Taking back control of subsidies: Replacing EU state aid rules in the UK

As the government prepares to unveil legislation for a UK state aid (or subsidy control) regime – which will regulate around £8bn of subsidies from governments and public bodies to businesses each year – this report sets out how to design a more flexible system than the EU’s to help achieve government objectives like ‘levelling up’ and ‘net zero’.

This will not be achieved by replicating the ineffective ‘interim regime’ in place since the end of the transition period. This model is weakened by government and public bodies self-assessing whether subsidies comply with broad, hard-to-define principles and the absence of an independent subsidies regulator. This is the worst of both worlds: it is likely to have deterred smaller bodies, such as local authorities, from applying for potentially beneficial subsidies, while offering no guarantee that harmful subsidies are prevented.

The new subsidy control system is also a source of potential tension between the UK and devolved governments, as the power to set the rules was, controversially, reserved to Westminster in the UK Internal Market Act. This risks undermining the regime from the start: without the support of the devolved administrations, the UK government could find itself embroiled in lengthy political battles – and even high-profile court cases.

The government’s objectives – to have the flexibility to promote good subsidies and rule out bad ones, while preventing damaging subsidy races within the UK – are sensible and ambitious. But achieving them will require a big shift from the ineffective interim system.

• The system includes clear and detailed guidance to help governments and public bodies comply with the rules and to direct subsidies towards UK priorities.
• A ‘safe harbours’ route for smaller subsidies. These are tightly defined rules which, if complied with, guarantee that the subsidy is legal. This is crucial if smaller subsidies are to proceed as or more smoothly than under the EU system.
• The Competition and Markets Authority (CMA) should be appointed as the system’s regulator to provide advice and legal certainty before subsidies have been offered and to challenge subsidies that are harmful or waste taxpayer money.
• The CMA’s governance should be reformed to ensure formal board representation to the devolved administrations.