Subsidy Control

Subsidy control is the legal framework public authorities must follow when providing certain forms of financial assistance, such as grants, loans, tax relief or support in kind. Its purpose is to allow public authorities to pursue policy objectives while limiting harmful effects on competition and investment.

The Subsidy Control Act 2022 came into force on 4 January 2023 and replaced the EU State aid regime with a domestic UK subsidy control regime. It covers effects on competition or investment within the UK and on international trade or investment.

Criteria

Not all public funding received by a third sector organisation is a subsidy. A public authority must apply the four-limbed test below. All four limbs must be met before financial assistance is a subsidy.

1. There is financial assistance from public resources given by a public authority

The assistance may be given directly or indirectly and can include grants, loans, tax relief, use of public land or buildings, and other support in kind.
A public authority can include a government body or a non-government body performing a public function.

Example: A local council gives a charity a grant to run a community centre. This is financial assistance from public resources, although the other three limbs must still be considered.

2. The assistance gives an economic advantage to an enterprise

An enterprise is a person or group of persons under common control that is engaged in economic activity, meaning that it offers goods or services on a market.
A charity or voluntary organisation can therefore be an enterprise for some activities, regardless of its legal form, not-for-profit status or use of volunteers.
An economic advantage exists where the recipient receives terms it could not obtain under normal market conditions.

Example: A lease of a building at below-market rent may give an organisation an economic advantage.

3. The economic advantage is specific

The assistance must benefit one or more enterprises over others. It is not a general measure open on the same terms to anyone who qualifies.

Example: A discount available only to a particular organisation is likely to be specific.

4. The assistance has, or is capable of having, an effect on competition or investment

The effect may be on competition or investment within the UK, or on trade or investment between the UK and another country or territory.
A purely local effect can be sufficient, and an actual competitor does not necessarily need to exist.

If any one of the four limbs is not met, the assistance is not a subsidy.

What is not a subsidy

Funding for genuinely non-economic activities will generally fall outside subsidy control because the recipient is not acting as an enterprise in relation to that activity. Many voluntary sector activities may fall into this category, but each activity must be considered on its own facts.

Other examples of arrangements that will not normally be subsidies include:

Goods or services purchased through an appropriate procurement process at market rate, because no economic advantage is conferred.
Funding that is clearly ring-fenced for non-economic activities, even where the organisation also carries out economic activities elsewhere.

How a subsidy can be awarded

If all four limbs are met, the funding can still be awarded. The public authority must then use one of the permitted options and follow the relevant checks, reporting and record-keeping rules. These options include:

A standalone subsidy assessed against the subsidy control principles. The subsidy must pursue a clear public policy objective, such as addressing a market failure or social inequity, and must be proportionate to that objective.
A subsidy awarded under a compliant subsidy scheme.
A subsidy awarded under a streamlined route established by the UK Government and approved by Parliament.
Special provisions for a Service of Public Economic Interest (SPEI), where a service benefits the public and would not otherwise be provided, or would not be provided on the required terms, under normal market conditions.
Minimal Financial Assistance (MFA), which allows an enterprise to receive up to £315,000 of relevant low-value assistance during the applicable period. The applicable period is the elapsed part of the current financial year and the two preceding financial years. Entities under common control may be treated as a single enterprise.

MFA is the term used under the 2022 Act and should not be confused with the EU State aid term 'de minimis'. An MFA award must be identified as such in writing when it is given. Organisations should keep the award letter and clear records of MFA and other relevant low-value assistance so that they can make any declaration requested by a public authority.

The main legal responsibility for awarding a subsidy lawfully rests with the public authority. A recipient must still meet any eligibility and scheme conditions and keep the records required by its funding agreement.

Where a voluntary organisation distributes public funding on behalf of a public authority, legal responsibility will generally remain with the public authority. However, the organisation may itself have responsibilities where it is performing a public function and has discretion over which recipients receive funding. The funding agreement should make the respective roles clear.

Questioning a subsidy control decision

If a public authority says subsidy control applies, the organisation can ask for its reasoning in writing. Useful questions include:

Which parts of the four-limbed test does the authority consider satisfied?
Why is the funded activity considered economic?
Which lawful award route is being used?
Has SPEI treatment been considered where the service would not otherwise be provided on the required terms?

If the reasoning appears inconsistent with the legislation or guidance, the organisation may wish to contact its local Third Sector Interface, SCVO, the Scottish Government Subsidy Control Team or an independent legal adviser.

Further resources and links

SCVO - Guide to Subsidy Control

UK Government Subsidy Control: a guide for beneficiaries

Scottish Government Subsidy Control - Guidance The Scottish Government Subsidy Control Team can be contacted at subsidycontrol@gov.scot