We have frequently advised universities on the various state aid implications of public funding under the EU state aid rules. In this article we examine the new approach to assessing grants and public income under the new subsidy control regime from 1 January 2021 and what this means for research, development and innovation.
In the university context, state aid issues commonly arise from:
● the construction of research infrastructures
● collaboration agreements between universities, other research organisations and businesses
● renting out equipment purchased with public funds to other users
● the operation of innovation clusters
● the provision of incubation and business innovation services.
Under the previous state aid regime, there were a range of measures in place which meant that universities often fell outside the scope of the state aid rules to the extent they were carrying out their main purposes of teaching, research and the transfer of know-how or could claim exemptions for certain research and development and innovation activities. That certainty provided by the State Aid General Block Exemption and the Framework for State Aid for Research and Development and Innovation is no longer there as the UK government has revoked the EU state aid provisions and the relevant exemptions from UK law.
At the time of writing, the UK government has just announced a consultation on a domestic subsidy control regime, with new legislation expected to be introduced later this year.
In the interim, pending the introduction of a new set of rules, universities will need to apply the new subsidy control principles set out in the EU-UK Trade and Co-operation Agreement (TCA) and implemented in the EU (Future Relationship) Act 2020.
The subsidy control principles are set out in Part 2 of the TCA which deals with trading and other economic arrangements, Title XI relating to the level playing field for open and fair competition and sustainable development. In addition, the principles are supplemented by a separate Special Joint Declaration on Research and Development (R&D Declaration).
Under the TCA, universities still have a duty to ensure their activities are not benefitting from subsidies and they are not flowing down subsidies to other beneficiaries, or they risk recovery of the amount of the subsidy.
So What Has Changed?
In order to be a subsidy, a measure must provide financial assistance from public resources which confers a specific economic advantage upon economic actors and which has or could have an effect on trade or investment between the UK and the EU. The language, although couched in different terms, uses familiar concepts to the definition of state aid.
For small amounts of aid there is the equivalent to the de minimis allowance, which permits beneficiaries to receive up to £344,600 of subsidies over a three-year period without the need for further assessment. However this is unlikely to be of much assistance to universities who generally will be dealing with much larger sums of money in the forms of grants etc.
Universities carrying on the activities of teaching, independent research and the transfer of know-how as part of their primary purpose are unlikely to be treated as economic actors.
However, where universities are engaged in commercial activities, universities will need to carry out an assessment of the proposed subsidy to ensure compatibility against the general principles set out in the TCA. Universities will need to be able to demonstrate that any subsidy:
● pursues a specific public policy objective to remedy an identified market failure or addresses an equity rationale such as social difficulties or distributional concerns
● is necessary, proportionate and limited
● has an incentive effect
● makes a positive contribution to achieving the objective which outweighs any negative effect.
In taking account public policy objectives, universities can have regard to the R&D Declaration which recognises the UK government’s commitment to driving innovation. This is helpful in that it provides a justification for subsidies for certain research and development activities. The activities covered are comparable to those under the State Aid General Block Exemption, including:
● fundamental research
● industrial research and experimental development
● the development of new and highly innovative technology which drives productivity growth and competitiveness
● new production processes
● relevant infrastructure
● innovation clusters
● digital hubs.
However, rather than providing strict conditions for what is permitted, there is a requirement that the amount of subsidy should reflect, amongst other factors, the risk and amount of technological innovation involved in the project, how close the project is to the market and the project’s contribution to knowledge generation.
This approach has the benefit of providing flexibility but lacks certainty and places the onus on universities to carry out their own self-assessment. Our view is that further guidance would be welcomed to ensure a consistent approach to interpretation.
As part of the consultation, which remains open to 31 March 2021, the government is seeking view on whether subsidies for research and development would benefit from tailored provisions or specific guidance on the extent to which they may be permitted.
Universities should also be aware of greater notification and transparency requirements. Subsidies which are granted must be notified either on an official website or a public database within six months of the subsidy being granted, providing information including the legal basis and policy objective or purpose of the subsidy, the beneficiaries, the amount of the subsidy and the date of grant of the subsidy and its duration. In the absence of an official UK database, one suggestion is for universities to publish information about subsidies that it receives on its website.
In the long term, the hope is that the new subsidy control rules will mean greater flexibility and opportunities to innovate for universities. In the shorter term, the concern is that the additional burdens for universities in terms of getting to grips with the new rules, the uncertainty around how the principles will be interpreted, and the prospect of more rule changes later this year, will delay or put research and development projects on hold.
Stephanie Rickard is a partner at leading education law firm VWV. Stephanie can be contacted on 07384 251 896 or at firstname.lastname@example.org.
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