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The new subsidy control regime: new rules on competition and relocation

In the second article in a four-part series, Edward Reynolds and David Owens consider two key provisions in the Subsidy Control Bill on competition and relocation of activities.

The Subsidy Control Bill introduced into Parliament at the end of June, has included two potentially significant additional provisions over and above the requirements under the UK-EU Trade and Cooperation Agreement, and indeed any other international obligations of the UK. These are:

  • a principle relating to competition in the UK with which subsidies and subsidy schemes must be compatible (Schedule 1, Principle F), and
  • introducing a new prohibition on the relocation of activities (clause 18).

In this note, the second in our four-part series, we consider the potential impact of these new provisions. Both appear to have their origins in the issues raised both in the consultation and by some commentators, that a subsidy control regime could, and perhaps should, include provision which explicitly addresses the risks of different public bodies using subsidies to influence investment decisions as between different areas within the United Kingdom, even if they did not materially affect trade or investment with outside countries.

The competition principle

Principle F states that:

“Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the United Kingdom.”

It is important to note that the wording does not require subsidies not to affect competition or investment in the UK, merely that the design of the subsidy should be to achieve the policy objective under Principle A, while minimising the effect on competition or investment. Worryingly, the explanatory notes suggest that public authorities should design subsidies so as to minimise the effects on competition in the UK, through assessing the effects likely to arise from providing the subsidy to ensure that a subsidy does not “unduly” favour one enterprise to the detriment of a competitor or potential new entrants into the market. This explanation seems to suggest a much more restrictive application, which could make it difficult to provide any subsidy in a market which is competitive, such as say the development of vaccines. It is very unclear what the notes mean by “unduly” in this context, and how a grant making body is expected to assess it. 

The wording of Principle F suggests a slightly different approach that prioritises the achievement of the objective, and then looks to minimise the effect on competition. If this is about the design of the subsidy in the sense of a choice between grant or discounted loan, or the amount of the subsidy in the circumstances, it may be questioned whether it actually makes any difference to the process already required by Principle B that the subsidy should be proportionate to the objective and limited to what is necessary to achieve it, and Principle E (least distortive means of achieving policy objective).

Without going so far as the explanatory notes, it may be thought that the intention is to avoid an anti-competitive effect through the design of the process by which beneficiaries are selected to ensure that there is a fair and open process by which this is done, allowing all potential competitors to bid. This may have problems for LEPs where their remit is to support local business, notwithstanding the fact that this may affect competition nationally. It may also be complicated to apply where the support is, for example, to the provision of a cultural building or its preservation. A developer who holds the site is likely to be in a materially advantageous position as against others who are in competition.

This needs to be clarified, and we would suggest that seeking to say that an effect on competition would make a subsidy unlawful is unworkable without a robust block exemption regime. Expecting all subsidy providing authorities to conduct a detailed assessment on the effect on competition across the UK of all subsidies is also, we suggest, unrealistic.

The relocation prohibition

18 Relocation of activities

(1) A subsidy is prohibited by this section if:

(a) it is given to an enterprise subject to a condition that the enterprise relocates all or part of its existing economic activities, and

(b)   the relocation of those activities would not occur but for the giving of the subsidy.

The application of this clause has already given rise to concerns that it may adversely affect the ability of LEPs and local authorities to use grants or other forms of subsidy to encourage business to relocate, and thus hampering the levelling-up agenda of the Government. As has been pointed out, there are some arguments that can be deployed to assist such authorities:

  • the prohibition does not apply if the relocation is not a condition of the subsidy. However, given the requirements of the subsidy principles, and the effect of clause 77 giving a right to recover subsidies not used for the purposes intended, it may well be the case that where a subsidy is given to fund acquisition and development of new premises on a specific site there would be an implied condition of relocation. This might also arise in the context of enterprise zones or freeports, where financial benefits flow from moving to the site
  • it may be possible to argue, although doubtful, that the reference to relocation in clause 18(1)(b) is intended to be construed as excluding a situation where the recipient needs to move from existing premises and the subsidy merely incentives site A against site B. This is unclear, and the notes do not address the point.

A further element of uncertainty here is the meaning of “area” in clause 18(2)(a). How is an area to be defined? Is for example a move from Poole to Bournemouth from one area to another (they are in the same local authority)? Equally, local authority boundaries in urban areas may not reflect divisions of a meaningful type, and moving half a mile but crossing a local authority boundary might not be of practical significance. Is that intended to be caught?

It will be interesting to see if any guidance from the Secretary of State clarifies the issues considered in this note, or whether they are discussed as the Bill moves through Parliament.

David Owens is a partner and Edward Reynolds is an associate at Bevan Brittan.

Read the first article in this series: Subsidy Control Bill - The General Principles