On 4 January last year, the Subsidy Control Act 2022 (the “Act”) came into full force and effect. The Government intends the Act to offer a more flexible approach to subsidy control, notably by moving away from more prescriptive notification and approval mechanisms (as under the previous EU State Aid rules) and adopting instead a principles-based and self-assessment focused approach to compliance.
Just over a year on since its enactment, this article provides an overview of what the new regime means for universities and research institutions in the UK. For more information about the Act, please see our previous article linked here.
Why is the Act relevant to universities and research institutions?
The subsidy control regime is likely to be relevant to universities and research institutions who:
- Are public authorities distributing public resources as subsidies,
- Receive a subsidy themselves, for example in respect of a research project they are managing,
- Receive a subsidy themselves, to pass on to other beneficiaries (possibly with some of their own funds), or
- Are involved in a collaboration, and although are not necessarily in receipt of a subsidy themselves, have contracted with another entity that is in receipt of or is administering resources as subsidies.
If you think that your organisation might be dealing with a subsidy, perhaps in one of the ways outlined above, then it may be required to comply with all or certain aspects of the Act.
The following flow-chart outlines the analysis process which your organisation will need to undertake to ascertain which parts (if any) of the Act will apply.
Is it a subsidy?
A “subsidy” is defined under section 2(1) of the Act as financial assistance which:
- Is given, directly or indirectly from public resources by a public authority (which is broadly defined to include any entity which exercises functions of a public nature),
- Confers an economic advantage on one or more enterprises,
- Is specific, such that it benefits one or more enterprises over others with respect to the production of goods or services, and
- Has, or is capable of having, an effect on competition or investment within the UK, or trade or investment between the UK and another country or territory.
Is it a subsidy?
- No: No further action needed. However, it is recommended that you: (i) take advice; and (ii) maintain a written record of your reasons for determining that it is not a subsidy.
- Yes: Is it exempt?
- Yes: No further action needed. However, it is recommended that you: (i) take advice, and (ii) maintain a written record of your reasons for determining that the subsidy is exempt.
- No: Is it covered by the streamlined route?
- No: You will need to undertake a principles-based assessment and comply with the Act.
- Yes: No further action needed. However, it is recommended that you: (i) take advice, and (ii) maintain a written record of your reasons for determining that the subsidy falls within the streamlined route.
Financial assistance is a wide concept and includes any kind of support or market transaction that is considered to have a financial value for the recipient. Grants therefore fall plainly within this remit.
The key limb in this context is limb b). Universities and research organisations typically act non-commercially and grant / receive funding in circumstances whether they / the grant recipient do not meet the definition of an “enterprise”.
Enterprise is defined broadly as any person that is engaged in an economic activity, which means offering goods and services on a market. Importantly, the activity in question does not have to generate profits in order to constitute an economic activity. Therefore, public or private bodies that operate on a voluntary or non-for-profit basis can also constitute an enterprise when offering goods and services on a market.
However, it is worth taking advice on whether your organisation / the grant recipient will fall within the definition of an “enterprise” for the purposes of the Act, particularly where there is a question around whether your organisation / the recipient is engaged in an economic activity. This is because the statutory guidance to the Act provides:
“where it is shown that economic activities are intrinsically linked or are directly related and necessary for the performance of the non-economic activity, and where such economic activities are limited in scope, such activities will not be caught under the subsidy control regime. […]”
Example: A non-profit organisation mainly carries out scientific research as a non-economic activity (including R&D projects; education and open-access teaching). Separately, it provides commercial research services and facilities hire to life science companies. These secondary activities are a small portion of its overall activities and turnover. In this scenario, the statutory guidance to the Act suggests that a grant given to support the non-economic activities would not be considered a subsidy. This mirrors the Research, Development and Innovation (RDI) framework under the previously applicable EU state aid rules which distinguished between “non-economic” and “economic” activities around research and knowledge, with only “economic activities” qualifying as state aid.
As regards economic advantage: this means that the financial assistance must be provided on favourable terms. Financial assistance will not confer an economic advantage if it could reasonably be considered to have been given on the same terms on the market. On this point, it’s worth considering who takes the economic advantage.
Example: Say an organisation receives public funding from the Government to support research and innovation projects. On receipt of the funding, the organisation transfers the majority of it to a specialist commercial research body, and simply retains its reasonable and market-orientated costs for administering the fund. In this scenario, the organisation will be treated as an intermediary for the financial assistance and won’t be conferred an economic advantage, directly or indirectly. However, if the organisation takes more than its reasonable costs then the position may be more nuanced. This can be quite a complex distinction so legal advice is recommended.
As mentioned, universities and research organisations typically act non-commercially and grant / receive funding that does not meet the definition of a subsidy. However, when they do, they may be eligible to grant / receive the subsidy either because: (a) they are exempt; or (b) the subsidy is permitted under the RD&I Streamlined Route.
Is the subsidy exempt?
The key exemption which is likely to apply in this context is minimal financial assistance (of “MFA”). Similar to the EU State Aid regime’s “de minimis” provisions, MFA allows public authorities to award low value subsidies.
To rely on MFA, no recipient can receive more than £315,000 over the “applicable period”. The applicable period is: (i) the elapsed part of the current financial year (ie from 1 April), and (ii) the two financial years immediately preceding the current financial year.
If a subsidy qualifies for MFA, the public authority will not need to comply with the majority of the subsidy control requirements, but will still need to comply with the applicable transparency requirements. That is, to within three months of the decision to grant the subsidy upload details of the subsidy to the UK subsidies database if it exceeds £100,000.
Is it covered by the RD&I Streamlined Route?
Streamlined Routes apply to categories of subsidies that the Government has pre-assessed are at low risk of distorting competition, trade or investment. Provided that the subsidy meets the relevant criteria, public authorities will not: need to assess compliance specifically against the subsidy control principles, or refer to the newly established Subsidy Advice Unit. This allows public authorities to give subsidies under routes quickly and easily.
There are currently three Streamlined Routes, the most relevant of which is for the objective of “increasing investment in research, development and innovation (or “the RD&I Streamlined Route”)”.
The RD&I Streamlined Route consists of three categories, each containing its own project definitions, maximum amounts, subsidy ratios, eligibility criteria, and limitation conditions. The three categories are:
- Feasibility Studies
This category can be used by public authorities to support enterprises which undertake feasibility studies related to RD&I projects, which often involve a level of uncertainty and risk. (Feasibility studies analyse and evaluate a project’s potential by uncovering its strengths, weaknesses, opportunities and threats, as well as identifying the resources needed and its prospects for success). - Industrial Research and Experimental Development Projects
This category can be used by public authorities to support RD&I projects related to industrial research and experimental development, to develop new, or improve existing products, processes, or services. - Small and Medium Sized Enterprise RD&I Support
This category can be used by public authorities to support innovative SMEs, in the following sub-categories: (a) innovation services, (b) process and organisational innovation, and (c) equipment and instruments.
Specific conditions apply to each category of subsidy granted under the RD&I Streamlined Route. However, in headline terms, the following are common conditions:
- Information gathering: The public authority must obtain certain information about the intended beneficiary before granting the subsidy, ie the size of their enterprise, a description of the project, and anticipated project costs.
- Availability: The public authority must make the subsidy available using transparent and objective selection criteria.
- Start Dates: Generally, public authorities may not give subsidies for projects which have started. However, there may be instances where starting a project or activity before receiving a subsidy or a commitment of a subsidy is justified. For example, where a project or activity would not be viable otherwise. Public authorities must take into consideration various factors where this is the case.
- Scope: The category may only apply to specific enterprises, eg SMEs.
- Eligible Costs: The subsidy can only be used to fund specified permissible costs.
- Maximum Amounts: The subsidy may only be given up to a specific maximum amount.
- Ratios: The subsidy may only be given up to specified ratios (ie, what percentage of eligible costs can be subsidised). To ensure that the subsidy is proportionate, the size of the beneficiary determines the level of subsidy in percentage of eligible costs that can be funded. For example, an SME might be entitled to up to 70 per cent of their eligible costs, whereas a large enterprise might only be entitled to 50 per cent, in each case subject to a maximum cap.
- Transparency: Any subsidy given under the RD&I Streamlined Route that exceeds £100,000 must be uploaded to the subsidy database within three months of the decision to grant the subsidy.
- Retention of Documents: Public authorities must collect certain information from beneficiaries, as well as for tax and managing public money purposes.
These conditions will be broadly familiar to those aware of the RDI framework under EU state aid rules, which similarly required the subsidy to meet conditions, for instance, around maximum amounts, ratios and eligible costs. There is helpful UK Government guidance on the UK’s RD&I Streamlined Route here. If the subsidy is not permitted by the RD&I Streamlined Route, then you will need to assess compliance with the subsidy control principles under the Act.
Does the subsidy comply with the principles?
The Act sets out seven subsidy control principles. Public authorities will need to ensure that they consider these principles when designing a subsidy, and must not grant a subsidy unless they are of the view that it is consistent and complies with the principles.
The seven principles are:
- Subsidies should pursue a specific policy objective in order to remedy an identified market failure or address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns).
- Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
- Subsidies should be designed to bring about a change of economic behaviour of the beneficiary. That change, in relation to a subsidy, should be conducive to achieving its specific policy objective and something that would not happen without the subsidy.
- Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
- Subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other, less distortive, means.
- Subsidies should be designed to achieve their specific policy objectives while minimising any negative effects on competition or investment within the United Kingdom.
- Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including, in particular, negative effects on competition or investment within the United Kingdom and / or international trade investment.
Assessment against the principles should be proportionate. The Government has prepared a template assessment table, linked here.
Key takeaways
When undertaking an assessment about whether the subsidy control rules are likely to apply, universities and research organisations should consider in particular:
- Whether the financial assistance is a subsidy. In particular:
- Whether the beneficiary of their grant is an “enterprise” (as outlined above), or whether the activity for which they have received grant funding constitutes an “economic activity” (again, as outlined above).
- Which entity is receiving an “economic advantage”, as this may not be the university or research organisation if it is simply gifting on the grant as an intermediary (though it could be made contractually responsible for compliance under the terms of its funding agreement).
- If the financial assistance is a subsidy, whether the RDI Streamlined Route is available. This would mean that assessment against the subsidy control principles would not be required.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2024
About the authors
Genna Morgan-McDermott
Anisha Birk
