This is the first of two articles providing an overview of recent amendments to the Statutory Guidance for the United Kingdom Subsidy Control Regime (Statutory Guidance).  The Statutory Guidance accompanies the Subsidy Control Act 2022, which introduced the UK’s new subsidy control regime in January 2023.

The Department for Business and Trade published the amendments on 30 June 2023 to provide further guidance on the requirement to publish details of subsidies on the UK’s subsidy database and on how to determine the value of a subsidy by calculating its Gross Cash Amount (GCA) or Gross Cash Equivalent Amount (GCE).  This article focusses on the guidance for calculating the value of a subsidy, and our second article will cover the further guidance on the requirements under The Subsidy Control (Subsidy Database Information Requirements) Regulations 2022.

Valuing a Subsidy

Annex 3 to the Statutory Guidance includes information about how public authorities should determine the value of subsidies in accordance with the Subsidy Control (Gross Cash Amount and Gross Cash Equivalent) Regulations 2022 (Gross Cash Regulations).  Part of the valuation exercise involves calculating the GCA where the subsidy is given in the form of a grant, or the GCE where the subsidy is given in any other form.

There are a number of reasons why it may be necessary to calculate the value of a subsidy.  These include the need to ensure that the subsidy falls within any monetary limit associated with an exemption or subsidy scheme, to be able to properly assess the subsidy’s compliance with the subsidy control principles, to comply with the transparency requirements in the Act and to determine whether the provisions about mandatory or voluntary referral of certain subsidies to the Competition and Markets Authority are relevant.

Part 1 of Annex 3 sets out some general principles relevant to the valuation of subsidies, noting that not all of these principles will be relevant in all cases, and that more than one of the principles may need to be applied in combination when valuing a subsidy.  The three areas covered are as follows.

  1. Application of discount rate

The general idea behind the practice of discounting is to arrive at a more accurate value for a subsidy, factoring in the time value of money.  For example, a grant of £100 given today is generally worth more to the recipient that a commitment to give a grant of £100 in two years’ time.  The discounting exercise reduces the value of the subsidy and so can be helpful when trying to fit the subsidy within an exemption which is limited in value (such as the exemption for minimal financial assistance) or when seeking to demonstrate that the subsidy is proportionate and therefore satisfies subsidy control principle B.

The need for discounting does not arise where a subsidy is provided in a single instalment and without delay (for example, a grant paid to the recipient in full when the grant agreement is signed).  However, discounting may be appropriate where the subsidy will be provided in tranches over a number of years, or where there will be a delay of more than twelve months between when the public authority commits to providing the subsidy and when the subsidy is actually provided. 

The Statutory Guidance recommends that public authorities discount future values when calculating the GCE or GCA of a subsidy, noting that it is best practice to discount future values only if:

  • the subsidy contains explicit conditions specifying when transfers of financial assistance are to be made, or
  • schedule of payments has been agreed between the parties (for example, milestone payments as part of a wider project). If the exact timing of payments is not known, the public authority can discount based on its best estimate of when the financial assistance will be provided.

If it is considered appropriate to apply a discount rate, a public authority must use the discount rate specified in regulation 4(5) of the Gross Cash Regulations.  This rate is currently 5.3% per annum, but will be updated annually.  Any instalment of the subsidy paid within the first 12 months should not be discounted, and future instalments (such as monthly instalments) can be discounted in 12-month blocks rather than each having to be discounted separately.  Importantly, the discounting exercise is undertaken before the GCA or GCE of the subsidy is determined.  An equivalent discounting exercise must also be applied to the market rate equivalent in order to ensure that the GCA or GCE is calculated accurately.     

The Statutory Guidance helpfully provides the mathematical formula used to calculate the present value of financial assistance given in the future:

Statutory Guidance  Formula

For anyone who sees this formula and wants to run a mile, the Statutory Guidance also contains a narrative description of the calculations involved!

  1. Calculating the maximum value of a subsidy within a scheme

Where a subsidy scheme is set up, it is necessary to know the maximum value of a subsidy which can be given under the scheme in order to ensure the entry on the subsidy database is accurate and in order to determine whether the subsidy scheme is a Subsidy Scheme of Particular Interest which has to be referred to the Competition and Markets Authority.

The Statutory Guidance says that it is best practice to incorporate a cap on the value of subsidies given under a subsidy scheme, provided the public authority will have the required level of control over the final amount of the subsidies given.

If it is not feasible or appropriate to incorporate a cap, the public authority is required to make a reasonable estimate of the maximum subsidy that will be awarded, having regard to the business case and its assessment of the scheme against the subsidy control principles.  The public authority should err on the side of caution and over-estimate the maximum subsidy where there is an element of uncertainty.

  1. Indirect subsidies

In some circumstances, the economic benefit from a subsidy does not accrue exclusively to the direct recipient of the subsidy.  Some or all of the economic benefit may be passed on to another enterprise which will (or may) therefore be in receipt of an indirect subsidy.  It is important to value an indirect subsidy, for example in order to determine whether it will be possible to rely on the exemption for minimal financial assistance, and in order to ensure that details of the indirect subsidy are published on the UK’s subsidy database.  This latter point is important because the time limit for challenging the indirect subsidy may not begin to run until details are published on the database.

The Statutory Guidance sets out a series of steps which, broadly, involve: working out the overall value of the financial assistance to the direct recipient, working out the proportion of that financial assistance passed on to other enterprises and valuing the GCA or GCE or each indirect subsidy.  The last of these steps will necessarily involve a separate assessment of each indirect subsidy specifically in relation to the enterprise concerned, since it will be necessary to compare the value of the financial assistance with what that particular enterprise would have received under normal market conditions.

Indirect subsidies can sometimes be difficult to spot and may be somewhat nebulous in nature.  They can therefore be inherently harder to identify and value than a direct subsidy and, even with the help of the Statutory Guidance, this may not always be an easy exercise.

Part 2 of Annex 3 provides more specific guidance on the various approaches available for valuing the following types of subsidy:

  • Cash grants
  • Measures that are also offered on the market
  • Loans
  • Guarantees
  • Equity investments
  • Purchase of goods and services
  • Provision of goods and services
  • Tax measures

The Statutory Guidance also provides a helpful explanation of how the various valuation methods provided by the Gross Cash Regulations are to be applied in practice.  The original Statutory Guidance published in November 2022 did not include any detail in Annex 3 and so this latest update is most welcome.   

The current version of the Statutory Guidance incorporating all recent amendments can be found here. It will be important for public authorities to continue to closely review and apply the most up-to-date version of the Statutory Guidance.

Our Subsidy Control Team is happy to support public authorities and other types of organisations, including subsidy recipients, with any queries relating to these amendments, or with the application of the Statutory Guidance more generally. Please contact Bethan LloydSally StoneIsobel Williams or Edward Reynolds for an initial discussion about how we can assist.

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