Introduction
Almost three years on from the Subsidy Control Act 2022 (the “Act”) coming into force, public authorities have, on the most part, got to grips with the routine processes and procedures needed to comply with the Act. However, there are some areas where public authorities are either unaware that the Act should bite or are failing to apply the full set of requirements. We call these “covert” subsidies.
Covert subsidies often sit in the “grey areas” of the Act. They either leave room for legal interpretation as to whether a measure falls within the “subsidy” designation altogether or arise so rarely that public authorities fail to recognise that they are subject to the Act’s rules.
Categories of covert subsidies
1) Shadow subsidies
The concept of a “shadow subsidy” was put forward by Jamie Dunne in an article in the UK Subsidy Control Insider’s last edition (Competing Visions of the UK’s Subsidy Control Regime), and arises when financial assistance escapes “scrutiny under the Act because the granting authority incorrectly (or, at least, questionably) concludes that they are not subsidies covered by the Act at all“.
A common example is when a public authority optimistically relies on the Commercial Market Operator (“CMO”) principle.
In such a situation, the public authority will already have an interest in proceeding with a particular transaction (even if it has not reached a final decision) – it is then required to assess whether the measure aligns with market practice. There is no external verification, unless a challenge is brought at the Competition Appeal Tribunal (the “CAT”) or alternatively a decision is made by the public authority to treat a measure as a subsidy and the value is such that it must be referred to the Subsidy Advice Unit (“SAU”) for review. As Professor Stephanie Rickard of LSE says in We need more scrutiny for business subsidies, we have a regime in which for the majority of awards, “public authorities must mark their own homework“.
In July 2025, in the case of Aubrey Weis v Greater Manchester Combined Authority, the CAT considered whether two public loans satisfied the CMO principle. The CAT found in favour of the loan provider, Greater Manchester Combined Authority, that the loans did indeed conform with commercial practice, reaffirming that public authorities will have a margin of appreciation in determining whether financial assistance is awarded on market terms (albeit this case is subject to an ongoing appeal). In the same month it was reported that Cambridgeshire County Council had reduced a £120m loan to a subsidiary development company by converting nearly £60m into a grant which would be repaid dependent on future performance.
2) Settlement agreements
Payments made by public authorities pursuant to settlement agreements are capable of being caught by the Act, but this is a category not addressed by the Statutory Guidance, nor widely analysed by legal commentators and not (yet) the subject of a case in the CAT.
It is therefore helpful that this issue has been considered in EU State aid law; a regime which the CAT in Durham recognised could be “of persuasive effect” when construing the provisions of the Act[1].
The European Commission is clear that “State aid may be involved in the conclusion of a tax settlement”[2] and an analogy can be draw with settlement agreements in non-tax contexts.
Given the focus will be upon whether the settlement confers an economic advantage on the beneficiary (i.e. whether a credible CMO case can be made), the test laid down by the European Commission[3] can be adjusted for the UK context as follows:
- Does the settlement agreement afford disproportionate concessions to the beneficiary, which the public authority does not afford to other parties?
- Is the settlement agreement unlawful?
The first limb focuses on two considerations: a) are the concessions made by the public authority disproportionate to the concessions made by the counterparty, and b) does the authority make similar concessions to other parties in similar situations? If the concessions made by the public authority are disproportionate in either sense, the settlement agreement in question should be seen to confer an economic advantage. In conducting this proportionality assessment, public authorities cannot take into account public policy objectives, as only commercial considerations can be factored into the CMO analysis[4]. However, public authorities are entitled to be “guided by prospects of profitability in the longer term”[5]. As an example, an agreement to release and discharge a public authority from all claims, rights, demands and set-offs might be of significant value from this long-term-profitability perspective.
The second limb looks at whether the settlement agreement is unlawful, noting the EU State aid law case of Umicore SA, in which the European Commission found that an economic advantage can be expected to be conferred where a settlement agreement has been concluded unlawfully[6]. Within the UK context, assessment of the legality of settlement agreements could start with an analysis of vires. Further considerations could include public law principles such as proportionality, rationality and fairness, which may form grounds for judicial review challenges.
However, settlement agreements are inherently confidential, which can hinder subsidy control enforcement. In the EU, State aid issues in tax laws came to light only after reviews and investigations initiated by the European Commission (e.g. Umicore SA). In contrast, the UK’s Competition and Markets Authority (“CMA”) lacks power under the Act to investigate subsidies on its own initiative. Potential issues may be highlighted by investigations launched under Chapter I of the Competition Act 1998, but a finding of anti-competitive behaviour would not necessarily trigger a subsidy control challenge. An interested party might be prompted by the outcome of such an investigation to use section 76(1) of the Act to seek information about a suspected subsidy awarded unlawfully, but this is limited by the authority’s ability to withhold commercially sensitive or confidential material[7]. Such restrictions, coupled with a lack of case law and high litigation costs, limit enforcement. This raises the question: are settlement agreements so deep in the shadows that meaningful subsidy control enforcement is not possible under the Act? Potentially – but settlement agreements may still fall within the scope of the Act, and authorities remain under a duty[8] to ensure compliance with the subsidy control principles if so.
3) Awarding or modifying public contracts without competition
Direct awards
A public contract awarded at market price pursuant to a lawful procurement procedure should not confer an economic advantage and, as a result, should not be a subsidy. This is because the competitive selection process will “show compliance with the CMO principle”[9].
However, the position is less clear in respect of public contracts that are not the subject of open competition, for instance[10] those which are directly awarded (pursuant to sections 41 – 43 of the Procurement Act 2023 (“PA23”)) or which are modified without reprocurement (by reference to section 74 and Schedule 8 PA23). Could such awards be exposed to dual-litigation risk (procurement and subsidy control)?
The Statutory Guidance does provide some comfort by explaining that an open competition is only one means to reach a conclusion that no economic advantage arises, with benchmarking and profitability analysis equally legitimate. However, it is not always possible to pursue these alternative routes[11].
Therefore it is helpful that EU State aid law provides a useful proxy to determine to what extent contracts that are not the subject of open competition are capable of constituting subsidies.
The European Commission’s Notice on the notion of State aid addresses single bid procurements[12], stating that “if only one bid is submitted, the procedure would not normally be sufficient to ensure a market price” unless there are “strong safeguards in the design of the procedure ensuring genuine and effective competition” and the public authority has credible grounds to believe that the market was able to engage with the process (as opposed to a situation where only one supplier is realistically able to submit a credible tender). Should the public authority not have such grounds, it will have to fall back upon benchmarking or profitability analysis.
Contract modifications
Similar tensions arise in the context of contract modifications. Certain modifications to public contracts are permissible under section 74 PA23, but to what extent does compliance with section 74 lead to a presumption in favour of no subsidy arising? Our view is that there is no presumption of compliance[13].
For instance, the exemption for “below-threshold” modifications under the PA23 allows authorities to modify a contract by less than the relevant threshold amount for the type of contract (effectively imposing a de minimis modification threshold)[14]. However, this is fundamentally at odds with subsidy control law, which provides that even low value financial assistance is capable of having “a genuine, adverse effect that is more than incidental or hypothetical on competition or investment in the UK, or international trade or investment”[15]. What this means in practice is that public authorities should carry out a case-by-case CMO assessment when modifying public contracts. If the conclusion is that a subsidy is present, authorities should apply one of the exemptions set out in the Act or otherwise comply with the subsidy control requirements.
4) Awards which ought to be subject to additional requirements under Chapter 2 of the Act
Another type of covert subsidy arises where there are additional requirements imposed by the Act, but the public authority is either unaware of this or does not engage with the requirements.
These awards, by their very nature, are difficult to spot. However, it is surprising that the Transparency Database only lists six subsidies awarded under section 28 of the Act (Subsidies for air carriers for the operation of routes) since 4 January 2023[16]. Likewise, there are only three rescue subsidies recorded.
Conclusion
When the subsidy control regime was designed, assurances were provided that the “regime safeguards domestic competition and the UK internal market“. However, this relies upon public authorities being able to correctly determine the presence of subsidies and thereafter apply the relevant rules.
As we have shown there are many grey areas in the regime. There are also areas where additional rules apply.
Authorities must stay alert to covert subsidies to ensure that they do not fly under the radar. Covert subsidies may arise from a wide range of sources in addition to the categories discussed in this entry. For example, they could emerge from the forgoing of revenue otherwise due (particularly when authorities carry out commercial activities) or the surrendering of other contractual rights.
Further, subsidy questions may arise as authorities begin to exercise newfound freedoms and flexibilities under the PA23’s competitive flexible procedure. For example, authorities using the new procedure can offer equal “supplier funding” to support bids involving complex or costly development, but this must comply with all relevant subsidy control rules[17].
Covert subsidies have the potential to raise challenging questions of subsidy control law. The key for public authorities will be to implement systems and controls to identify covert subsidies in the first place. In the same way that authorities are familiar with the “safe harbour” analysis required to ensure contract modifications comply with procurement rules, subsidy control analysis should form part of routine safeguards. In many cases, such analysis will lead to the conclusion that no subsidy arises. If potential subsidies are identified, authorities can consider, and mitigate against, risk of challenge. The most dangerous position is ignorance. If an authority fails to comply with its section 12 duty to consider the subsidy control principles, ignorance as to a subsidy’s existence is no defence. A challenge in this scenario would surely succeed.
That said, subsidy control challenges are based on judicial review principles[18], one being the “no substantial difference test”[19]. The CAT must refuse to grant relief if it appears to be highly likely that the outcome for the applicant would not have been substantially different if the conduct complained of had not occurred. This may allow authorities to argue against the imposition of a remedy on the basis that the covert subsidy is consistent with the subsidy control principles. Nevertheless, a finding of unlawfulness in respect of a subsidy is an undesirable prospect, covert subsidy or not.
In terms of driving improvements, we recommend that the Statutory Guidance be updated to clarify the application of the law to the points above. We also urge the government to consider innovative solutions to the issues identified in this entry. In particular:
- The SAU could be empowered to conduct investigations into public authorities’ compliance with the Act (under a similar remit to the Procurement Review Unit). Alternatively, this power could be afforded to the CMA more broadly (bringing subsidy control enforcement into alignment with the position under competition law). Increased scrutiny would likely discourage overly optimistic CMO analysis in fringe cases.
- Require “no subsidy” notices to be published for financial assistance awarded over a certain value outwith the Act, explaining on what basis no subsidy arises. This would provide greater visibility of potentially challengeable shadow subsidies.
- The challenge window could be regularised in circumstances where covert subsidies arise. Under the current regime, a subsidy to an air carrier awarded without regard to the Act’s section 28 requirements would be challengeable for one month. However, a shadow subsidy, details of which are not uploaded on the database, is essentially subject to an open challenge window. Greater consistency would benefit both public authorities and prospective appellants alike.
[1] The Durham Company Limited v Durham County Council [2023] CAT 50.
[2] European Commission, Notice of 19 July 2016 – 2016/C 262/01, para 175.
[3] European Commission, Notice of 19 July 2016 – 2016/C 262/01, para 176; and European Commission, Decision of 26 May 2010 – State aid C 76/03 (ex NN69/03), Umicore SA – 2011/276/EU, para 155.
[4] Statutory Guidance, paragraph 15.61.
[5] Case C-305/89: Alfa Romeo, paragraph 20.
[6] European Commission, Decision of 26 May 2010 – State aid C 76/03 (ex NN69/03), Umicore SA – 2011/276/EU, paras 155 – 157.
[7] As per sections 76(5)(a) and 76(5)(b) of the Act. Note that this qualification also extends to information subject to legal privilege and that which, if disclosed, would be contrary to public interest (under sections 76(5)(c) and 76(5)(d) respectively).
[8] Under section 12 of the Act.
[9] Statutory Guidance, paragraph 15.66.
[10] The analysis in this section is also applicable to the three direct award routes set out in the Provider Selection Regime (which regulates the procurement of healthcare services for the NHS).
[11] Schedule 5, paragraph 6 of the PA23 permits direct award where there is “an absence of competition for technical reasons… and there are no reasonable alternatives”. However, the absence of competition for the purposes of subsidy control law seems to be a stricter test, whereby there are no alternatives available to relevant consumers. Similar issues arise at Schedule 5 paragraphs 2 (the supply of novel goods or services), 4 (the creation of unique art) and 5 (only a sole supplier can supply the services due to exclusive rights).
[12] Paragraph 93.
[13] This seems to be consistent with State aid rules as per the Commission Decision of 2 October 2002 in London Underground Public Private Partnership N 264/2002.
[14] See Schedule 1 PA23 for relevant threshold amounts.
[15] Statutory Guidance, paragraph 2.20.
[16] Non-compliance with section 28 is one of the grounds for challenge in the forthcoming case of Bristol Airport v Welsh Ministers.
[17] According to the Transforming Public Procurement Manual.
[18] Section 72(6) of the Act.
[19] Section 31(2A) of the Senior Courts Act 1981.