The importance of subsidy control compliance for LUF applications and UK Shared prosperity fund

The Government has published more detail about the second round of the Levelling Up Fund (LUF) and the UK Shared Prosperity Fund (UKSPF).  Although compliance with the subsidy control rules was an important part of LUF round one (and the Towns Fund), on our reading of the additional detail its profile has been raised.  It is now very clearly an essential requirement, and one which must be given thorough consideration at the outset.  The two key points to take from this article are to recognise this and take legal advice as early as possible. 

The subsidy control requirements for round 2 of the LUF are explained in Annex G of the Technical Note and Part 2 of the Application Guidance.  Both are more detailed than previously seen, and Part 2 includes not only the following statement but also various questions to work through and complete:

“If the Levelling Up Fund is used to provide a subsidy, expenditure must be compliant with the UK’s obligations on subsidy control. All bids that have the potential to be a subsidy must consider how they will deliver in line with subsidy control principles (or State aid for aid in scope for Northern Ireland only) as per UK Government guidance.

All applicants must establish if the direct award of LUF funds could constitute a subsidy. It is vital that all applicants complete this section of the application form. Where applicants do not adequately demonstrate that the LUF award is compliant under the UK Subsidy Control Regime or State aid rules then the project could be considered ineligible and the application may be rejected.”

If it appears that the LUF will provide a subsidy then the applicant must (under question 2.2 of Part 2) demonstrate how the award has been considered under each of the subsidy principles listed in the Subsidy Control Bill.  For example, that it pursues a specific public policy objective to remedy an identified market failure or address an “equity rationale” (please see our earlier article on the principles for more information).  In addition to considering the subsidy principles, the section 151 officer of the applicant local authority must complete Proforma 5 where LUF will be transferred to one or more third parties – this is stated to be “an eligibility requirement and if it is not met the bid will not proceed to assessment.”

Part 2 contains similar requirements in relation to the EU State aid rules for projects in Northern Ireland.

The Technical Note reinforces the overall compliance message:

"How we will assess information on subsidy control/state aid
Whilst the application form now includes a dedicated section for subsidy control/state aid, the assessment will not be limited to this section, and we will also consider the applicant’s responses across the wider application (particularly the Deliverability section). The subsidy control/state aid assessment will sit independently (it will not be considered as part of the scoring framework). Responses will be subject to a risk RAG rating process. Where a bid presents an unacceptable risk with non-compliant delivery then the bid may fail the assessment and could be recommended for rejection on the grounds of ineligibility.

Where applicants do not adequately demonstrate that the LUF award is compliant under the UK subsidy control regime or state aid rules then the project could be considered ineligible, and the application may be rejected"

The additional information published for the UKSPF does not contain the same level of detail, but does emphasise the importance of subsidy compliance.  For example, see section 7.6 of the Prospectus (which also promises further subsidy guidance this summer), and the following, which is used repeatedly in the Investment Plan Questions:

Having supported numerous local authorities applying for LUF and Towns Fund grant over the last 12 months, in our experience it is much easier to provide detailed and reasoned advice tailored to reflect a project when there is plenty of time to do so.  This reflects the technical nature of the rules and the diverse nature of the projects (for example, we advised on renovating a historic regional theatre, restoring a town hall for public authority and market facing activities, building a new community hub and leisure centre, building a new science and industry museum, demolishing a car park and constructing a building for performing arts and a range of cultural and leisure uses, and acquiring and bringing forward for housing development a 1.2 hectare brownfield site).  The fact that subsidy compliance is now being given more prominence in round 2 of LUF and in the UKSPF means it is even more important to take early advice to avoid unexpected problems.  Doing so typically means that even where subsidy will exist, it can be provided compliantly even if further work is needed to ensure that the subsidy principle are met.