Modifying subsidies: What is permitted and what is not?

Public authorities are likely no stranger to the rules governing the modification of instruments awarded by public authorities in the procurement context[1], but the legal framework surrounding amendments made to awarded subsidies may feel less familiar.

This is no surprise – in fact, at the time of writing, only 10 of the 1554 standalone subsidies and 37 of the 1277 subsidy schemes uploaded onto the Government’s Subsidy Control Database for awarded subsidies appear to have been subject to a “permitted modification”[2].

In reality, however, obligations on public authorities to manage spending responsibly, such as those captured in the Local Government Transparency Code or HM Treasury’s Managing Public Money guidance, coupled with policy changes within the wider landscape (including, but not limited to, local government reorganisation) mean that amendments to subsidy awards may sometimes be unavoidable. Therefore, understanding the applicable rules is vital for public authorities.

Categories of “Permitted Modifications”

Where public authorities are considering modifying an awarded subsidy (for example, through an amendment to a grant agreement), the starting point should be that modified subsidies/schemes should be treated as new subsidies/schemes unless a permitted modification ground applies.

The practical effect of this is that for new subsidies/schemes, public authorities are required to complete a new assessment against the subsidy control principles and ensure that all the obligations of the regime are complied with,which may include re-uploading to the subsidy database and referral to the Subsidy Advice Unit (“SAU”)[3].

Public authorities should note that where they wish to make multiple modifications at once, without a new assessment against the principles or referral to the SAU, each modification must individually be a permitted modification.

There are six types of permitted modifications set out in section 81 of the Subsidy Control Act 2022 (“SCA”) for public authorities to consider.

These are modifications which:

• Provide for an increase in budget of a subsidy or subsidy scheme of up to 25%;
• Provide for an extension of a subsidy scheme of up to six years;
• Are ‘administrative’ in nature;
• Are made to a legacy subsidy or legacy scheme that are consistent with its terms;
• Are made to remedy any failure of a subsidy or subsidy scheme to operate effectively, and/or avoid deficiencies arising from, the withdrawal of the UK from the European Union; or
• Are made under Regulation (EC) No 1370/2007 (on public transport services by rail and road), which is retained EU law in the UK.

We set out some further details on these categories below:

1. Modifications for an increase of up to 25% of the original budget of a subsidy or subsidy scheme.

Key points to note on this category of modification:

• The 25% figure represents a cumulative total compared to the original budget of the subsidy or subsidy scheme. This means, if a modification is made to increase the value of a subsidy/scheme by 24%, any further modifications exceeding or equal to an additional 1% would surpass this cap.
• Where the budget for a subsidy or scheme is provided as a range of potential subsidy awards (instead of or as well as a cap on total spending), the Subsidy Control Statutory Guidance[4] confirms that the threshold should be calculated from 25% of the maximum potential award.
• The 25% figure should be calculated by reference to the baseline figure as set out in the financial year in which the permitted modification of that subsidy or scheme was made.
• Changes to the subsidy intensity levels/intervention rates should not be assessed under this limb (as these do not represent changes to the subsidy’s “budget”). Instead, public authorities should consider this kind of amendment in line with the other limbs where applicable.
• If the permitted modification increases the value of a Minimal Financial Assistance (“MFA”) subsidy, a low-value Subsidy of Particular Economic Interest (“SPEIA”), or a subsidy given under a scheme, from below £100,000 (i.e., exempt from transparency requirements) to above £100,000, it must be uploaded to the subsidy database (see more on the transparency obligations for modifications below).

2. Modifications for an extension of subsidy schemes by up to six years

Key points to note on this category of modification:

• The six-year figure represents a cumulative total from the original end date of the subsidy scheme. This means, if a scheme is extended by six years, then any further extension to the same scheme should be considered a new scheme, rather than a permitted modification.
• If a scheme was created under an EU State aid General Block Exemption Regulation (i.e., those categories of State aid scheme that were deemed to bring benefits to society that outweigh the possible distortions of competition in the Single Market – such as investment aid for local infrastructure), the end date of the scheme should be interpreted as being the expiry of the relevant Regulation, as it stood at the time the SCA came into force on 4 January 2023.

3. Administrative modifications

The SCA is silent on what is meant by an “administrative modification”, and the Statutory Guidance is ambiguous on this point.

However, the Statutory Guidance does explain at paragraph 9.22 that an administrative modification is one that would not result in a “substantial change” being made to the awarded subsidy.

Paragraph 9.24 clarifies that assessing whether a change is substantial involves considering whether it would have a “negative effect on the likelihood of the subsidy’s compliance with the subsidy control requirements, including the principles assessment”.

State aid caselaw provides some further assistance on this point. In the State aid context, an administrative modification is generally understood as a change that does not affect the evaluation of the compatibility of the aid measure with the internal market.

More specifically, any change that “does not alter the economic data or circumstances on the market at the time of the Commission’s decision” (i.e., when it evaluates compliance with the internal market) is considered an administrative modification^[5].

The substitute for compliance against the internal market in UK subsidy control terms is compliance against the subsidy control principles.

Owing to the above, we take the view that a sensible interpretation of the test for an administrative modification is that it is one which does not result in a substantial change being made to the original subsidy – i.e.:

• A modification that is purely formal in nature (i.e., setting documentation and/or procedural requirements); and / or otherwise
• A modification which does not have a negative effect on the likelihood of the subsidy’s/scheme’s compliance with UK subsidy control requirements, including the principles assessment. Interpreted in line with State aid law, this kind of modification should not alter the economic data or circumstances that were available to the public authority at the time of their initial principles assessment.

4. Modifications to a legacy subsidy/scheme

Key points to note this category of modification:

• “Legacy subsidies/schemes” must be modified in a way that is consistent with the terms of the subsidy or scheme that were in effect before the SCA came into force.
• A legacy scheme is a scheme that existed before 4 January 2023.
• A legacy subsidy is a subsidy given on or after 4 January 2023 under a legacy scheme.
• A modification to a standalone subsidy given before 4 January 2023 will not fall within this permitted modification limb, because this limb only applies to subsidies awarded under legacy schemes, or to a legacy scheme itself. However, in this case, the other categories of permitted modification may apply instead.

5. Modifications made to allow a subsidy or subsidy scheme to operate effectively and/ or avoid deficiencies arising from the withdrawal of the UK from the European Union

Modifications to legacy subsidies or legacy schemes that seek to deal with the effects of Brexit are permitted, including modifications to remedy any failure of a subsidy or scheme to operate effectively due to this event.

6. Modifications made under Regulation (EC) No 1370/2007 (on public transport services by rail and road), which is retained EU law in the UK

Modifications made under this specific EU Regulation, whose primary objective is to establish a framework for public passenger transport services while allowing for regulated competition among operators, can be considered permitted modifications.

Transparency requirements when making a permitted modification

Public authorities must comply with the transparency requirements set out in section 33 of the SCA and any relevant modifications made to a subsidy or subsidy scheme must be made clear on the Government’s subsidy database in the majority of cases[6].

For most[7] subsidies/schemes, the deadline for such an upload should be within three calendar months of confirmation of the decision to modify.

The most sensible interpretation of this in our view is to start the clock running from the day the modification is formally enshrined (i.e., when a deed of amendment to a relevant grant agreement is executed by the parties).

However, the Statutory Guidance clarifies that only the Department for Business and Trade (“DBT”) subsidy control team can upload details on subsidy modifications to the database.

Therefore, public authorities must contact DBT directly if they wish to make a permitted modification and should explain exactly what changes it wishes to make.

This extra administrative hurdle may explain why so few permitted modifications have been submitted to the subsidy control database to date.

In order to comply with these transparency requirements, it is very important for public authorities to carefully consider whether their proposed modification fits within one of the above permitted modification limbs and we suggest keeping a clear audit trail that evidences these conclusions. Contact with DBT should be made as soon as possible, noting the deadlines set out above.

[1] See s74 and Schedule 8 of Procurement Act 2023.

[2] “Permitted modifications” are defined in section 81 of the Subsidy Control Act 2022, and explained further in this article.

[3]  For example, non-permitted modifications to a subsidy or scheme that meet the definition of a subsidy or scheme of particular interest (as set out in paragraph 3 of the The Subsidy Control (Subsidies and Schemes of Interest or Particular Interest) Regulations 2022) require referral to the SAU.

[4] Paragraph 9.15.

[5] C‑590/14 P, DEI v Commission [2016].

[6] Note that modifications in relation to legacy subsidies relating to agriculture, fish and fish products, or the audio-visual sector do not need to be uploaded to the database.

[7] If the subsidy in question is a form of tax measure and is not a subsidy scheme, then the deadline for upload is within one calendar year of the date of the tax declaration.