Subsidy Control Act 2022

Part 2: Subsidy control requirements

Chapter 1: Principles

Section 12: Application of the subsidy control principles

56. Subsection (1) of this section establishes a duty for public authorities to consider the subsidy control principles set out in Schedule 1 before deciding whether to grant a standalone subsidy (i.e. a subsidy not granted under a subsidy scheme). It also requires the public authority not to grant the subsidy unless they are of the view that it is consistent with the principles contained in Schedule 1.
57. Subsection (2) of this section explains that a public authority giving a subsidy under a subsidy scheme is not subject to the subsection (1) duty.
58. Similarly, subsection (3) of this section places an obligation on public authorities, before making a subsidy scheme, to consider the principles in Schedule 1. It also requires public authorities not to make the scheme unless they are of the view that the subsidies provided for by the scheme will be consistent with the principles contained in Schedule 1.

Schedule 1: The subsidy control principles

59. Schedule 1 describes the seven main subsidy control principles. Six of these are derived from the TCA. The UK competition and investment principle (Principle F) is an additional domestic principle that was proposed in the consultation document.
60. The effect of each principle is:
    1. Principle A: Public authorities will need to consider, explain and assess the policy objective behind the subsidy to ensure there is a benefit to wider society in providing the subsidy. To illustrate what addressing an equity rationale means in practice, three examples are provided.
    2. Principle B:  Subsidies should be both proportionate and limited to what is necessary to achieve the policy objective.
    3. Principle C: Subsidies must incentivise and lead to a change in the behaviour of the beneficiary. They must help to address the public policy objective being pursued.
    4. Principle D: Subsidies should be targeted to bring about an effect that is additional to any that would occur in the absence of the subsidy. They should not normally cover everyday business expenses.
    5. Principle E: Alternative policy levers, that are likely to cause less distortion to competition and investment in the UK, or trade and investment internationally, should be considered before turning to subsidies.
    6. Principle F: Public authorities should design the subsidy in a way that minimises the impact on competition and investment within the UK’s internal market. This will require them to assess the effects which are likely to arise from providing the subsidy. This is a domestic test to ensure that a subsidy does not unduly favour one firm to the detriment of a competitor or new entrants to the UK market, or unduly reduce competition within the UK market.
    7. Principle G: Public authorities should assess the material effects on competition and investment in the UK, and international trade and investment, and decide whether the benefits of the subsidy are greater than the harmful impacts of providing the subsidy.

Section 13: Application of energy and environment principles

61. This section is similar to section 12, setting out that when deciding whether to grant subsidies in relation to energy and environment, and make schemes that provide for giving these subsidies, public authorities must consider the energy and environment principles in Schedule 2 and should not give the subsidy or make the scheme unless they are of the view that it is consistent with the principles.

Schedule 2: The energy and environment principles

62. This schedule sets out the additional principles that must, where relevant, be considered for subsidies in relation to energy and the environment. These are derived from the UK’s international obligations, specifically under Annex 27 of the TCA.
63. The effect of each principle is:
    1. Principle A: energy and environment subsidies shall be aimed at and shall incentivise the beneficiary in either delivering a secure, affordable and sustainable energy system and a well-functioning and competitive energy market, or increasing the level of environmental protection compared to the level that would be achieved in the absence of the subsidy.
    2. Principle B: energy and environment subsidies shall not relieve the beneficiary from liabilities arising from its responsibilities as a polluter under the law of any of the nations of the UK.
    3. Principle C: Subsidies for electricity generation adequacy, renewable energy or cogeneration shall not undermine the ability of the UK to meet the specified obligations under the TCA, and shall be determined by means of a transparent, non-discriminatory and effective competitive process. A non-competitive process may, however, be used to determine a subsidy for renewable energy or cogeneration if appropriate measures are put in place to prevent overcompensation and the market supply (i.e. the number of potential subsidy beneficiaries) is insufficient to ensure a competitive process, the eligible capacity is unlikely to have a material effect on any competition or investment within the UK, trade between the UK and any country or territory outside the UK, and investment as between the UK and any country or territory outside the UK, or if the subsidy is given for a demonstration project.
    4. Principle D: Subsidies for electricity generation adequacy may be limited to installations not exceeding specified CO2 emission limits.
    5. Principle E: Subsidies for renewable energy or cogeneration shall not affect beneficiaries’ obligations or opportunities to participate in electricity markets.
    6. Principle F: Subsidies in the form of partial exemptions from energy-related taxes and levies in favour of energy-intensive users shall not exceed the total amount of the tax or levy concerned.
    7. Principle G: Subsidies in the form of compensation for electricity-intensive users given in the event of an increase in electricity costs resulting from climate policy instruments shall be restricted to sectors at significant risk of carbon leakage due to the cost increase.
    8. Principle H: Subsidies for the decarbonisation of emissions linked to industrial activities in the UK shall achieve an overall reduction in greenhouse gas emissions, and reduce the emissions directly resulting from the industrial activities.
    9. Principle I: Subsidies for improvements of the energy efficiency of industrial activities in the UK shall improve energy efficiency by reducing energy consumption, either directly or per unit of production.

Chapter 2: Prohibitions and other requirements

Section 14: Introductory

64. This section sets out the purpose of this chapter in general terms. All but one of these provisions (the relocation condition) are derived from and implement the UK’s international obligations, including the TCA and the ASCM.

Section 15: Unlimited guarantees

65. This section prohibits any subsidy that would guarantee an unlimited amount of liabilities or debts, or which would guarantee a finite amount of liabilities or debts but over an indefinite period.
66. This section gives effect to the UK’s international obligations, including under the TCA (Article 3.5).

Section 16: Export performance

67. This section establishes rules around subsidies for goods and services designed to be contingent, whether in law or in fact, on export performance. These may include, for instance, subsidies to cover the price difference between domestic market prices and international market prices. Subsidies of this kind are prohibited unless specific conditions or terms are met, in line with the UK’s international obligations under the WTO’s ASCM and the TCA.
68. The section establishes that short-term export credit support, where this support is not in the form of support for marketable risk for buyers in marketable risk countries, or in export support that is permissible under the terms of the ASCM, is not prohibited. Marketable risk countries (such as, for instance, the United States, or Member States of the EU) have higher levels of private insurance market capacity such that Government short-term export credit support is not appropriate.
69. Subsection (3) provides relevant definitions of terms used in this section.
70. Subsections (4) to (6) establishes that the Secretary of State can make regulations, subject to the negative resolution procedure, to the effect that a marketable risk country is no longer to be treated as such, provided the Secretary of State considers that specific conditions regarding the capacity of the private market in the relevant country are met. Any regulations must be revoked via instrument, subject to the negative resolution procedure.

Section 17: Use of domestic goods or services

71. This section prohibits subsidies that are contingent on preferences for domestically produced goods or services, often known as ‘local-content’ subsidies.
72. Local content subsidies for goods are a key prohibition of the WTO ASCM; as noted in the explanation for section 15, the ASCM is a core part of the UK’s obligations as a WTO member. Local content subsidies for many services sectors are prohibited under many FTAs, including the TCA with the EU.
73. Subsection (2) provides that the prohibition does not apply to subsidies related to the audiovisual sector.
74. Subsection (3) provides that this section is without prejudice to Article 132 and Article 133 of the TCA. These articles allow for the provision of local-content subsidies in the certain circumstances, e.g., to incentivise the location of production or service supply, or the hiring of workers in a territory without being non-compliant with the prohibition on local-content subsidies.

Section 18: Relocation of activities

75. This section prohibits subsidies that explicitly require enterprises to relocate economic activities from one part of the UK to another, where this relocation would not have occurred in the absence of the subsidy.
76. Subsection (1) states that a subsidy may not be given on condition of an enterprise relocating any aspect of economic activities and may not be given if that relocation would not occur without said subsidy.
77. Subsection (2) clarifies, for the purpose of subsection (1), that an enterprise relocates its existing economic activities where it is conducting activities in an area of the UK before the subsidy is given, halts those activities after the subsidy is given, and continues them in another area of the UK.
78. Subsection (3) defines economic activities.
79. Subsection (4) specifies an exemption to the relocation prohibition by reference to three conditions in subsection (5), (6) and (7). The three conditions ensure that a public authority can only give a relocation subsidy that has the effect of reducing social or economic disadvantage in both the area to which the relocation takes place and within the UK generally, while also changing the economic behaviour of the beneficiary

Section 19: Rescuing

80. This section establishes rules around subsidies designed to rescue ailing or insolvent enterprises. Subsidies of this kind are prohibited unless specific requirements are met. A rescue subsidy is one that is given temporarily to allow an enterprise to stay in business so that a restructuring plan can be prepared. An ailing or insolvent enterprise is one that would almost certainly go out of business in the short to medium term without subsidy.
81. Subsection (2)(a) establishes that these subsidies are permitted only where the subsidy would prevent social hardship or a severe market failure. Subsection (2)(b) establishes that, the conditions in Subsection (2)(a) notwithstanding, rescue subsidies for ailing or insolvent enterprises should only be granted in exceptional circumstances.
82. Subsection (3) establishes that rescue subsidies should only be given as temporary liquidity support, as a loan or loan guarantee, to provide time for the enterprise to prepare a restructuring plan.
83. This section does not apply to subsidies for rescuing ailing or insolvent banks, other deposit takers, or insurance companies; see sections 21 to 23 for provisions for subsidies to ailing and insolvent banks, other deposit takers, or insurance companies.

Section 20: Restructuring

84. This section establishes rules around subsidies for the purpose of restructuring ailing or insolvent enterprises. A restructuring subsidy is one given to support the restructuring of an enterprise, subsidies of this kind are prohibited unless specific requirements are met. An ailing or insolvent enterprise is one that would almost certainly go out of business in the short to medium term without subsidies.
85. Subsections (2) to (5) set out the relevant conditions, including that:
    1. The recipient enterprise should have a credible restructuring plan in place.
    2. The public authority giving the subsidy is satisfied that this plan is based on realistic assumptions, with a view to restoring the enterprise to long-term viability within a reasonable time period.
    3. Where the recipient is not a small or medium-sized enterprise, the enterprise, or its owners, creditors, or new investors, have made a considerable contribution to the cost of restructuring or have a contractual obligation to do so.
    4. The public authority giving the subsidy is satisfied that the subsidy contributes to an objective of public interest, including by preventing social hardship or a severe market failure.
86. Subsection (6) establishes that in principle restructuring subsidies should not be granted to the same beneficiary more than once every five years. This does not apply in genuinely unforeseeable circumstances.
87. Subsection (7) establishes that temporary liquidity support may be extended to enterprises preparing a restructuring plan under subsection (2).
88. Different rules apply for subsidies to restructure ailing or insolvent banks, other deposit takers, or insurance companies; see section 20.

Section 21: Restructuring deposit takers or insurance companies

89. This section establishes rules around subsidies for the purpose of restructuring ailing or insolvent banks, other deposit takers or insurance companies. Subsidies of this kind are prohibited unless specific requirements are met.
90. These conditions are set out in subsections (2) to (4), and require:
    1. that the recipient enterprise should have a restructuring plan in place which the public authority giving the subsidy is satisfied is credible and likely to restore long term viability;
    2. that the enterprise, its shareholders, creditors, or investors, should have made a considerable contribution to the cost of restructuring from their own resources, or have a contractual requirement to do so; and
    3. that the public authority should expect to be remunerated for the cost of the subsidy.

Section 22: Liquidating deposit takers or insurance companies

91. This section establishes rules around subsidies for the purpose of liquidating ailing or insolvent banks, other deposit takers or insurance companies. Subsidies to a bank, other deposit taker or insurance company unable to credibly demonstrate that it can be restored to long-term viability are prohibited unless specific conditions or terms are met.
92. These conditions are set out in subsections (3) to (5), and require:
    1. that the purpose of the subsidy is to ensure the orderly liquidation and exit from the market of the beneficiary of the subsidy;
    2. that the public authority giving the subsidy is satisfied that the subsidy is limited to what is strictly necessary to ensure an orderly liquidation and exit from the market, and is limited to minimise any negative effects on competition or investment within the UK or trade or investment between the United Kingdom and countries and territories outside the United Kingdom; and
    3. that the beneficiary of the subsidy, its shareholders, its creditors (or the business group it belongs to) should make a significant contribution to the cost of its own liquidation, or else have a contractual obligation to do so.

Section 23: Liquidity provision for deposit takers or insurance companies

93. This section establishes rules around subsidies for the purpose of supporting liquidity provision to ailing or insolvent banks, other deposit takers or insurance companies.
94. Subsidies of this kind are prohibited unless specific requirements are met.
95. These conditions are set out in subsections (2) to (4), and require:
    1. that the subsidy should be temporary;
    2. that the subsidy should not be used by the recipient to cover losses or become capital support; and
    3. that the public authority giving the subsidy should have been, or reasonably expect to be, remunerated for the cost of the subsidy.

Section 24: Meaning of "ailing or insolvent"

96. This section defines ailing or insolvent enterprises, specifically in relation to sections 19 to 23.
97. Ailing or insolvent businesses are those that would almost certainly go out of business in the short to medium term in the absence of subsidies, or are unable to pay debts as they fall due, or where the value of the enterprise’s assets is less than its liabilities.
98. The Secretary of State may make regulations on the specific meaning and terms of ‘almost certainly go out of business’.

Section 25: Meaning of "deposit taker"

99. A deposit taker, for the purpose of sections 19 to 24, is defined in this section.
100. A deposit taker is a person who has permission to carry on the regulated activity of accepting deposits, listed under the relevant provisions of the Financial Services and Markets Act 2000. This does not include a person who accepts deposits solely in connection with another regulated activity in the Financial Service and Markets Act 2000.

Section 26: Meaning of "insurance company"

101. This section defines insurance companies, for the purpose of sections 19 to 24.
102. An insurance company is a body corporate that has permission to carry on the regulated activity of effecting or carrying out insurance contracts under the relevant provisions of the Financial Services and Markets Act 2000. Insurance companies do not include certain persons: e.g. friendly societies (under the Friendly Societies Act 1992), a registered society under the Co-operative and Community Benefit Societies Act 2014, or a member of Lloyd’s that is not a company under the Companies Acts.

Section 27: Subsidies for insurers that provide export credit insurance

103. This section prohibits subsidies to insurers providing export credit insurance unless this insurance for marketable risk is either provided on commercial terms or does not directly or indirectly benefit the insurer’s export credit insurance business.
104. Definitions in this section are the same as those made in section 15 (export credits) and section 24 (meaning of insurer).

Section 28: Subsidies for air carriers for the operation of routes

105. This section establishes that subsidies for air carriers for the operation of routes are prohibited unless they meet one of the conditions set out in subsections (2) to (4), which are:
     1. that the air carrier is undertaking a public obligation as a consequence of the regulation for common rules for the operation of air services between the EU and the UK;
     2. that the public authority giving the subsidy is satisfied that the subsidy will provide wider societal benefits; or
     3. that the subsidy is a start-up subsidy that will establish a new route to a regional airport, and that the public authority giving the subsidy is satisfied that the new route will increase travellers and facilitate regional development.

Section 29: Services of public economic interest

106. Services of Public Economic Interest (SPEI) are public services that would not be supplied (or would not be supplied under the required conditions) without public intervention, and which are of particular importance to society. Examples of an SPEI could include social housing or rural public transport services.
107. A public authority can only award a subsidy for the delivery of a SPEI if it does so in a transparent manner and it is satisfied that the value of the subsidy is restricted to what is necessary to deliver that service. Public authorities should take into consideration the cost of delivering the service and what would be a reasonable profit for the enterprise delivering the task when deciding the value of the subsidy.
108. Subsections (4) and (5) set out the steps a public authority has to take to award a SPEI subsidy in a transparent manner.
109. Public authorities must review a SPEI subsidy to ensure it remains what is necessary to deliver the service and, if the compensation is above what is necessary, then the public authority must recover the excess. Public authorities must conduct such a review at least every three years and upon final delivery of the service of public economic interest.
110. The subsidy control principles in Schedule 1 only apply to the award of a subsidy for the delivery of an SPEI insofar as applying them does not obstruct the delivery of the service.

Section 30: Effect of prohibitions etc in relation to subsidy schemes

111. This section prohibits subsidy schemes to the extent that the scheme in question provides for a prohibited subsidy (for example, a subsidy that is explicitly conditional on relocation within the UK as prohibited by section 18) or otherwise does not meet the relevant requirements provided for in this Act. If the scheme also allows for subsidies that do meet the subsidy control requirements, then those subsidies may still be awarded under that scheme.

Section 31: Subsidies or schemes subject to mandatory referral

112. Chapter 1 of Part 4 deals with mandatory referrals to the CMA. This section prohibits a subsidy or scheme which is given or made in circumstances where:
     1. a mandatory referral request should have been made to the CMA but none was submitted by the public authority in accordance with the requirements that apply to such requests; or
     2. a mandatory referral request was submitted but the public authority did not wait for the mandatory referral process to conclude before giving the subsidy or making the scheme.

Chapter 3: Transparency

Section 32: Subsidy database

113. This section provides that the Secretary of State must make arrangements for a database of subsidies and subsidy schemes for the purposes of transparency.
114. The Secretary of State must ensure that the database is accessible to the public and free of charge, and that public authorities who have to upload details of a subsidy or subsidy scheme to the database are able to do so.
115. The Secretary of State must also keep the database under review in such manner and at such intervals as the Secretary of State considers appropriate.
116. The Secretary of State may direct the CMA to take on responsibility for maintaining the database in future. Part 4 sets out the CMA’s functions in relation to subsidy control. Were responsibility for the subsidy database to be taken on by the CMA in future, it would be responsible for maintaining the database, rather than the Secretary of State, as set out in subsections (1) and (2).
117. The Secretary of State may amend or revoke any direction to the CMA to maintain the database under a power in section 88. This means that the Secretary of State could, if considered appropriate, choose to take back the responsibility for the database from the CMA in future.

Section 33: Duty to include information in the subsidy database

118. This section details the specific obligations that a public authority has with regard to uploading subsidies and subsidy schemes onto the subsidy database. A public authority must ensure that an entry is made in the database in respect of any subsidy scheme that the public authority has made. There is no financial threshold that triggers the uploading of a subsidy scheme: all schemes must be uploaded, unless a relevant exemption in Part 3 applies.
119. A public authority must also make an entry in the database in respect of any subsidy it provides. However, there are a number of key exemptions from the requirement to upload a subsidy award where the amount of the subsidy is no more than £100,000. First, subsection (2) exempts a subsidy from the requirement to be uploaded if it has been given under an uploaded scheme and the individual award is no more than £100,000. Secondly, Part 3 of the Act contains further exemptions from the transparency requirements. In particular, section 36 provides that minimal financial assistance, which must not exceed £315,000 over three years per recipient, is exempted from the subsidy control requirements. This includes an exemption from the transparency requirements where the amount of the subsidy given as minimal financial assistance is no more than £100,000. Minimal financial assistance exceeding this threshold is subject to transparency requirements. Section 38 and 41(1) outline further provisions relating to transparency, where the subsidy is for SPEI assistance or other types of SPEI subsidy: such subsidies are also exempt from transparency requirements where the amount of subsidy is no more than £100,000.
120. The threshold from which awards given under schemes must be added to the database is amendable via regulations subject to the affirmative resolution procedure. The regulations may not increase this threshold above £500,000.
121. Subsection (3) states that if a subsidy or scheme needs to be uploaded, it must be uploaded within three months of the confirmation of the decision to grant the subsidy or to make the subsidy scheme; this includes subsidy schemes made in the form of a tax measure. Subsidies provided in the form of a tax measure must be uploaded within one year of the date of the tax declaration.
122. Public authorities must ensure that the subsidy or scheme is maintained on the database for at least six years or the duration of the subsidy or scheme if longer.
123. The same deadlines apply for uploading a modification to a subsidy or scheme. This means a modification should be uploaded within one year of the modification where it is made to a subsidy given in the form of a tax measure. Where the modification is for any other type of subsidy or scheme, the entry to the database should be made within three months of the modification.
124. Subsidy awards given under schemes of no more than £100,000 do not need to be uploaded and under subsection (6) any modifications to such subsidies do not need to be uploaded provided the subsidy remains below this threshold as modified.
125. The deadlines for uploading subsidies and schemes and modifications may also be amended via the affirmative resolution procedure, up to one year in respect of tax measures, and up to six months for any other form.

Section 34: Information to be included in the subsidy database

126. Section 34 provides the Secretary of State with a power to make regulations which specify what information should be included in the database when a public authority uploads a subsidy or a subsidy scheme.
127. Subsections (2) and (3) provide an illustrative list of the sort of information that may be specified in the regulations. Some of these categories reflect information which the UK is under an obligation to provide under international agreements, such as the TCA. In the case of subsidy schemes, the regulations may also require a public authority to demonstrate how it calculates the subsidy amount.
128. Subsection (2)(h) specifies that the regulations may require public authorities to indicate where the information described in subsections (2)(a) to (g) and (3) can be found. This could be on a linked website for example. This is to ensure that those viewing a public authority’s entry in the database can find all the required information if it is not directly hosted within the database itself.