On 30 June 2023, the Department for Business and Trade (DBT) published amendments to the Statutory Guidance for the UK’s Subsidy Control Regime, 2 providing further guidance on how to determine the value of a subsidy by calculating its Gross Cash Amount (GCA) or Gross Cash Equivalent Amount (GCE).
Calculating the value of a subsidy is necessary to comply with the transparency requirements in the Act, to determine whether a mandatory or voluntary referral to the CMA is needed based on monetary thresholds (and other criteria), and to ensure that subsidies fall within any monetary limits associated with an exemption or scheme. Part 1 of Annex 3 of the Statutory Guidance provides additional guidance on methodologies that may be relevant for all types of subsidies, and Part 2 of Annex 3 explores approaches to valuing different types of subsidies.
Application of discount rates
Discounting is a technique used to determine the present value of a future payment, reflecting the time value of money (ie, enterprises would prefer to receive funding earlier and delay repayments as far as possible). It is applicable where a subsidy is provided over several years or where there is a delay between the commitment and provision of the subsidy.
The Guidance recommends that public authorities discount future values when calculating the GCE or GCA, using 12-month periods from the date the subsidy was given, and using the discount rate specified in reg 4(5) of the Gross Cash Regulations 2022. This is currently 5.3% per annum (and it is intended to capture the average risk-free rate that a business may borrow at). Discounting has the effect of reducing the overall value of the assistance, which may make a difference where subsidy amounts are close to financial thresholds eg, the minimum financial assistance, Subsidies and Schemes of Particular interest (SSoPIs) and Subsidies and Schemes of Interest (SSoIs) thresholds.
Maximum value of a subsidy within a scheme
In setting up a subsidy scheme, public authorities must calculate the maximum award given under a scheme, to ensure that the entry on the transparency database is accurate and to calculate whether a SSoPI referral may need to be made to the CMA. Where public authorities have introduced a cap on the value of any individual subsidy given under the scheme, it may use the value of the cap to determine the GCA or GCE of any subsidy given under the scheme. If it is not feasible to operate a cap for a subsidy scheme, the public authority should use reasonable estimates to establish the maximum subsidy that will be awarded. Where there is uncertainty, it should be conservative in its estimate and err on over-estimating the maximum subsidy.
Indirect subsidies
It may be the case that the economic benefit from a subsidy does not accrue exclusively to the direct recipient of the subsidy, and that some or all of the benefit is passed on indirectly to more than one enterprise. In this case, the public authority should establish the cash value of assistance to each enterprise. To do so, it should consider the overall value of the assistance to the direct recipient, the proportion of the assistance that is ‘passed on’ to each enterprise and adjust the cash value of this assistance based on what would have been available to the enterprise under normal market conditions. By attributing a proportion of value to each enterprise, the total value of the financial assistance across all enterprises should equal the total amount of assistance given by the public authority. Indirect subsidies are likely to be harder to identify and value than direct subsidies, particularly as some indirect subsidies may provide economic benefits that do not manifest immediately or do hold a predetermined monetary value.
Approach to valuing different types of subsidies
Specific guidance is provided on the approaches available for valuing different types of subsidy including: cash grants, measures that are offered on the market, loans, guarantees, equity investments, purchase of goods and services, provision of goods and services, and tax measures. Some types of subsidies are more straightforward to calculate than others. For instance, the GCA of a cash grant is equal to the cash made available to the enterprise under the grant. Where the offer sets out a maximum amount that can be drawn down by the enterprise, then that maximum figure is the GCA. Other types are more complex and have a variety of approaches that can be used depending on the availability of information.
Two such examples are loans (where public authorities lend money to an enterprise that is then repaid to the public authority at a rate below what would have been available to that enterprise on the market) and guarantees (covering any liability or debt, where a public authority enters into an agreement to cover any payments on a loan should an enterprise default). The guidance helpfully provides a range of approaches, including simplified methodologies for loans or guarantees of lower value or to enterprises with better credit ratings, adjustments to the principal amount based on expected repayments or the probability of default, or use of parent company credit ratings.
Calculating the GCE typically requires determining the difference between what the enterprise is expected to repay to the public authority and what they would have paid to another institution on market terms. The key is being able to identify and evidence the relevant comparator interest rates, fees or premiums. Understanding the enterprise’s risk is needed for being able to identify a reasonable comparator, and public authorities must critically evaluate which estimates or information sources are more accurate. As such, public authorities will need to make numerous judgements on what is appropriate in the context.
Establishing what might have been available on the market may also be challenging, especially when adjusting the value for terms and conditions or features of a transaction, and public authorities are required to critically evaluate which estimates or information sources are accurate. However, where a reasonable comparator can’t be found (eg, if an enterprise has a very high risk of default, or the terms of the loan/guarantee are unusual), the final alternative is that the loan or guarantee should be valued as the whole principal amount or amount being guaranteed. Similarly, with the provision of goods and services, the GCE should be calculated as the difference between the price that would have been available on the market and the price that the enterprise will pay the public authority. Where there is no suitable market price it should be taken as zero (ie, the GCE is the full amount paid for the goods or services). This has the effect of encouraging public authorities to find reasonable comparators and market rates wherever possible to avoid calculating the GCE as the whole amount.
Other general themes of the guidance include that it is generally good practice to split expected payments by 12-month periods following the point that the subsidy is given. The use of terms such as ‘reasonable estimates’ and a ‘proportionate approach’ indicate that there is some degree of flexibility that can be employed by public authorities. Lastly, where there is uncertainty, public authorities should exercise caution and err on the side of overestimating values.