Subsidy control: a new regime for the UK

February 2023  |  FEATURE | FINANCE & INVESTMENT

Financier Worldwide Magazine

February 2023 Issue

Subsidies are one of numerous ways in which governments can help stimulate or supplement economic activity. They are often a crucial source of funding for new and existing businesses.

In the UK, several sectors benefit from government subsidies – health insurance, technology, housing, education, electric vehicles and sustainable solutions among them – which provide financial help via loans, grants and tax credits, among others.

According to UK government grants statistics, around £258bn was spent on subsidies in 2020/21, representing about 23 percent of all spending. Despite being under scrutiny for many years, expenditure has been on an upward trajectory.

Thus, to address concerns over spiralling costs, the UK government has introduced a new subsidy control system (the framework for which is the Subsidy Control Act 2022) that will allow devolved administrations and local authorities to deliver subsidies to local businesses, as well as providing impetus to the government’s plans to supercharge economic growth.

The new regime

Essentially, the new subsidy control regime comprises a set of regulations to control the amount of money that goes toward subsidies and ensure that the money is spent in a way that is most beneficial to the economy and to UK citizens.

Under the new system (which came into force on 4 January 2023), devolved administrations and local authorities will be able to deliver subsidies that are tailored to local needs, providing the flexibility needed to ensure that support quickly gets to where it is most needed.

Moreover, public authorities will be able to support viable businesses across their region quickly and simply, delivering good value for the taxpayer while ensuring businesses can help deliver economic growth.

“The subsidy control regime is built to meet the needs of modern Britain, freeing UK authorities from the restrictive shackles of European bureaucracy and longwinded approval processes,” announced Dean Russell, the then business minister, on 20 October 2022. “Our new rules are robust yet flexible, empowering public authorities to deliver money quickly, fairly and simply, to businesses that need it the most.”

Indeed, the new rules are a major move away from the prescriptive European Union (EU) aid regime that could have stymied elected governments in Belfast, Cardiff and Edinburgh from delivering funds to businesses that need it.

“The new UK subsidy control regime is designed to strip back excessive red tape and enable public authorities to deliver subsidies tailored to local needs and UK-specific industries,” says Gareth Smythe, founder and chief executive of Hilton Smythe. “Previously, all subsidies except those permitted under a ‘block exemption regulation’ had to be approved by the European Commission in advance – a long and bureaucratic process.

“Moreover, the new system is explicitly designed to avoid the failed approach of the 1970s, where the government would grant subsidies to ailing or insolvent businesses without credible restructuring plans,” he continues. “To this end, the Subsidy Control Act 2022 establishes additional conditions which prevent the allocation of grants to unsustainable companies.”

Reservation

While the new subsidy control regime’s move away from an overly-prescriptive and onerous approval process toward a more flexible approach has been broadly welcomed, it is not without reservation.

“If the new regime operates anything like some of the coronavirus (COVID-19) assistance managed by local authorities, the scheme could be little more than a news headline,” opines Mr Smythe. “Some local authorities were poor at making businesses aware of grant entitlement during COVID-19 and, in our experience, it was made difficult to obtain. Hopefully, the government will ensure the regime gets to businesses that benefit through a proactive effort rather than a silent benefit that only a few hear of.”

Another concern is the publication of draft guidance to assist granting bodies, a move which raises worries in some quarters that the new subsidy control regime will not be significantly less onerous than EU legislation. “The guidance suggests asking and answering several detailed and complex questions regarding the proposed subsidy and its compliance with seven principles,” notes Mr Smythe. “For this, granting bodies will no doubt need significant professional legal, accountancy and economic support.”

Time will tell

While it is too early to determine whether the new subsidy control regime will achieve its objectives, it does promise to level the playing field between large and smaller businesses, freeing up cash to fund other services, as well as delivering key domestic priorities, such as levelling up economic growth across the UK and driving the country’s green revolution.

“The new regime targets support for UK businesses, and well-targeted state subsidy programmes can help to improve economies, nurture businesses and create new jobs, all while ensuring healthy competition,” says Mr Smythe. “It also aims to streamline the funding of projects that might otherwise have required referral to the European Commission for individual assessment – a process that often takes years.”

Undoubtedly a step in the right direction, the new subsidy control system, if successful, has the scope to save the government millions of pounds every year and, in time, become a key part of the regulatory framework in the UK.

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Fraser Tennant