State Aid: Taking back control….eventually

Published by Caitlin Powell on 5 February 2021

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The new Business Secretary, Kwasi Kwarteng MP, has announced that the Government will be undertaking a consultation into how State Aid rules should work in the new post-Brexit world.

Following the end of the transition period on 31 December, the UK has a pressing need to develop a new subsidy control system that is in line with World Trade Organisation Rules, the UK-EU Trade and Cooperation Agreement and also fits within (i.e. does not breach) the various Free Trade Agreements that have been, and will be, signed.

The consultation

The Government is stressing that this will be a new approach that works to support businesses and empower local authorities across the whole of the UK, and (notably) will be a clear departure from the “inflexible and bureaucratic EU state aid regime”. Their words, not mine. It will be principles-based with greater powers given to local authorities to decide if they can issue subsidies to support business growth and innovation, whilst at the same time, avoiding any wasteful public spending. Exactly how this is going to happen though is not quite clear; hence, the call for help to the wider business and public service community. The consultation will run for approximately eight weeks and will close on 31 March 2021.

The news of the consultation is welcome. There is a clear need for a carefully developed and considered system that supports businesses, especially with R&D, whilst also protecting market competition. The Government has a fantastic opportunity to capitalise on and support the many innovative businesses that are our clients in London and the South East, as well as the UK more broadly. Flexibility and agility is key, as the Government has noted. But this will need to be combined with clear guidance for businesses on how it will work and checks and balances need to be put in place to ensure that it is implemented fairly across the UK.

What’s happening right now with subsidy control?

What is slightly concerning is the timing of the consultation. Whilst this wouldn’t normally be an issue (businesses and public authorities need time to give thought to and develop a considered response to the questions raised), there has been a lack of clear guidance for businesses regarding how State Aid is meant to work from 1 January. And given the levels of support that are currently being utilised, this is becoming a pressing issue. Government consultations are often 12 weeks so the slightly shorter 8 week process is welcome but it also risks contributors to the consultation having little time to consider their responses.

It will also take some time for government to issue its response when the consultation has closed and then issue draft legislation.

In the meantime, the Government has issued guidance for public authorities on complying with the UK’s international obligations on subsidy control. But with more businesses claiming government support than ever before due to the COVID-19 pandemic, this guidance fails to meet the bar of what constitutes a clear outline of how the subsidy controls work for each of the different types of grant and support so that businesses can themselves work out if they have already exceeded those levels before applying. The uncertainty is unhelpful.

Where do subsidy controls apply?

Not all of the Coronavirus support packages are subject to state aid subsidy controls: the Coronavirus Closed Businesses Lockdown Payment is subject to its restrictions, whilst the Coronavirus Job Retention Scheme (CJRS or furlough scheme) is not. For the record, state aid is usually defined along the lines of the use of public funds to provide selective support to businesses in a way that could distort competition. Hence, the CJRS does not qualify as it is not selective, whilst the lockdown grant payments have further restrictions on eligibility which means that they are. The CJRS also falls within the approval for general subsidy schemes in response to Covid in the EU Temporary Framework.

Where this gets difficult though is in the context of large or group companies. How each of the limits for the grants applies across group structures, and for subsidiaries experiencing differing levels of difficulty, is confusing at best. Bearing in mind that this is an unprecedented time, one still wouldn’t normally expect this level of confusion around whether a subsidy/state aid limit has been breached.

COVID times means that the amount of money going out of Local Authorities’ doors is huge. And businesses with lots of different locations, or complicated group structures, are taking advantage of this to survive. As such, there does need to be clear interim guidance for businesses and their advisers as to what the limits are and how this applies. Especially when these limits are constantly being moved out of necessity in relation to the changing COVID environment.

What happens say, if a group of companies has one company whose turnover has increased due to a successful pivot, and one company where turnover has fallen away to the extent that an insolvency procedure needs to be considered. The guidance says that these companies are considered to be linked for the purposes of subsidy control.  The fact that one business has had financial difficulties due to COVID means that the subsidy can be further limited to avoid state support of failing businesses.

It is not clear what should happen in this situation which is hardly going to be uncommon. And given that the penalty for getting it wrong is potentially having to repay any funds that are over the relevant subsidy limit, these are serious questions that require guidance. Or at least a lengthy FAQ.

Lack of clear guidance = consequences?

Such a call for repayment, at a point in time when many companies may be struggling to meet their current liabilities (let alone a reclaim demand they aren’t expecting), could be sufficient to tip them into an insolvency procedure that may otherwise have been unnecessary.

Whilst insolvency procedures play an incredibly important role in the health of the UK’s business community, unnecessary winding up also means unnecessary job redundancies going into a time when unemployment is likely to meet new highs. Not exactly the outcome the Government would be looking for and one, it would seem, that could quite easily be avoided, at least in this particular context.

Subsidy controls are a complex issue. Ignoring the differing views on the political divide as to how they should be implemented (or to the extent they should be implemented!), the UK has clear obligations under its international commitments to come up with a situation that supports businesses, whilst not unnecessarily impinging or distorting market competition.

Time and care needs to be taken to ensure that whatever new system is developed, it achieves its goals and further cements the UK as a desirable place to do business. This should not come at the cost, however, of what businesses need in the here and now. Whilst the long-term goal is admirable, in the short term the Government needs to be issuing some sorely needed guidance now as to how subsidy controls work in the context of the Coronavirus support packages.

If you need guidance on the above, please contact us.

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