Local government finance circular 5/2023: non-domestic rates relief guidance

Subsidy control

Background

13. The Subsidy Control Act 2022 is applicable from 4 January 2023.
14. All public authorities must have regard for the Subsidy Control Act 2022 as well as commitments in the EU-UK TCA, Withdrawal Agreement, Northern Ireland Protocol, World Trade Organisation rules (including the Agreement on Subsidies and Countervailing Measures), and Trade Agreements between the UK and non-EU countries. Non-domestic rates reliefs, like other subsidy or support measures, may be subject to the conditions set out in these international agreements. 
15. Relevant links are provided below:

• Subsidy Control Act 2022
• UK Subsidy Control Statutory Guidance
• Scottish Government Subsidy Control Guidance

Defining a Subsidy

16. The Subsidy Control Act 2022 (“the Act”) defines a subsidy as financial assistance awarded to an enterprise involved in the provision of goods or services which:
    1. is given, directly or indirectly, from public resources by a public authority,
    2. confers an economic advantage on one or more enterprises,
    3. is specific, that is, such that it benefits one or more enterprises over one or more other enterprises with respect to the production of goods or the provision of services, and
    4. has, or is capable of having, an effect on:
       1. competition or investment within the UK
       2. trade between the UK and a country or territory outside the UK, or investment as between the UK and a counry or territory outside the UK

17. The Act prohibits some categories of subsidy outright because of the greater risk they pose of significantly distorting competition or investment in the UK, or international trade or investment. The UK also has obligations under international agreements to prohibit many of these kinds of subsidies. These categories are:

1. Any subsidy that would guarantee an unlimited quantity of liabilities or debts, or which would guarantee a finite amount of liabilities or debts but over an indefinite period.
2. A subsidy that is contingent in law or in fact, whether solely or as one of several other conditions, upon export performance relating to goods or services.
3. Subsidies that are contingent on the use of domestically produced goods or services, often known as ‘local content’ subsidies.
4. Relocation subsidies where the subsidy contains a condition requiring the relocation and the relocation would not occur without the subsidy, except for the purposes of addressing social or economic disadvantage.
5. Rescuing and restructuring subsidies to ailing or insolvent enterprises unless certain requirements are met.

18. Other specific prohibitions and requirements are set out in Chapter 5 of the UK Subsidy Control Statutory Guidance.

Minimal Financial Assistance (MFA) Threshold

19. The Act sets out common principles that must be met for subsidies. The designing and granting of subsidies must consider these principles on a case-by-case basis – including those under the Community Empowerment (Scotland) Act 2015. Failure to do so could leave a public authority open to judicial review in the UK.
20. The principles are (Schedule 1 of the Act):

1. Subsidies pursue a specific public policy objective to remedy an identified market failure or to address an equity rationale (such as local or regional disadvantage, social difficulties or distributional concerns).
2. Subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.
3. 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.
4. Subsidies should not normally compensate for the costs the beneficiary would have funded in the absence of any subsidy.
5. Subsidies should be an appropriate policy instrument to achieve their specific policy objective and that objective cannot be achieved through other, less distortive, means.
6. Subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition and investment within the UK.
7. Subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects, including in particular negative effects on competition and investment within the UK, and international trade and investment.

21. Minimal Financial Assistance (MFA) allows public authorities to award low value subsidies without needing to comply with the majority of the subsidy control requirements and provides an exemption from the above principles. MFA has a financial threshold which allows recipients to receive up to £315,000 over three financial years.
22. The MFA level of £315,000 replaces the TCA minimum financial assistance of 325 Special Drawing Rights (which replaced the EU de minimis regulation under the Treaty of the Functioning of the European Union which limited support to a beneficiary to €200,000 over three years).
23. Although subsidies given as MFA are exempt from the main substantive subsidy control requirements, there are two prohibitions that apply to all subsidies including MFA - the prohibition on giving subsidies relating to goods for export performance and the prohibition on domestic content.

Awarding a subsidy under MFA

24. Public authorities awarding subsidies as MFA must comply with certain procedural requirements.
25. Before awarding an MFA subsidy, the public authority should provide the intended recipient enterprise with an ‘MFA notification’ which is a written statement:

• explaining that the public authority is proposing to give to the enterprise a subsidy by way of MFA,
• specifying the gross value amount of the assistance, and
• requesting written confirmation from the enterprise that the MFA threshold specified in section 36(1) of the Subsidy Control Act 2022 will not be exceeded by the enterprise receiving the proposed assistance.

26. The public authority can only award the subsidy when it has received this confirmation. If the enterprise confirms it will exceed the threshold on receipt of the subsidy, it can still elect to receive part of the subsidy up to the threshold as MFA. Any remaining balance will be subject to the full subsidy control requirements associated with providing a subsidy.
27. When awarding an MFA subsidy, the public authority must give the intended beneficiary an ‘MFA confirmation’ which is a written statement that confirms:

• that the subsidy is given as MFA,
• the date on which it is given, and
• the gross value amount of the assistance.

MFA Thresholds Calculation

28. Any previous subsidies given under the TCA should be cumulated with any subsidies given as MFA. Therefore, it is necessary to account for any previous payments made over the three year period (the elapsed part of the current financial year and the two financial years immediately preceding the current financial year). 

Transparency Requirements

29. The transparency rules set out in the Act require public authorities to upload details of both subsidy schemes and awards to the UKG Subsidy Database. Transparency obligations apply regardless of any information that a beneficiary believes is commercially sensitive.
30. Details of every subsidy payment must be uploaded to the transparency database within three months of the date of award (unless an exemption applies). All subsidy awards  which exceed £100,000 are required to be uploaded to the database.  For information on how to upload details to the transparency database please refer to the Scottish Government’s webpage on transparency requirements.

Relief Restriction Regulations

31. The Non-Domestic Rates (Restriction of Relief) (Scotland) Regulations 2023 come into force on 1 April 2023 and require that the granting of prescribed mandatory non-domestic rates reliefs must be compatible with the Subsidy Control Act 2022, in particular the subsidy control requirements set out in the Act.

32. Under the Regulations, from 1 April 2023 reliefs awarded as MFA must meet the following requirements:

• The total amount of minimal financial assistance must not exceed the amount set out in section 36(1) of the Subsidy Control Act 2022 (currently £315,000 over the current and preceeding two financial years);
• The procedural requirements in section 37 of the Act must be followed; and
• Where the relief exceeds the amount specified in section 36(4) of the Act (currently £100,000), certain requirements as to transparency must be followed.

33. These reliefs also amend the Non-Domestic Rates (Restriction of Relief) (Scotland) Regulations 2021 to specify that those regulations only apply in the financial years 2021-22 and 2022-23.