The new subsidy control regime: a death knell for “local aid” in the UK?

Kieran McGaughey analyses an important change to the four stage test of what constitutes a subsidy under the Subsidy Control Act 2022.

The Subsidy Control Act 2022 will take full effect from 4th January 2023. The four stage test of what constitutes a subsidy under the Act will, at first blush, look broadly familiar to those conversant with the State aid regime (and indeed the interim subsidy regime under the TCA). On closer inspection however, the fourth limb of the test represents an important divergence for local authorities and other granting bodies. Particularly so when considered in tandem with the new statutory guidance to accompany the Act, which was published on 11 November 2022.

Under the test at section 2(1) of the Act, a subsidy is financial assistance which, amongst other ingredients:

d) has, or is capable of having, an effect on—

(i) competition or investment within the United Kingdom,

(ii) trade between the United Kingdom and a country or territory outside the United Kingdom, or

(iii) investment as between the United Kingdom and a country or territory outside the United Kingdom.

Section 2(1)(d)(i) here in particular represents a significant change, as it requires for the first time an assessment of such effects (or potential effects) against the internal market. This new domestic focus is further evidenced by the introduction of a new “7th principle” at Schedule 1 of the Act, which requires that in-scope subsidy awards:

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

The statutory guidance confirms the wide scope of the definition at section 2(1)(d), citing the example of two newsagents operating in a remote rural village. If the local council gave financial assistance to one of the newsagents, the guidance indicates that this “may” constitute a subsidy. The subsequent example (the only given of what may not satisfy this test) envisages a grant to a barber shop in a remote rural village, where there are no other barber shops.

Somewhat ironically given the political discourse around the new regime, this definition would appear then to cover a broader range of measures than its predecessor under the EU State aid regime. Under Article 107(1) of the Treaty on the Functioning of the European Union, it was a requisite ingredient of a State aid that it “affects trade between Member States”. It was settled case law that actual distortion was not required to satisfy this test, rather only to examine that aid was liable to affect such trade and distort competition.

The Commission Notice on the notion of State aid from 2016 set out a range of decisions where the European Commission considered “in view of the specific circumstances of the cases, that the measure had a purely local impact and consequently had no effect on trade between Member States.” In those cases the Commission ascertained “that the beneficiary supplied goods or services to a limited area within a Member State and was unlikely to attract customers from other Member States, and that it could not be foreseen that the measure would have more than a marginal effect on the conditions of cross- border investments or establishment.” The examples given included:

• sports and leisure facilities serving predominantly a local audience and unlikely to attract customers or investment from other Member States;
• cultural events and entities performing economic activities unlikely to attract users or visitors away from similar offers in other Member States;
• hospitals and other health care facilities providing the usual range of medical services aimed at a local population;
• a conference centre deemed unlikely to divert users from other centres in other Member States; and
• small airports or ports that predominantly serve local users.

The Notice was followed later that year by a press release where the Commission gave further “guidance on local public support measures that do not constitute state aid.” This set out five additional cases where the Commission had found that “public measures for purely local operations in Spain, Germany and Portugal involved no state aid because they were unlikely to affect trade between Member States”. Those cases related to a sports camp, a port on a small island, an assisted living facility for elderly residents and two local media projects in Spain involving local languages.

In October of this year another public support measure was deemed to be local aid and thus outwith the scope of the State aid regime. The decision this time was made by the General Court, a constituent court of the Court of Justice of the European Union, following an appeal against a previous Commission finding. In Case T-582/20, Interessengemeinschaft der Hoteliers und Grestauren Region 10 (Ighoga Region 10) v European Commission the construction of a congress centre and an adjacent hotel in Germany was held not to be liable to affect trade between Member States. Decisive elements in this finding included the relatively small size of the congress centre, and its local catchment area for local events. Further, the majority of tenders in respect of operating the centre came from bidders in the region, and the conference was also a negligible player in the market for international conferences.

The timing of this recent judgment perhaps brings into sharp focus the apparent future divergence between the two regimes of State aid and subsidy control. In light of the new statutory test and guidance as above, it would appear difficult for UK local authorities (and other public funders) to rely on such arguments as a “no aid” basis where embarking upon similar ventures in the UK.

Comment

Local aid (or local subsidy in new money) arguments were never a hugely attractive option for local authorities. Their subjective nature lacked the legal certainty, much coveted by funders and recipients alike, of other routes such as GBER or de minimis/small amounts of financial assistance. However, they were a useful tool of last resort, particularly where measures aligned on a factual basis with some of the above decisions. Despite the promised freedoms and flexibilities of the new post-Brexit legal regime, it appears difficult to reconcile some of the above European examples as being permissible under the strict test set out in the new UK guidance. Funding applicants often take an over generous view of this test and thus local authorities would do well to carefully scrutinise any future awards proposed on this local aid basis. Unless you’re dealing with the only barber shop in the village, it’s unlikely to make the cut….

Kieran McGaughey is a Commercial Solicitor at Newcastle City Council, and a Director of Lawyers in Local Government (LLG). He is also their National Lead for Procurement Law, which includes subsidy control. You can contact Kieran by email at This email address is being protected from spambots. You need JavaScript enabled to view it. or connect with him on LinkedIn here: https://uk.linkedin.com/in/kieran-mcgaughey-29383b66