of men’s rugby union in England. Wessex District Council votes to build a stadium for them, to be let on a peppercorn lease until the Maulers achieve promotion to the RFU Premiership. Once there, they hope to entice the services of players from Ireland and France to boost attendance figures and sponsorship opportunities. The Council’s policy objective is to provide a world class stadium which boosts regional employment in a deprived area of the country. The local rivals to the Maulers, the Solentsea Scrummers, are aggrieved at the decision, since their local stadium is cramped. Wessex District Council did not put the decision out to consultation or competitive tender.
An overview of the three interlocking regimes
(1) The Northern Ireland Protocol
The UK left the EU on 31 January 2020 in accordance with the WA signed on 24 January 2020. The NIP forms part of the WA. The application of EU State aid rules under the NIP is confined to trade between Northern Ireland (‘NI’) and the EU with a number of required adaptations. Article 10(1) of the NIP provides as follows:
“The provisions of Union law listed in Annex 5 to this Protocol shall apply to the United Kingdom, including with regard to measures supporting the production of and trade in agricultural products in Northern Ireland, in respect of measures which affect that trade between Northern Ireland and the Union which is subject to this Protocol.” (Emphasis added)
[8] The Notice also referred back to a unilateral declaration made by the EU in the Joint Committee established under Article 164 of the Withdrawal Agreement on 17 December 2020. The Declaration stated that the State aid provisions would not be engaged in respect of trade between NI the EU which was “merely hypothetical, presumed, or without a genuine and direct link to Northern Ireland. It must be established why the measure is liable to have such an effect on trade between Northern Ireland and the Union, based on the real foreseeable effects of the measure.”
While noting that the Declaration was without prejudice to the EU Courts’ treatment of the concept of ʻeffect on trade’ in the State aid provisions, the Notice also added that:
“In this context, it should be noted that the sentence stating: “[…] cannot be merely hypothetical, presumed, or without a genuine and direct link to Northern Ireland” as well as the explanation that such finding must be“based on the real and quantifiable effects of the measure” qualify the earlier phrase“effect on trade between Northern Ireland and the Union which is subject to this Protocol”. This qualification is fully in line with the case law of the Union Courts (see below) that an effect on trade cannot be merely hypothetical or presumed, but has to be demonstrated, and needs to extend to the relevant trade, i.e. between Northern Ireland and the Union in the case of Article 10(1) of the IE/NI Protocol.” (Emphasis in original)
In our fictional example, there is little prospect of the subsidy having a genuine and direct link in trade in goods between NI and the EU. The NIP does not apply to the cross-border provision of services, so the potential impact on the employment of professional Irish or French rugby players is irrelevant.
The issue of how direct and significant the connection with NI/EU trade needs to be was also considered in R (British Sugar plc) v. Secretary of State for International Trade [2022] EWHC 393 (Admin) by Foxton J. The first issue in the case concerned the compatibility with State aid rules under Article 10 of the NIP of an autonomous tariff quota introduced by the UK for the importation of raw cane sugar for refining from 1 January 2021. British Sugar complained that the measure was a subsidy for its direct competitor, Tate & Lyle, which was the only established sugar cane refiner in the UK. Foxton J applied EU State aid principles and case law when determining that it was not a subsidy, but a measure of general application. The fact, in practice, that it operated to the substantial benefit of one principal operator did not convert the measure into unlawful State aid. That was so because the measure was of general application which did not through its inherent design confer a selective advantage on only one operator. It was not de jure selective. The fact that it was only taxpayers falling within the tax regime who would benefit from the duty free quota did not turn it into a selective measure: [83]-[85].
Foxton J also went on to consider whether, on the facts of the case, the ATQ was capable of affecting trade in goods between NI and the EU. He referred to the EU Unilateral Declaration as an admissible aid to the interpretation of Article 10 of the NIP at [122], but declined to treat the Commission’s Notice in the same way. That Notice considered that aid granted to a UK manufacturer whose goods were offered for sale in NI would fall within the scope of Article 10. Foxton J declined to go that far. He found that the requirement to establish a genuine and direct link to trade between NI and the EU represented a development of the EU law test for effect on trade between Member States. It was a more stringent requirement. On the facts, the impact on NI/EU trade would be indirect and minimal: [132]-[133]. Foxton J declined to allow the low volumes of refined cane sugar imported into NI by Tate & Lyle to be determinative of the issue. That would be to “permit a barely discernible tail to wag a very large dog”, which the EU Unilateral Declaration had been intended to prevent.
(2) Subsidy control under the TCA
The WA did not provide a comprehensive basis for the EU and the UK to trade after the end of the IP. Instead, that was addressed by the TCA, concluded on 24December 2020. The TCA came into effect on 1 January 2021.[1] Article 5 provides that nothing in the TCA should be treated as permitting the TCA to be directly invoked in the UK legal system.
Title XI to the TCA contains provisions dealing with a ʻLevel Playing Field for Open and Fair Competition and Sustainable Developmentʼ. Chapter 3 of that Title deals with ʻSubsidy Controlʼ. Article 366 of the TCA contains provisions setting out how the parties are to deal with measures which amount to a subsidy which “has, or could have, a material effect on trade or investment between the Parties”. A definition for ʻsubsidy’ is given by Article 363, requiring a specific economic advantage to be conferred on one or more economic actors in a manner which has or could have an effect on trade or investment between the UK and the EU. A non-exhaustive list of subsidies in Article 363(1)(b) include the provision of goods or services. In our fictional example, the grant of rights to use a new rugby stadium at a peppercorn rent could well constitute a subsidy.
Article 366(1) sets out the principles to be applied if a particular measure does amount to a subsidy which has or could have a material effect on trade or investment between the Parties, including that subsidies should be applied proportionately in pursuit of a public policy objective. Article 372 sets out the role of domestic Courts and tribunals in reviewing the grant of subsidies for compliance with the principles set by Article 366. Article 372 also confirms that while remedies for any breach should be effective, there is no obligation imposed on the UK to create new rights of action or new rights of review by a Court if these did not already exist in its legal system. Footnote 1 to Article 373 nonetheless recognises that the requirement to have in place effective remedies may require a new remedy of recovery to be available in the UK at the end of a successful judicial review.
The EUFRA 2020 makes provision to implement into UK law the three main future relationship agreements, including the TCA, and makes other provision in connection with the future UK-EU relationship. Section 29(1) of the EUFRA 2020 provides as follows:
“(1) Existing domestic law has effect on and after the relevant day with such modifications as are required for the purposes of implementing in that law the Trade and Cooperation Agreement or the Security of Classified Information Agreement so far as the agreement concerned is not otherwise so implemented and so far as such implementation is necessary for the purposes of complying with the international obligations of the United Kingdom under the agreement.”
Section 29(2) states:
(2) Subsection (1) –
(a) is subject to any equivalent or other provision—
(i) which (whether before, on or after the relevant day) is made by or under this Act or any other enactment or otherwise forms part of domestic law, and
(ii) which is for the purposes of (or has the effect of) implementing to any extent the Trade and Cooperation Agreement, the Security of Classified Information Agreement or any other future relationship agreement, and
(b) does not limit the scope of any power which is capable of being exercised to make any such provision.”
Pursuant to section 30 of the EUFRA 2020 (as amended), when interpreting the TCA or any supplementing agreement a Court or Tribunal must have regard to Article 4 of the TCA which provides that TCA must be interpreted in accordance with rules of customary international law, including the Vienna Convention on the Law of Treaties.
In the British Sugar case, it was common ground that the Claimant was entitled to challenge the alleged compatibility of the contested measure with the TCA subsidy principles by virtue of section 29 EUFRA 2020. The issues about the ease with which principles of the TCA could be converted into hard-edged legal obligations, as arose in Avaaz Foundation v Scottish Ministers [2021] CSOH 119, [2022] SLT 334, did not arise. Foxton J construed the TCA in its own right, but with acknowledgments to the WTO Agreement on Subsidies and Countervailing Measures 1994, on which parts of the TCA had clearly been based, as well as concepts of EU State aid law which represented a development of the position.[10]
In Heathrow Airport Ltd v. HM Treasury [2021] EWCA Civ 783, DC (and CA), the airport challenged HM Treasury’s abolition of the “tax free shopping” extra-statutory concession. The Government relied on the need to ensure compliance with the General Agreement on Tariffs and Trade (‘GATT’) 1994 in defence of its position. Green LJ (with whom Whipple J agreed) analysed in some detail the relevant WTO case law before concluding that the maintenance of the VAT Retail Export Scheme as an extra-statutory concession would have been in breach of the non-discrimination requirement set by Article I.1 of GATT. The Claimants also applied to amend their grounds of challenge to rely on section 29 EUFRA 2020 and certain obligations under the TCA. That amendment was, on the merits, rejected as unarguable. But at [224] to [232], Green LJ considered how the UK had chosen to implement requirements established by the TCA into domestic law, notwithstanding provisions in the TCA which confirmed it was not of itself to be treated as being directly applicable in the legal orders of the respective parties.
At [227], Green LJ noted that section 29 went beyond a statement of interpretation:
“It is more fundamental and amounts to a blanket, generic, mechanism to achieve full implementation, without the need for any further parliamentary or other executive intervention.”
Having confirmed that the effect of section 29 was to give rise to an automatic modification of existing English law where necessary to comply with the requirements of the TCA, Green LJ at [230] also identified two statutory clarifications to this principle:
“230. The process of automatic modification in section 29 is subject to two statutory clarifications. First, it applies only so far as required i.e. it does not modify a domestic law that, otherwise, is already consistent with the TCA. This should include the provisions of the EU(FR)A 2020 intended to implement the TCA but in the case of any doubt as to this the terms of the TCA take automatic effect. Secondly, it covers modifications ‘necessary for the purposes of complying with the international obligations of the United Kingdom under the agreement’. This is needed because under the TCA the parties bind themselves to a variety of international law obligations beyond the TCA itself, including for instance provisions of the GATT which are incorporated by express reference.”
Many commentators have suggested that the TCA regime as applied through section 29 EUFRA 2020 represents an interim regime, which must now give way to the SCA 2022. For reasons set out below, I consider there is a decent argument that the TCA and section 29 will still fulfil a residual role where the SCA 2022, either consciously or otherwise, fails to give full force and effect to the subsidy control requirements of the TCA.
Reverting to our fictional example, given the potential cross-border ownership and participation in rugby matches of teams within the UK and the EU, as well as a number of cross-border sporting competitions which benefit from the commercial realisation of broadcasting rights, sponsorship and stadium attendances, it is entirely possible that the subsidy to the Maulers could have an effect on trade or investment between the EU and UK such as to bring it within the scope of the TCA requirements. A similar conclusion was reached by Foxton J in relation to the challenge by British Sugar on TCA grounds, notwithstanding the contrary conclusion reached by him on the effect on trade between NI and the EU in the same case. It is also apparent from the British Sugar case that the Court approached compliance with the TCA as a question of law, which would either be right or wrong. The matter was not looked at through the prism of Wednesbury considerations.
(3) The domestic subsidy regime under the SCA 2022
- There are four core enforcement related issues under the new regime. They are: (a) the creation of a subsidy database; (b) a system of mandatory and voluntary referral of prospective subsidies to the CMA; (c) the limited scope for challenge of primary legislation; and (d) the practical limitations on legal review of any subsidy decision. I shall consider each in turn.
First, the subsidy database. The first point to note concerns the requirement for a subsidy database to be established by the Secretary of State pursuant to sections 32 and 33 SCA 2022. This will be an important tool in the enforcement of the new regime. That database must be accessible to the public free of charge: section 32(2). Public authorities will have direct editing rights to fulfil their duty under section 33(1) to ensure an entry is made in the database for any subsidy given by a public authority or any scheme made by that authority. Entry in most cases to be made within three months (or one year for a tax measure, but not a tax measure which is a subsidy scheme). Details of the entries are to be set by Regulations to be made under section 34.
While the establishment of a subsidy database is undoubtedly helpful for transparency, there are some potential drawbacks. There is, of course, a risk that public authorities will list a potential subsidy, wait 30 days to see if any objections are raised to it and then push ahead with it if not. There is no express sanction within the SCA 2022 if a public authority fails to list a subsidy on the database, although the provisions on time limits for challenge (addressed below) broadly ensure that time does not begin to run until the subsidy is listed (or becomes known to the complainant). The Secretary of State seems likely to delegate to the CMA the task of monitoring the database, under section 32(3). But the CMA has no power to take any enforcement steps of its own volition.
Second, the referral system to the CMA. In our hypothetical example, I will assume that Wessex DC has considered whether or not the proposed construction of a rugby stadium is a subsidy and concluded that it is. I shall also assume they have deemed it to be necessary and proportionate to assist with regional development in a deprived area and to contribute to sporting activity for the local population. It does not obviously fall into any of the prohibitions established by the subsidy control requirements in Part 2 of SCA 2022. But nor does it fall into any of the permitted exemptions found in Part 3 of the Act. Wessex DC has therefore decided in principle to list the proposed subsidy to Melchester Maulers on the Subsidy Database. I shall assume it is willing to enter all of the prescribed information onto the database in accordance with the applicable Regulations (which at the time of writing have not yet been made).
What happens next? Before Wessex can simply enter the subsidy details on the subsidy database, it must determine whether or not it must refer the matter to the CMA or whether it should, in the exercise of its discretion, make a voluntary reference. Mandatory referrals to the CMA are governed by section 52 SCA 2022. The public authority must request a report from the CMA when either the subsidy or subsidy scheme is of particular interest (‘SSoPI’) or it is directed to do so by the Secretary of State under section 55 SCA 2022.
In relation to the first situation, the Regulations governing SSoIs and SSoPIs have not yet been published. DBEIS has recently conducted a consultation on them. The consultation document included a draft set of Regulations: The Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022. These essentially introduce a £10 million threshold for SSoPIs in non-sensitive sectors and £5 million in sensitive sectors. The sensitive sectors are listed in a Schedule to the draft Regulations.
As for the second situation, the Secretary of State may make a “call in direction” under section 55(1) on any of the grounds set out in section 55(2) namely:
- The subsidy or scheme is “of interest” (‘SSoIs’) (section 55(2)(a));
- The Secretary of State considers that there is a risk that the public authority has failed to comply with the subsidy control requirements found in Part 2 of the Act, with the exception of a failure to comply with the requirement to list the subsidy on the subsidy database (section 55(2)(b)(i));
- The Secretary of State considers that there is a risk of negative effects on competition or investment within the United Kingdom (section 55(2)(b)(ii)). This provision is one of several in the Act where the focus of the statutory power or obligation is on the impact on competition or investment within the UK. There is no equivalent provision that in terms directs the focus to be on the impact on competition or investment between the UK and the EU, even though that is the area where the obligations imposed by the TCA are of most significance.
The construction costs of the Maulers’ new stadium are likely to exceed £10 million, so the Wessex DC subsidy will be a SSoPI and subject to mandatory referral to the CMA. Wessex DC must provide the CMA with the information which it must publish in due course on the subsidy database: section 52(2). It must also explain why the subsidy has been made, why it does not fall foul of the subsidy control requirements and why the criteria for it to be a SSoPI are met. It should also include evidence relevant to its assessment.
The role of the CMA on a mandatory referral includes the following steps:
- It must conduct an initial filter check within five working days and confirm whether or not the requirements for a mandatory referral have been met. If so, it gives a notice to Wessex DC to that effect and proceeds to the next stage (section 53(1)(a)). If not, it must give reasons to Wessex DC as to why the request does not comply (section 53(1)(b));
- The next stage involves a 30 working day reporting period within which the CMA will publish a report on the proposed subsidy or subsidy scheme, giving a copy to the public authority and the Secretary of State (section 53(2), (3)). The reporting period of 30 working days may be extended by agreement between the CMA and the public authority (section 53(4)) or on direction from the Secretary of State (except where the Secretary of State has given the subsidy) following a request from the CMA pleading exceptional circumstances (section 53(6), (7)).
There is then a cooling off period of five working days following the publication of the CMA’s report: section 54(1), (2). The public authority cannot give a subsidy or make a subsidy scheme before the end of that cooling off period. If the CMA fails to publish a report, the public authority may proceed with the subsidy after the day on which the 30 working day reporting period expires. The cooling off period may be extended by the Secretary of State up to an additional period of 30 working days where he considers that the CMA report has identified serious deficiencies in the public authority’s assessment (section 54(4)).
While it is not relevant to our fictional example, the role of the CMA on a voluntary referral from a public authority is broadly similar: section 56 SCA 2022. The request is filed with the CMA at the public authority’s volition, and the CMA has a discretion as to whether not to prepare a report in response: section 57 SCA 2022. Under section 58, where the Secretary of State exercises his call-in discretion during the course of a voluntary referral, it is converted into a mandatory referral but the reporting period then becomes 10 working days. If the voluntary report has already been produced but the subsidy not yet granted and a call-in direction is made, then the ‘cooling off’ period under section 54 is applied.
In the case of either a mandatory or voluntary referral, there are requirements for the form which the CMA Report should take: section 59 SCA 2022. It must include:
- An assessment of whether or not the subsidy control requirements have been met. That will likely include a review of the public authority’s assessment as to whether or not the subsidy control principles have been properly considered and/or applied;
- A consideration of the effects of the proposed subsidy or scheme on competition or investment within the UK. Note that, once again, there is no requirement for the CMA Report to consider the impact or effect of the subsidy on competition or investment between the UK and the EU (even though the TCA requires a consideration of such issues);
- Advice as to how the subsidy or subsidy scheme might be improved or modified to comply with the subsidy control requirements. That advice could potentially involve a review of the economic and/or socio-political considerations applied by the public authority when evaluating the compliance of the proposed subsidy or scheme with the subsidy control principles;
- These reports are likely to be prepared by a panel or group of the CMA under section 69 SCA 2022, which will be formally appointed by a new Subsidy Advice Unit (‘SAU’) within the CMA which is established and has specific functions designated to it under section 68 SCA 2022.
The Secretary of State also has a power under section 60 to refer a subsidy or subsidy scheme to the CMA after it has been given or made. Such a referral may be made when the Secretary of State considers that there has or may have been a failure to comply with the subsidy control requirements or where there is a risk of negative effects on competition or investment within the UK. There is no equivalent requirement to consider the impact or effect on trade or investment between the EU and the UK. Any such direction must generally be made within 20 working days of the publication of the subsidy/scheme on the subsidy database. The Secretary of State may direct the public authority to provide analysis and evidence to the CMA. Pursuant to section 61, the CMA must publish a report within the reporting period. This will be the usual 30 working day period but with an extension of time to run from the point at which the public authority provides the information directed by the Secretary of State. That period may also be extended by agreement with the public authority or direction from the Secretary of State (following a request from the CMA citing exceptional circumstances for it). The CMA’s report (section 62) essentially evaluates the public authority’s assessment of the compatibility of the subsidy/scheme with the subsidy control requirements.
The referral and reporting procedures are subject to some exemptions. The principal ones are:
- Subsidies granted under a scheme do not fall within the scope of the regime. This means that once the scheme has been addressed, individual subsidies granted under it are not subject to separate consideration. This is because an evaluation of the scheme will necessarily consider any possible award of a subsidy that might be made under it. This may make it harder in practice for the CMA to give a positive report on a subsidy scheme unless it is very clearly demarcated.
- Streamlined subsidy schemes (covered by section 10);
- Minimal financial assistance (not exceeding £315,000 in a maximum three year period) (section 36);
- Services of public economic interest (‘SPEI’) assistance (section 38);
- Certain tax measures that come within criteria set by Article 413 of the TCA which broadly covers tax conventions agreed between States (section 49).
There are some observations on this new referral system which are worth making. As a general matter, there is no longer a regime whereby subsidies must be notified to a central regulator and are then subject to a standstill requirement. There is a much greater emphasis on self-assessment by the public authority of whether or not the relevant subsidy control requirements are met. However, the apparent laxity of this new feature should not be overstated. The definition of SSoPIs enables the most significant awards of subsidy to come within the mandatory referral regime. That will provide a certain discipline to public authorities, since an adverse report from the CMA is more likely to lead to a legal challenge to the validity of the subsidy.
That said, there is no provision in the SCA 2022 by which an adverse report from the CMA, even following a call-in direction from the Secretary of State, will automatically lead to the invalidity of the subsidy. The most that the Secretary of State can do is extend the “cooling off” period, thus affording disgruntled competitors of the recipient of the subsidy time within which to bring a challenge. The only statutory prohibition on the grant of a subsidy or scheme is that found under section 31 SCA 2002, which prohibits the grant in circumstances where the mandatory referral criteria are met but the full and proper procedure has not been followed. The new regime is accordingly solely dependent on private enforcement rather than regulatory or statutory prohibition to invalidate subsidies or schemes which breach the subsidy control requirements.
It can also be seen that the focus of the consideration for the CMA Report is on competition or investment within the UK. The CMA is not directed to consider the impact on investment or competition between the UK and the EU more widely. It could be argued that this is subsumed within a consideration of the subsidy control requirements in Schedule 1. Principle G(b) does indeed refer to the need for the beneficial effects of a measure to outweigh its negative effects having regard to “international trade or investment”. But in marked contrast there is a specific principle – principle F – which requires subsidies to be designed to minimise any negative effects on competition or investment within the UK. There appears to be a statutory intent to focus on the impact on competition or investment within the UK and leave considerations of the impact on EU/UK investment to one side.
There is then a real issue as to whether or not this effectively implements the subsidy control principles found in Article 366(1) TCA. While Principle G(b) in Schedule 1to the SCA 2022 does echo the requirements of Article 366(1)(f), in terms of positive benefits outweighing negative effects, there is little in Schedule 1 that reflects the opening words of Article 366. That requires the UK to have in place an effective system of subsidy control “[w]ith a view to ensuring that subsidies are not granted where they have or could have a material effect on trade or investment between the Parties.” If the statutory regime downplays that aspect, as it seems to, there is a case for suggesting that section 29 EUFRA 2020 (considered under section C(2) above) might fill the breach. The residual obligation could be said to arise because the provisions of the TCA would not “otherwise” be implemented as was necessary for the purposes of complying with the UK’s international obligations under the TCA.
Third, the challenges to subsidies given by way of primary legislation. That apparent deficit in the implementation of the TCA leads on to the question of subsidies or subsidy schemes established by primary legislation. The SCA 2022 generally binds the Crown: section 85(1). But section 6(1) SCA 2022 excludes from the definition of “public authority” the Houses of Parliament and the devolved legislatures. Section 78 confirms that the SCA 2022 requirements only apply to financial assistance provided by means of primary legislation to the extent set out in Schedule 3. Primary legislation is defined by section 89(1) to be an Act of Parliament or an act or legislation from each of the three devolved legislatures.
Those looking for a comprehensive scheme of review and control of subsidies or schemes granted by the Parliament will not find one. The concept of a subsidy is applied to all manner of primary legislation. But there is then a schism between the primary legislation to which the subsidy control principles and enforcement mechanisms apply. The legislation of devolved Governments is brought within the scope of the overall system of control, including the power of the appropriate Court to order recovery. But Acts of the Westminster Parliament are only brought within scope to the extent of: (i) the obligation to enter details of the subsidy on the subsidy database (paragraph 8); and (ii) the power to make voluntary referrals to the CMA under sections 56, 57 and 59 (paragraph 9).
It follows that it is only primary legislation from devolved powers which may be subject to a mandatory referral and can be reviewed, not Acts of the Westminster Parliament. That leaves a potential gap by which the UK might enact legislation in breach of the TCA without any form of control under the SCA 2022. In principle, that could potentially be filled by section 29 EUFRA 2020. But section 29 makes clear that it is only existing domestic law which will be subject to the automatic adjustment mechanism. Existing domestic law is relevantly defined for these purposes, in practice, as an existing enactment passed or made before 1 January 2021. So a new enactment of the Westminster Parliament establishing a subsidy scheme or conferring a subsidy cannot be made subject to section 29 EUFRA 2020. Any enforcement will be a matter for the EU Commission using the dispute mechanisms available under the TCA.
Fourth, the legal review available before the CAT. As has been seen, the sole means of enforcing the subsidy control requirements against public authorities is through private action. Does this permit an effective enforcement regime to be put in place enabling the UK courts or tribunals to review subsidy decisions for compliance with the UK’s implementation of Article 366 of the TCA?
Section 70 confers jurisdiction on the CAT to hear reviews of a subsidy decision or an overall subsidy scheme. The CAT will apply the same principles as would be applied in a judicial review before the High Court: section 70(5). It is not possible to review the grant of an individual subsidy under a scheme: section 70(2). The application for review may be brought by an interested party – that is someone whose interests may be affected by the subsidy decision – which for these purposes includes the Secretary of State: section 70(7). In our fictional example, it seems likely that the Solentsea Scrummers would have standing to challenge the Wessex DC decision. But would they be well advised to bring a challenge?
The limitation on the scope of the review might suggest that the CAT’s latitude to interfere significantly with public authority decisions is limited. The subsidy control principles in Schedule 1 to the SCA 2022 are broad and open ended in nature. The CAT seems unlikely to want to second-guess macro-political choices which often lie behind subsidy decisions. Indeed, it will be for the public authority to select which considerations among the subsidy control principles should be taken into account, which is likely to be reviewable only on rationality grounds.[11] A rationality challenge of the substantive decision is far from easy.[12] Solentsea Scrummers may struggle to challenge the socio-economic case for the construction of the stadium, even if they can point to the blatant competitive advantage it confers on a rival. Wessex DC could ameliorate the risk of a successful challenge by imposing requirements on the stadium owners to engage in a series of public events aimed at increasing local participation in sport. Moreover, if the CMA has published a positive report on the subsidy following a mandatory referral, the prospects of a successful challenge would be substantially diminished.
However, Subsidy Principle B (in Schedule 1 to the SCA 2022) confirms that subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it. Principle E requires subsidies to be an appropriate policy instrument for their objective and to consider whether the same objective could be achieved through other, less distortive means. The approach of the Divisional Court to section 29 EUFRA 2020 in the Heathrow case would suggest that the Court is prepared to take a more active role in assessing the legal compatibility of a subsidy with the WTO principles which lie behind the TCA and the SCA 2022 more generally. The Divisional Court was prepared to consider a failure to comply with those international obligations as a potential error of law which it could review.
Moreover, the TCA principles also play a residual interpretative role when dealing with the subsidy control requirements. Section 89(2) SCA 2022 states that section 30 of EUFRA 2020 (interpretation of the TCA in accordance with public international law principles) applies where a Court or Tribunal has regard to the TCA for the purposes of interpreting a provision of the SCA 2022. The fact that the Wessex DC decision seems very likely to fall within the definition of a subsidy given by the TCA might give the Solentsea Scrummers cause for cautious optimism.
In terms of procedure, the usual course would be for an interested party to make a request for pre-action information to be provided under section 76, so as to enable it to determine whether or not to make an application for a review. There is no official limit for making such a request, but it affects the time limits applicable to any subsequent review before the CAT. The public authority must then provide written information within 28 days which would be sufficient to enable or assist in determining whether or not a claim for review should be brought (section 76(3), (4)).
Section 71 inserts a new rule 98A into the CAT Rules. This provides that a review must be brought by sending a notice of appeal to the CAT before the end of one month beginning with the relevant date. The relevant date is variously described as follows:
- Where a request for pre-action information has been made within one month of the transparency date, the month time limit runs from the date on which then public authority gives the interested party notice that it has provided a response to the section 76 request;
- Where the Secretary of State makes a post-award referral, the date runs from the date on which the post-award referral report is published;
- In any other case, time runs from the transparency date. That is defined by Rule 98A(4)(b) as either:
- Where there is no obligation on the public authority to provide details on the subsidy database, the date on which the interested party knew or ought to have known of the subsidy decision; and
- In all other cases, the date on which the relevant entry is made on the subsidy database which complies with the duty under section 31 SCA 2022 (minor omissions or errors will be excepted).
As indicated above, this shows the importance of keeping track of the public database. It seems likely that large solicitors’ firms will run a monitoring service for their clients to keep the database under review.
The powers of the CAT on a review include the power to grant the usual judicial review forms of relief, including a mandatory order, a prohibiting order, a quashing order, a declaration, or an injunction: section 72(2). Under section 72(3), the matter may be remitted to the decision maker if a decision is quashed. The relief granted by the CAT is given equivalent effect to an Order of the High Court: section 75(5). The CAT may also make a recovery order under section 74 if it would otherwise be granting a form of relief and it finds that the public authority did not comply with one of the subsidy control requirements. Such a recovery order both confers on the public authority a statutory right of recovery, and mandates that the public authority must exercise that right in accordance with the order.
The CAT must also apply standard judicial review principles when deciding whether to grant relief: section 72(6). It may decline to grant relief if there has been undue delay in making the application or, more controversially, the grant of relief would “be likely to cause substantial hardship to, or substantially prejudice the rights of, any person or would be detrimental to good administration.” It might be thought that any post-subsidy recovery would be substantially prejudicial to the beneficiary, so clearly this reservation should not be construed too liberally. It is also open to the CAT to decline to grant any relief on the basis that the outcome of the public authority’s decision would have been much the same. Section 72(9) directs the CAT to apply the test set by section 31(2A) and (2B) of the Senior Courts Act 1981.
Concluding analysis
The potential tri-partite system of enforcement is capable of giving rise to significant complications in practice. It might be questioned whether this is a simpler and clearer system than that which it replaces. There are also some areas where the TCA alone will govern the matter. Section 49 SCA 2022 states that tax measures which confer permitted subsidies under Article 413 of the TCA are not subject to the subsidy control requirements. Article 413 essentially permits the non-discriminatory imposition and collection of direct taxes or the enforcement of multilateral tax conventions.
There is a strong suggestion in the statutory regime that two principles have been consistently applied: the sovereignty of the Westminster Parliament and the perceived desirability of a light touch review by the Courts or Tribunals of public authority decisions. In truth, the Regulations establishing the test for SSoPI mean that the most significant decisions will be subject to an advisory review by the CMA. Moreover, the CAT may, in practice, subject subsidy decisions to a greater degree of scrutiny than is typically seen in the Administrative Court. But subsidies which are subject to a positive report from the CMA would appear to be difficult to challenge under the new regime.
The absence of a specific regulator with enforcement powers will contribute to the risk of variable decision making by public authorities which has potential to cause distortions of competition between regions. The EU system was heavily centralised with a requirement to notify the Commission, which provided a strong incentive to bring subsidies within the scope of one of the various block exemptions. But it meant that there was one specialist body with overall oversight of the regime and the necessary economic and data analysis skills to determine the impact of any particular subsidy.
The new system risks being much more fragmented. For central Government subsidies, that is less of an issue. But with a large range of public bodies falling within the scope of the regime, the risk of divergent approaches to subsidy control is evident. That may well produce effects which are distortive of competition. Disgruntled competitors (whether justified or otherwise) may well resort to litigation to put a spoke in the wheel of any governmental action which favours a competitor.
At the same time, the loss of the GBER means that a large number of subsidy schemes which might have been entirely beneficial will now be required to be notified to the CMA and at risk of challenge before the CAT. 82.2% of the total volume of all new subsidy measures granted by the UK in 2018 were “pre-approved” through the GBER.[13] These schemes may well now need to be referred to the CMA. Indeed, there is a certain irony that for a large category of subsidies, the new regime will therefore introduce a greater level of bureaucracy and greater uncertainty than would have been found if the GBER had been kept on as a measure of retained EU law.
These practical outcomes seem at odds with the Government’s professed aim of making subsidy control simpler and more consistent. The absence of any explicit concern for negative impacts on EU/UK competition and investment, coupled with the absence of any review mechanism for Acts of the Westminster Parliament, is likely to bring the UK into confrontation with the EU Commission.
This article was written on 7 July 2022.
[1] See: Articles 5-8 of the NIP.
[2] See Article 9 of the NIP.
[3] House of Commons Library Report on the Subsidy Control Bill, September 2021, p. 11.
[4] House of Commons Library Report, ibid, p. 14, citing the Institute for Government, Taking back control of subsidies, 27 May 2021.
[5] House of Commons Library Report, ibid, pp. 20-21, citing commentary from Anton Spisak of the Tony Blair Institute for Global Change.
[6] UK Government Impact Assessment, paragraphs 305 to 334.
[7] See the Impact Assessment ibid at paragraph 337.
[8] https://ec.europa.eu/info/sites/info/files/notice-stakeholders-brexit-state-aid_en.pdf
[9] Following the publication of the original TCA in the Official Journal of the EU on 31 December 2020, a subsequent version, amended with sequentially re-numbered paragraphs used throughout was published on 30 April 2021: [2021] OJ L No 149, 30.4.2021, p. 10.
[10] Such as the provisions governing the analysis of tax measures, which follow a similar path to that adopted in Joined Cases C-51/19 P and C-64/19 P World Duty Free Group [2021] EU:C:2021:793, the CJEU at [31] to [36].
[11] See the judgment of Laws LJ in R (Khatun) v. Newham BC [2004] EWCA Civ 344, [2005] QB 37, CA at [35]; and R (oao DSD) v. Parole Board [2019] QB 285, DC per Leveson P at [140]-[141].
[12] R v. Secretary of State for the Home Department ex p Brind [1991] 1 AC 696, HL per [1991] 1 AC 696, HL per Lord Lowry at p. 764.
[13] See [54] of the Government’s Impact Assessment.
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