Insights from the first year of the UK’s new subsidy control regime 

Overview

The UK’s new post-Brexit subsidy control regime sits against a backdrop of governments across developed economies pursuing more active industrial policy. The UK’s trade partners, most notably the EU, are watching its subsidy regime and decisions closely.  

There is significant domestic scrutiny too. Those responsible for scrutinising public spending, such as the National Audit Office and Parliamentary Accounts Committee, will all be watching closely, particularly for the largest of subsidies. 

This context means that the evolution of the UK’s subsidy control regime will be an area of increasing political and diplomatic focus.  

The Subsidy Advice Unit (SAU) of the Competition and Markets Authority (CMA) is an important part of the new regime. It evaluates public authority’s subsidy assessments against the requirements of the subsidy control legislation.  

As the new system passes its first year of operation, we consider what those awarding and bidding for subsidies can learn from the early experience. We also consider how the regime could evolve in the coming years, particularly in light of the broader political and diplomatic context.  

Our main findings are: 

• The new UK regime gives public authorities more flexibility to award subsidies than the previous EU rules but requires authorities to self-assess their decision against subsidy control principles. This process can impose a material burden on authorities, particularly for larger subsidies.  
• Since the launch of the new regime, the SAU has reviewed public authority assessments for over 30 subsidies, often finding areas where the assessments could be improved, such as: 
  • More clearly identifying the policy rationale and making the link to specific market failures or equity considerations; 
  • More thoroughly considering alternatives and explaining what might happen in the absence of a subsidy; and 
  • Providing a more balanced assessment of effects on competition and investment. 
• The SAU's role is advisory, which means public authorities decide on awarding subsidies, but they face risks of legal disputes and public scrutiny. Legal challenges have been limited to date though, with only one case considered by the Competition Appeal Tribunal (CAT). 
• Determining the regime's overall effectiveness requires more time and experience. However, the SAU is due to publish its first monitoring report in 2026, potentially providing greater insight and guidance. 
• A change to a Labour government later this year could bring further change to the regime. We could see greater pressure to reduce the administrative burden on public authorities. Further, any moves to develop closer links to the EU could also result in other changes.  

Life after EU state aid control: a new approach 

In January 2023, Britain's approach to public subsidies underwent a significant transformation with the implementation of the Subsidy Control Act 2022 (‘the Act’). This change is a consequence of the UK’s departure from the European Union's ‘State Aid’ subsidy control framework.  

The new subsidy control regime, as set out in the Act, serves two main purposes. 

First, it implements the UK’s international trade commitments.  

Subsidy control was a key area of focus in the Brexit negotiations. The EU was keen to ensure that the UK retained a regime like its own state aid rules. The UK wanted to create a regime that was less administratively burdensome and would allow a greater focus on delivering domestic priorities.  

The subsidy control provisions in the eventual EU-UK Trade and Cooperation Agreement (TCA) represent a compromise between these positions. They require the UK to have a regime that goes further than what would be required under the UK’s other international obligations (e.g. World Trade Organization rules), but still allows the UK government to operate a framework that is a clear departure from EU state aid rules.  

The Act implements the UK’s international subsidy control obligations, including those required under the TCA. The Act applies to all public authorities in the UK, including central, devolved, and local government bodies, and covers a wide range of subsidies, from direct grants to tax breaks and loan guarantees. 

Second, the Act aims to protect domestic competition and investment from potentially distortive subsidies. This provides safeguards for British businesses that might be concerned about unfair competition from subsidised rivals elsewhere in the economy/country. 

Self-regulation is at the heart of the new regime

The new regime departs from the EU’s approach. Under the EU's system, the European Commission plays an active role in approving subsidies. However, UK public authorities can now self-assess subsidies against the principles set out in the Act. 

This self-assessment process reflects the UK government’s desire to minimise administrative burdens. It applies to most subsidies, with only the most substantial cases requiring consultation with the SAU.  

The SAU’s role is materially different from that of the European Commission. It provides independent advice to public authorities, but that advice is not binding and the SAU cannot veto subsidy award decisions. 

Outside of political avenues, the main route for those seeking to challenge a subsidy decision is through the courts – typically the CAT. This route is open to those who qualify as an “interested party” – i.e. anyone whose interests may be affected by the subsidy or scheme.  

When reviewing subsidy decisions, the CAT will not determine whether the public authority’s decision was correct, but whether it was lawful. 

A learning curve for public authorities 

Given the focus on self-regulation, public authorities play a key role in ensuring the efficacy of the new regime and compliance with the subsidy control principles and processes.  

Early experience suggests some uncertainty among public authorities in applying the new principles and determining the appropriate level of analysis required, especially for smaller subsidies. Key challenges include: 

• Building confidence in navigating the new regime; 
• Determining the appropriate level of detail required in assessments; 
• Managing situations where multiple authorities are involved in granting a subsidy; 
• The referral process to the SAU creating uncertainty, as the SAU reports do not provide clear-cut approval (given its mandate) and may lack sufficiently detailed guidance; and 
• The significant effort and resources required to follow the new regime's principles (which could be argued undermines the overall value of the regime). 

The SAU’s reports to date help provide insight into its views on the robustness of public authority assessments to date. Although the SAU does not publish the public authority assessments, it does publish its reports on them. To date, the SAU has issued 37 advisory reports across various sectors, including energy transition, transport, technology, and agriculture.  

It is common for the SAU to recommend that public authorities improve their assessments. Improvements range from minor adjustments in the evidence presented, to significant improvements to the justifications for the subsidy. This indicates a learning curve for public authorities in aligning their case for subsidy with the expectations of the SAU and the Subsidy Control Act. A more transparent approach to making public authorities’ submissions to the SAU readily available might make it easier for public authorities to get this right. 

Common areas identified by the SAU for improvement 

Our analysis of the SAU's reports to the end of March 2024 reveals that commonly identified areas for improvement are: 

1. Clear goals and reasoning: Clearly identifying policy objectives and their connection to market failures or equity considerations is crucial. Each objective should address a specific market issue directly, supported by robust evidence and analysis (albeit tailored to reflect the scale of the subsidy in question).¹ 
2. Thorough analysis of alternative scenarios: The SAU emphasises the need for detailed, evidence-based analysis when considering what would happen absent the subsidy (referred to as the ‘counterfactual’). Assessments should rigorously examine key assumptions and potential outcomes.²
3. Further detail on the subsidy’s effect on competition and investment: A careful, robust analysis of a subsidy's effects on competition and investment is a key element of the assessment. Such analysis involves applying the techniques and frameworks familiar to competition economists from other regulatory and competition settings. The temptation for subsidy promotors is to shy away from discussing such risks. However, by its very nature, the CMA will be looking at such assessments closely. Of the seven principles, this appears to be the area where public authorities have struggled to meet the SAU’s expectations most frequently, with only one case³ where improvements under this principle were not suggested.

Looking forward: risks to self-regulation? 

Public authorities must continue to draw learnings from the SAU process. Ensuring that their future subsidy assessments are appropriately robust, balanced, and directly address all seven subsidy control principles will continue to be essential to ensure a clean bill of health from the SAU.  

Although the SAU cannot veto subsidy decisions, its assessment and views still carry significant weight. A critical report from the SAU means that the public authority will face heightened risks of legal disputes and public/political scrutiny. 

Despite a rise in UK subsidies, challenges to subsidy awards have been limited so far (only one case has been considered by the CAT). This could indicate that the regime is working well, with properly awarded subsidies. But it could also mean that procedural and cost barriers are deterring valid challenges. Determining the regime's overall effectiveness requires more time and experience. However, the SAU is due to publish its first report reviewing the effectiveness of the new regime in 2026 (i.e. three years after the commencement of the Act) – this should provide greater insight and guidance. 

However, perceptions of the ongoing effectiveness of the regime also carry broader political and diplomatic significance. The UK’s main trading partners, most notably the EU, will be carefully monitoring how the new regime is playing out. It will be paying particularly close attention to subsidies that have more significant implications for EU businesses and trade.  

The anticipated change to a Labour government later this year could bring additional changes. Labour is likely to seek closer links to the EU, which could bring the UK subsidy control regime back into any future EU-UK discussions, with important implications for how the current self-regulatory scheme evolves. But a Labour government may also consider further changes to the current self-regulatory approach to reduce red tape, given the significant effort required from public authorities to meet current requirements.  

Pressure for change may also come from other interested parties, such as the National Audit Office and Parliament who are also likely to take an interest in how the new regime is operating. Some current high-profile subsidy cases have already been the subject of Select Committee interest, and as further cases accumulate, we can expect scrutiny of the new regime and its effectiveness to intensify. 

While we do not anticipate any further legislative changes, certainly in the short term, these sorts of political and diplomatic pressures could lead to future changes to formal guidance and the SAU’s approach.  

How Flint can help 

The Flint team includes experts on competition and subsidy policy, as well as senior political and official decision-makers with experience in awarding and clearing subsidies from within No10, the Treasury, the CMA, and other key departments such as those covering energy, business, regional development and innovation. If you would like to speak to us about subsidy clearance, contact us.

Footnotes

¹ Examples from the extension of high-speed broadband in Wales and Loganair/Dundee City Council assessments underscore the importance of this clarity to the SAU.

² The Lancaster City Council/Eden Project Morecambe case highlights the significance of evaluating various scenarios and their long-term impacts. Belfast City Council’s referral of the Mourne Mountain Gateway project is an example of a submission containing the required level of analysis that met the SAU’s expectations for Principles C and D.

³ The Department for Energy Security and Net Zero’s assessment of the Hydrogen Production Business Model subsidy scheme.