Many of the authorities we work with will be familiar with the process of making sure a loan that you are making to a subsidiary company or local business in your area is being charged at a market rate of interest so as to avoid making a subsidy. However, there may be some instances where you may want to give a company a loan at below market rates, or perhaps even give it a grant. Is this allowed?
Well the answer is yes, sometimes, and provided that certain conditions are met. As we have now left the EU the previous State Aid rules have now been replaced with the UK Subsidy Control Regime. This is designed to give more freedom to make a subsidy. The rational and process whereby this can be done is outlined below.
Economists tend to frown on subsidies, and for the good reason that they are prone to distorting markets and leading to inefficient outcomes. However, whilst the free market is very good at many things there are some things that it is not so good at. Many of these instances are referred to as ‘market failures’. Street lighting is a commonly used example of this: nobody wants to pay for street lighting because if you did it would cost you lots of money and then everyone else who hadn’t paid anything would also get it for free. That’s why street lighting is provided by the government which forces everyone to pay for it fairly through their taxes. Another way that the free market is often seen as less desirable is that it leads to inequalities. High levels of inequality and particularly where this leads to poverty and deprivation are usually seen as a bad thing. This is also where governments typically step in by taxing the rich and redistributing income to the poor.
The Subsidy Advice Unit (the central government department set up to monitor the Subsidy Regime) allows subsidies in some circumstances where they meet these two positive points of addressing a market failure or of making things more equal (or both). It’s worth initially considering whether the help you are intending to give meets the definition of a subsidy. For something to be a subsidy it has to be made by the public sector and provide an economic advantage that benefits one or more enterprises over others. It must have an effect on competition. If it doesn’t do these things, then it is not a subsidy. For example, when councils provide social housing this is not a subsidy: social housing provides homes for people who would otherwise not be able to afford them in the existing market. Providing them therefore is not judged to affect existing markets or competition.
If you have established that you wish to make a subsidy for a permitted purpose, you must also meet other objectives. These include that the subsidy should be expected to change the behaviour of the recipient for a specific purpose (otherwise you wouldn’t be doing it). You should only give a subsidy if it is the best and least distorting way of achieving an objective: if there’s a better way of addressing market failure or inequalities you should do that rather than give a subsidy. Subsidies should not be larger than needed to archive their objectives, any negative effects should be minimised and (clearly) you should only give them if the positives would outweigh the negatives.
There are some instances where subsidies will be regarded as never justifiable and there are specific prohibitions on them. This includes making unlimited guarantees, covering the price between UK and international market prices on exports, subsidies to failing or insolvent businesses (with a few exceptions) and subsidies which are contingent on using domestically produced inputs or that require relocation to a certain area. On the last point however, it should be noted that requiring relocation is allowed if it is specifically to address inequalities and social disadvantage (for example locating a factory in an area of high unemployment) rather than just because you want something in your area. There are specific rules covering subsidies that affect international markets where the UK is required to adhere to international laws on this subject.
There are also exceptions where conversely subsidies are allowed, or are exempted from the normal restrictions. These include national disasters and global emergencies, such as a pandemic, where a bit of market distortion is generally the least of your worries. Giving very small amounts of up to £315,000 over a three-year period, known as ‘Minimal Financial Assistance’, is also exempted from most of the provisions.
All subsidies should be made on a transparent basis and recorded on the UK Subsidy Database. This enables interested parties (typically other businesses that may be negatively impacted by a subsidy) to see what subsidies have been given and challenge them if they desire. Subsidies which are over £10m, or over £5m but in certain ‘sensitive sectors’ must be referred to the Subsidy Advice Unit (SAU). Authorities can choose to voluntarily refer subsidies over £5m which are not in sensitive sectors to the SAU, but is at the SAU’s discretion whether to assess these. The SAU will then assess the subsidy and produce a report on it within a certain timescale. These reports are advisory in nature and are not legally binding – although going ahead with a subsidy which the SAU does not think meets the necessary requirements is probably a bad idea.
All things being well you can then go ahead with giving the subsidy. It pays to do things properly, because as under the previous State Aid regime you stand to be challenged in court if they are not. Any interested party can challenge a subsidy. ‘Interested party’ is anyone who’s interests may be negatively affected by the subsidy – commonly competitor companies. Most cases would be reviewed by the Competition Appeal Tribunal, although in some circumstances they could also be reviewed by higher courts. If a subsidy does not meet the requirements, it is unlawful. In these circumstances the courts can force the authority not to make the subsidy, or not make further subsidies. They can direct the authority to recovery any subsidies already made – which could be problematic if the receiver has already spent them – and deprive the whole arrangement of any legal standing.
If you’d like to make a subsidy and require assistance, please contact the Arlingclose team at firstname.lastname@example.org or on 08448 808 200.