Subsidy Control Act 2022: economic queries
In July, the long-awaited statutory guidance on the Subsidy Control Act 2022 (Act) was published in draft form (Draft Guidance). A consultation on the draft guidance has recently ended and the results have not yet been published – it may therefore change before the final version is published.
In July, the long-awaited statutory guidance on the Subsidy Control Act 2022 (Act) was published in draft form (Draft Guidance). A consultation on the Draft Guidance has recently ended and the results have not yet been published – it may therefore change before the final version is published.
The Act itself is expected to come into force later in 2022, and the government is expecting to publish statutory guidance and secondary legislation to support it.
Historically, under the state aid rules, universities were treated as capable of giving and receiving state aid, and the Act and Draft Guidance do not suggest that the position will be different under the Act, although universities are not expressly referred to and the guidance on the position of educational services is quite limited.
One of the key questions in determining whether a university is giving or receiving a subsidy will relate to whether the supported activity is an economic activity. Where support is provided to an activity which is not economic, this will not give rise to a subsidy. For example, the provision of funding towards teaching, independent research or knowledge transfer is unlikely to be considered economic activity, and therefore can be supported without giving rise to a subsidy. However, where a university or other entity is engaged in economic activity, this may give rise to a subsidy. This might arise where a university is constructing research infrastructure, renting out equipment, entering into a collaboration or operating an innovation cluster (for example).
Is it ‘economic?’
The question as to whether an entity is carrying out an economic activity or not is therefore one of the deciding factors in many cases as to whether providing public support to that entity will give rise to a subsidy or not. If it can be said that the entity is not carrying out economic activity, then it is not an ‘Enterprise’ and no subsidy will arise.
This is very clear in some cases – most businesses are clearly enterprises, and many other organisations, such as community groups, are not. But in the case of entities carrying out a mix of activities, notably universities, local authorities, voluntary sector organisations and charities, the position is less clear. The question of whether an activity is economic or not is considered at the level of the supported activity – therefore some entities will be enterprises in relation to some of their activities, and not in relation to others (and universities fall into this category).
The Act introduced a new provision – s.7(2) which provides that “an activity is not to be regarded as an economic activity if or to the extent that it is carried out for a purpose that is not economic.”
In the absence of further guidance or judgements on this provision, it would be necessary to simply consider the purpose of the beneficiary in carrying out the activity. There is a clear parallel with the ‘primary purpose’ test discussed in R (Peters) v Haringey LBC. In that case, the court considered whether a local authority was acting for a commercial purpose within the meaning of s.4(2) of the Localism Act 2011, which requires that where a local authority acts for a commercial purpose, it must do so through a company. The court found that as the local authority’s motive for entering into a transaction was not commercial, then the transaction itself would not be seen as commercial, even if it was profit making.
The primary purpose test
If that is correct, then it appears to give rise to an argument that where an entity’s motivation for carrying out an activity is not commercial, even if the activity is profit making, the entity should not be considered to be an enterprise and the relevant activity may receive public support without this giving rise to a subsidy control issue.
However, in Peters v Haringey, the primary purpose test was considered in relation to a local authority who clearly had public policy objectives to pursue and whose primary business is not ‘economic’. It is not clear how the test would be applied in the case of a commercial entity where the drivers for undertaking any activity, including ostensibly non-economic activity, are much more likely to be profit-driven and therefore, at some level, economic. Similarly, it is not clear how this will apply to universities, charities and voluntary sector organisations, who often undertake a range of economic and non-economic activities but with an overarching purpose which may not be commercial.
The Draft Guidance does little to clarify this issue, essentially setting out an approach to economic activity which is reflective of the approach under the state aid regime. However, the provisions of s.7(2) of the Act appear to go further than this and suggest a different approach, which could be interpreted as meaning that where any entity does something for a purpose which is not economic, even if the wider activities of the entity are economic and the activity itself is profit making, then it will not be acting as an enterprise and may therefore receive public support without a requirement to consider the subsidy control rules.
This interpretation seems very broad and could lead to a situation where public money is provided towards the ‘non-economic’ activities of commercial operators, in circumstances where application of the subsidy control principles in the Act might suggest that a subsidy would not be appropriate (for example, because the recipient could afford to fund these activities itself). The approach taken in the Draft Guidance would appear to confirm that this is not the intention of s.7(2), in that the Draft Guidance provides that where support is provided in relation to non-economic activity, this would not amount to a subsidy, provided that the support is ring-fenced so that it cannot cross-subsidise economic activities. Nevertheless, this is not express and means that the purpose of s.7(2) is unclear. If (as the Draft Guidance suggests) the approach to identifying whether an entity is an enterprise is the same the established position under the state aid rules, what does s.7(2) do?
It seems to us that s.7(2) could give comfort to public authorities (including universities) that unless they are acting for a clearly commercial purpose, their receipt of public support will not give rise to a subsidy. However, clarification of the scope of s.7(2) would be welcomed, especially for organisations who carry out a range of commercial and non-economic activities, because being able to rely on s.7(2) may simplify the process for them. This might be done by considering the balance of economic and non-economic activities carried out at the level of the entity itself as well as the relevant activity and setting a threshold below which the entity will not be considered to be an enterprise.
As it stands, the purpose of s.7(2) is not clear and to the extent that it is intended to simplify the subsidy control regime for entities which are broadly carrying out non-economic activity, the benefits of this are unlikely to be realised.
Contact
Angelica Hymers
Senior Associate
angelica.hymers@brownejacobson.com
+44 (0)115 976 6092
Related expertise
You may be interested in...
Legal Update
Public matters - February 2023
Legal Update
Government introduces first Streamlined Subsidy Schemes under new regime
Legal Update
Public matters - January 2023
On-Demand
The Subsidy Control Act 2022. Putting the new regime into practice
Legal Update
Safeguarding at scale report published
Legal Update
Government provides guidance on new Subsidy Control Database and the calculation of their value
Opinion
Consultation on holiday entitlement – part-year and irregular workers
Guide
FAQs - becoming an academy sponsor
Legal Update
The impact of the new Subsidy Control regime on public regeneration projects
Legal Update
The importance of understanding the transitional provisions under the Electronic Communications Code
Legal Update
Biodiversity Net Gain: positive for nature and an opportunity for landowners
Legal Update
Discrimination comes of age
Press Release
Law firm picks up record breaking sixth Education Investor Award
Browne Jacobson’s education team has been named as winner of the ‘Legal Advisors to Education Institutions’ category at the Education Investor Awards 2022 for a record sixth time.
Opinion
How does the UK Education Sector fare amidst the energy crisis?
Press Release
Education team maintains clean sweep of top rankings in latest legal directories
Browne Jacobson’s education team has again been confirmed as a national powerhouse after securing five Tier 1 rankings relating to Education in the latest edition of Legal 500 and maintaining a Band 1 UK-wide ranking for Education in Chambers & Partners UK 2023.
Legal Update
be connected newsletter for higher education - Autumn 2022
Press Release
Browne Jacobson and The University of Nottingham announce Knowledge Transfer Partnership to promote greater equality, diversity and inclusion in the legal sector and beyond
Law firm Browne Jacobson and the University of Nottingham are launching a ground-breaking two and a half year Knowledge Transfer Partnership which aims to develop and embed long-lasting equality, diversity and inclusion (EDI) principles and learnings into the firm’s practices and processes, amongst its key client-bases and the national legal sector.
Legal Update
Authorship disputes and employment claims
In an academic environment, there can be pressures to publish, particularly where funding is dependent upon research and reputation. Whilst there can be competition between Higher Education establishments to be the first to publish, there can also be internal conflicts over authorship rights where several individuals have contributed to the work.
Legal Update
Subsidy Control Act 2022: economic queries
In July, the long-awaited statutory guidance on the Subsidy Control Act 2022 (Act) was published in draft form (Draft Guidance). A consultation on the draft guidance has recently ended and the results have not yet been published – it may therefore change before the final version is published.
Legal Update
Changes to holiday pay for part-year workers
In July 2022, the Supreme Court handed down its long-awaited Judgement in the case of Harpur Trust v Brazel relating to the correct calculation of statutory holiday pay for part year workers. This decision has implications for all part year workers on contracts which subsist all year round, whether their hours are normal or irregular.
Legal Update
Facing the threat of cyber security breaches
Universities and colleges are not immune from deception by unscrupulous bad actors. The extent to which educational institutions can manage and control risk not only depends on financial management and internal controls, but also the robustness of security and processes which can be exploited from outside the organisation.
Legal Update
Browne Jacobson’s market leading Education expertise recognised again in latest Legal 500 rankings
The new set of Legal 500 directory rankings have been published and we are proud to once again be recognised as one of the country’s leading firms advising the Education sector.
Opinion
Internal reports and privilege
In University of Dundee v Chakraborty, the Employment Appeal Tribunal (EAT) considered whether a first draft of a grievance report could retrospectively be deemed to be privileged.
Legal Update
Data reform in the UK
Since the UK left the EU and are now able to move away from the EU data protection regime, the UK government have implemented a national data strategy with the aim of reducing the burden on organisations but maintaining a high data protection standard.
Legal Update
Economic activity for the purposes of the Subsidy Control Act 2022
When carrying out a mix of activities it can be less clear if it is 'economic'. We look at the impact on local authorities & charities.
Legal Update
What opportunities do the REF 2021 results offer universities?
The long-awaited publication of the Research Excellence Framework (REF) 2021 provides universities with opportunities to generate additional income and build upon the quality of their research output.
Legal Update
be connected newsletter for higher education - May 2022
In this edition we provide you with the latest in legal updates, news and insight from the higher education sector.
Legal Update
Harassment and sexual misconduct in Higher Education
Cases involving the handling allegations of harassment and sexual misconduct by Universities continues to hit the news. They are clearly difficult issues for Universities given the competing duties owed to both the reporting individual and the alleged perpetrator and the inevitable sensitivities around the nature of these matters.
Legal Update
Are spin-ins the new spin-outs?
Browne Jacobson has extensive experience in advising across all aspect of a HEI’s commercialisation strategy. If you would like to find out more, particularly in relation to spin-ins, please get in touch.
Legal Update
ICO consultation on research provisions guidance
The data protection legislation (namely, the UK GDPR and Data Protection Act 2018) contain various provisions that deal with the processing of personal data for research purposes.
Opinion
The UK’s first domestic subsidy control case
We waited more than a year for it, but the wait is over – we finally have a domestic case on the new subsidy control regime.
On-Demand
Subsidy control webinar - 30 March 2022
In this on-demand session, Alex Kynoch and Angelica Hymers explore the practicalities of complying with the new Subsidy Control Bill, and the impact of illustrative guidance and policy statements recently published by the Government.
Press Release
Browne Jacobson’s C-suite exec level coaching team appoints two new education specialists
National law firm Browne Jacobson has grown its team behind its dedicated Space + Time executive coaching programme with the addition of two more qualified coaches who will work with clients in the education sector.
Published Article
The Subsidy Control Bill – Illustrative Guidance and Regulations – legal certainty vs flexibility
It has been a turbulent couple of years for those involved in subsidy control, and 2022 will be equally challenging. The Subsidy Control Bill (Bill) will take effect in 2022.
Legal Update
Subsidy control regime: new Bill working its way through Parliament
2022 is the year in which the UK’s new post-Brexit subsidy control regime will take effect. The new Subsidy Control Bill will form the backbone of the UK’s new subsidy control regime. The new Bill will replace the EU’s state aid rules, which applied until the end of the Brexit transition period.
Legal Update
New Year, New Subsidy Control Regime Part 2: Schemes, enforcement and transparency under the Subsidy Control Bill
In the first part of this article, we discussed the application of the Subsidy Control Principles. In part 2, we look at how Streamlined Subsidy Schemes will be used to grant certain subsidies more quickly, and at the enforcement and transparency provisions of the Bill.
Legal Update
New Year, New Subsidy Control Regime Part 1: The principles, restrictions and exemptions under the Subsidy Control Bill
The repeal of the State aid rules and their replacement by the regime stemming from the UK-EU Trade and Co-operation Agreement (TCA) in 2021 meant that practitioners and public bodies had to acclimatise to a new, more flexible but less certain approach.
Legal Update
be connected newsletter for higher education - February 2022
In this edition we provide you with the latest in legal updates, news and insight from the higher education sector.
Legal Update
Digitising the student experience in higher education: Some practical tips for procurement
Five considerations for HEIs when undertaking an IT procurement for largely “off the shelf” small-scale student-facing applications for online teaching, knowledge stores and document repositories etc.
Legal Update
How will HSE’s focus on occupational health affect UK HE institutions?
What does the HSE's decision to prioritise occupational health inspection & enforcement activities mean for higher education institutions?