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Concerns raised over new post-Brexit state subsidy regime

3 min read

Such has been the lack of fanfare and media attention that you could be forgiven for not noticing that the government has set up a new post-Brexit state subsidy regime. However, as Dods Political Intelligence Principal Consultant Harry Banton explains, there are concerns the new rules could raise costs for local councils and pose risks to the competitive landscape.

The UK’s new system for regulating subsidies to business—which is due to come into force in autumn 2022--will be “robust yet agile, allowing public authorities to provide subsidies where they are needed most,” Small Business Minister Paul Scully declared on the day the legislation received royal assent on April 28. The UK would no longer be bound by the excessive bureaucracy and lengthy pre-approval processes of the EU’s state aid rules, he added.

However, some council officials and lawyers have privately expressed concerns that the new regime could create added bureaucracy and costs for councils and the market regulator, undermine the levelling up agenda by favouring more wealthy local authorities, reduce transparency, and possibly create friction with the devolved administrations.

Under the new rules, subsidies will be tested against a series of ‘principles’ designed to be broad enough to give local authorities significant latitude. For example, principle B states that a subsidy should be, “proportionate and limited to what is necessary to achieve the policy objective”.

However, some council officials told The House the issuance and design of subsidies, as well as the responsibility for uploading details of the subsidies to a centralized government database could increase their costs at a time when budgets are already under pressure from the Covid crisis and cost-of-living pressures.

The new regime is also expected to increase the workload of the Competition and Markets Authority (CMA) which is tasked with reviewing contentious cases. One lawyer told the House that the CMA had expected to review around 30 of the most questionable subsidies per year from across the UK, but their law firm alone had already been handed that many cases since the start of the year.

While the government has emphasized the value of empowering local decision-making, this decentralized approach could fuel competition between councils to attract businesses and create jobs, a move which would favour wealthier authorities and undermine its levelling up efforts and claims of a level playing field.

Alexander Rose, Legal Director at global law firm DWF, a leading expert in subsidies and state aid programmes, told The House that the new regime would benefit wealthier councils which could hamper the government’s efforts to spread economic opportunity and benefits across the UK. Indeed, given the higher land costs, it can be “easier to justify a subsidy in Mayfair than Middlesbrough, which undermines what levelling up is all about,” he said.

Questions have also been raised about transparency of the new subsidy regime. Although local authorities are required to upload almost all subsidies issued to a central and publicly accessible database, they have a maximum of three months to enter the details, 12 months if the subsidy is given as a tax measure – a potentially lengthy time lag for firms to examine and perhaps challenge the conditions of state support.

The subsidy regime also threatens to create friction with devolved government in Scotland and Wales which have complained that they do not have the same power as the secretary of state to refer a subsidy to the CMA.

A Scottish government spokesperson warned that any attempt to undermine devolution by pressing ahead with any proposals which involve changing the law in devolved policy areas without the consent of the Scottish Parliament would be challenged and resisted.

In response, a spokesperson for the Department for Business, Energy, and Industrial Strategy, said all public authorities, including local councils and the devolved administrations, were being empowered to award subsidies according to UK-wide principles​.

“This will ensure value for money for the taxpayer, prevent authorities competing with one another, and provide parties with routes to redress if something goes wrong,” the spokesperson said.


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