How subsidy control applies to agriculture: guidance for public authorities

Question 1

1.  Determine whether the support is a subsidy

Accepted Answer

You must decide if the support you propose is a subsidy according to the legislation. In the Act, this support is referred to as ‘financial assistance’.

Financial assistance in agriculture can include:

a direct transfer of funds (for example, a grant to improve the infrastructure to house animals or a loan from a bank secured against agricultural land and property)
a contingent transfer of funds (such as a loan or rent guarantee)
foregoing of revenue that is otherwise due (for example, vehicles used solely for agricultural purposes exempted from vehicle tax, red diesel)
providing goods or services as benefit-in-kind or for payment (for example, giving farm machinery to a farm enterprise for free)
purchase of goods or services (for example, government commits to buying produce at a guaranteed price)

You must use the following four-limbed test to determine whether the financial assistance is a subsidy. If you answer yes to all four questions, the financial assistance you propose is a subsidy.

Ask yourself the following questions (limbs):

1.1 Limb A - are you a public authority and is the financial assistance being given from public resources?

A public authority includes any person who exercises functions of a public nature.

For further guidance on the definition of a public authority read chapter 2 of the subsidy control statutory guidance.

Public resources include public funds administered by:

the UK government
devolved governments
local authorities

Public funds can also be given directly or indirectly through other public bodies such as agencies, or through private bodies.

1.2 Limb B - does the financial assistance confer an economic benefit on an enterprise?

An enterprise means any person, or group of people, under common control that are engaged in an economic activity (offering goods, services, or both, on a market). This includes, for example, charities as well as private sector organisations.

An economic benefit means that receiving the support gives the person, or group, an advantage over competitors. This is when the support has been given on more favourable terms than what the market could offer at the time. This is known as the Commercial Market Operator principle. If support is given on the same terms as a commercial market operator could have given it, then it is not a subsidy.

Example of financial assistance that would give an economic benefit to an enterprise: tax relief to a landowner for capturing and storing carbon.

Example of financial assistance that will not meet this limb: a ringfenced grant to a wildlife charity for its non-economic activities.

1.3 Limb C - is the financial assistance specific?

Financial assistance is specific where you are providing it on a discretionary basis. It is also specific if the assistance only benefits enterprises in a certain sector, industry, with certain characteristics, or within a specific area within your reference area.

Example of financial assistance that may be considered specific: providing all farmers and landowners, within one specific region of England, with services that support the health of trees.

For further guidance on what constitutes your reference area, read chapter 15 of the subsidy control statutory guidance.

1.4 Limb D - is the financial assistance capable of influencing competition and investment in the UK, or trade and investment between the UK and another country or territory, or both?

To have this capability, a subsidy must have the potential to have a relevant, genuine effect. This means it is capable, to some degree, of adversely distorting competition of investment in the UK, or trade and investment internationally.

The threshold required to meet this limb is low.

It could be:

between two areas in which different devolved administrations exercise their responsibilities
two areas of the same country
two small businesses in the same office block.

It does not matter spatially where this distortion occurs, or whether the possible negative effects will only affect a limited number of enterprises.

Example of financial assistance that would be capable of influencing competition and investment and may distort trade: a subsidy towards the costs of growing over-wintering plants to prevent, or reduce nutrient run off that occurs from soil being left exposed. This subsidy would provide an economic benefit to the recipient, influencing competition with their competitors.

Example of financial assistance that may not be capable of influencing competition and investment: support to an enterprise operating in a market inherently without competition, where the evidence shows no potential market entry. A provider of wool shearing services in a remote community may meet this test if the public authority finds no evidence that farmers using the service gain a competitive advantage.

Question 2

2.  Design subsidy to ensure compliance with the subsidy control principles

Accepted Answer

If the financial assistance you propose is a subsidy, you will need to assess it against each of the subsidy control principles (principles).

If you are proposing a new scheme that awards different subsidies, your assessment against the principles should:

assess the scheme (the effect of the scheme’s entire scope and scale, whether for a specific sector, industry or area, or all of these)
concentrate on those subsidies with the highest risk of not complying with the principles, assessing these as you would for a standalone subsidy

2.1 Subsidy control principles overview

You can read about these principles in Schedule 1 of the Act.

Principle A: subsidies should pursue a specific policy objective to remedy an identified market failure or address an equity rationale (such as local or regional disadvantage, social difficulties, or distributional concerns).

Principle B: subsidies should be proportionate to their specific policy objective and limited to what is necessary to achieve it.

Principle C: subsidies should be designed to bring about a change of economic behaviour of the recipient. That change, in relation to a subsidy, should be conducive to achieving its specific policy objective, and something that would not happen without the subsidy.

Principle D: subsidies should not normally compensate for the costs the recipient would have funded in the absence of any subsidy.

Principle E: subsidies should be an appropriate policy instrument for achieving their specific policy objective and that objective cannot be achieved through other, less distortive, means.

Principle F: subsidies should be designed to achieve their specific policy objective while minimising any negative effects on competition or investment within the UK.

Principle G: subsidies’ beneficial effects (in terms of achieving their specific policy objective) should outweigh any negative effects. This includes negative effects on competition and investment within the UK, and international trade and investment.

2.1.1 Assess a subsidy against the principles using the assessment framework

You can follow the steps of the four-part assessment framework to establish that a subsidy or scheme is consistent with the principles.

Step 1: identify the policy objective, make sure it addresses a market failure or equity concern, and determine whether a subsidy is the right tool to use. This makes sure the subsidy or scheme is consistent with Principle A and Principle E.

Step 2: make sure the subsidy is designed to create the right incentives for the beneficiary and bring about a change. This makes sure the subsidy or scheme is consistent with Principle C and Principle D.

Step 3: consider the distortive impacts the subsidy may have and keep them as low as possible. This makes sure the subsidy or scheme is consistent with Principle B and Principle F.

Step 4: carry out the balancing exercise, establishing that the negative effects of the subsidy are outweighed by the benefits related to achieving the policy objective. This makes sure the subsidy or scheme is consistent with Principle G.

In most cases you should assess whether a subsidy or scheme complies with the principles at the same time as you plan or design it. You can use similar or same evidence sources and analytical techniques.

The extent of your analysis should be proportionate to the size and potential distortive impacts of the scheme or subsidy.

For further guidance on how much depth may be required when you do an assessment against the principles, read chapter 3 of the subsidy control statutory guidance.

There are certain exemptions where a subsidy or scheme will not need to comply with the principles. The most relevant exemptions that apply to those giving agricultural subsidies are:

Minimal Financial Assistance (MFA) (read section 4) of this guidance
natural disasters and other exceptional circumstances (read section 8 of this guidance)
legacy schemes and permitted modifications (read section 6 of this guidance)

In addition, subsidies that were given before the Act came into force on 4 January 2023 are exempt from the subsidy control requirements. This applies even if a further instalment of a subsidy is given after 4 January.

2.2 Case studies

The case studies can help you work through each step of the assessment framework. They show what you may need to consider when you assess a subsidy or scheme against the principles.

Case study: The Edge Habitat Scheme (EHS) - to remedy a market failure.

A public authority wants to introduce an agricultural subsidy scheme. It pays farmers to create strips of unfarmed land around the edges of their arable fields, known as field margins, and maintain or increase the width of existing field margins.

The purpose of this scheme is to increase biodiversity. The scheme will provide habitats for birds, small mammals, insects, and other creatures, as well as increase the diversity of plant species.

The EHS will be a subsidy under the four-limb test as:

the financial assistance will come from public resources administered by the public authority
the payment rate of EHS will be set to incentivise uptake among farmers with less productive fields, who will receive economic benefit from the creation or expansion of field margins
EHS will only be made available to crop farmers, so the financial assistance is specific

EHS will provide the most benefit to those farmers with less productive fields, helping them to compete with more efficient and productive farms. This could have an effect on competition or investment within the UK, or international trade or investment.

Case study: The Remote Farming Scheme (RFS) - to address an equity rationale.

A public authority wants to financially support farmers in remote areas with geographical challenges that are impacting profitability and leading to inequality. These farmers are often part of remote communities reliant on farming and may struggle to diversify income streams due to these constraints.

The public authority decides to introduce an agricultural subsidy scheme to tackle this regional inequality. It aims to assist economic development of these remote communities and contribute to levelling the playing field between farmers in remote and non-remote areas. Farmers in remote areas will be paid based on the size of their land and the severity of the natural challenges.

The RFS will be a subsidy under the four-limb test as:

the financial assistance will come from public resources administered by the public authority
the payment rates of RFS will be set to compensate farmers for the economic disadvantage caused by the features of their land, providing an economic benefit
RFS will only be made available to farmers whose land has certain geographical features identified during the public authority’s assessment, so the financial assistance is specific

RFS may cause farmers with economically unviable businesses to remain in the market despite it being rational for them to exit (this could have an effect on competition or investment within the UK, or international trade or investment)

2.3 Assessment Framework Step 1 (Principles A & E) – pursues a specific policy objective and is an appropriate policy instrument

You must evidence how your proposed subsidy or scheme:

remedies a market failure
addresses an equity concern

Your scheme or subsidy must have a specific policy objective that falls within at least one of these two categories. Schemes and subsidies can have additional policy objectives. However, only the benefits from specific policy objectives can be considered when conducting the balancing exercise.

Subsidy should not pay for actions that are required to take place due to existing regulatory requirements.

Example: farmers of livestock are required by law to adhere to certain standards of animal welfare. A subsidy cannot be used to pay farmers with poor animal welfare practices to help them comply with these standards.

2.3.1 Establish whether a market failure exists

The most common cases of market failure involve the following features:

externalities
involvement of public goods
asymmetric or imperfect information

Market failures occur where market forces alone do not lead to an efficient outcome. An efficient outcome is defined as a situation where you can be made better off without making someone else worse off. However, evidence that a project or activity would not go ahead in the absence of subsidies, is not necessarily a sign of market failure. It may indicate a market is working well, as the activity would not be an efficient use of resources.

You should:

establish that a market failure exists
assess its significance
evidence how a subsidy, over other alternative ways of addressing the market failure, will remedy it

Example: the use of a certain insecticide may provide crops with greater protection, leading to higher yields. However, this insecticide may have a damaging effect on biodiversity. In this circumstance the market incentives encourage a greater use of this insecticide than is optimal. It may be appropriate to use a subsidy to promote research into less harmful insecticides or alternative methods that could lead to reduced use of this insecticide.

Example: upgrading livestock infrastructure to improve animal welfare creates environmental and social benefits. However, this may involve significant upfront costs and create limited additional income. In this case, the market does not currently incentivise improving animal welfare,

For further guidance on market failures read chapter 3 of the subsidy control statutory guidance.

2.3.2. Demonstrate the existence of externalities

Externalities refer to the effects, positive and negative, of an enterprise’s activities on third parties. Third parties do not pay for benefits that result from the activities (positive externalities) and are not compensated for the costs that result from the activities (negative externalities). Externalities can indicate a market failure.

Example of negative externality: poor slurry storage on a farm causes pollution to groundwater and waterways. The pollution has negative effects on third parties, such as on insects or fish in local water courses and on local drinking water abstractors.

Example of positive externality: a land management company provides training on conservation techniques to its employees. This training increases the effectiveness of the company’s land stewardship and employee job satisfaction and performance. However, the training also increases the broader level of knowledge in society. It may benefit other organisations as its employees take jobs elsewhere and transfer their skills to their new roles.

When considering externalities, you should also note the ‘polluter pays’ principle where those who produce pollution should bear the costs associated with the pollution. Subsidies in relation to environmental protection must not relieve the recipient from their liabilities as a polluter under the law (read section 3 of this guidance). For this reason, negative externalities are usually best dealt with through regulation, coupled with advice and guidance. However, in some circumstances it may be appropriate to address them with a subsidy.

2.3.3 Demonstrate that there are public goods

Public goods are goods and services that are difficult to exclude others from accessing or enjoying. Their use or consumption does not reduce the amount available for others.

Examples include:

biodiversity on a farm
cultural heritage
access to the countryside
high quality water in a river

Through subsidies you can incentivise farmers and landowners to provide public goods.

2.3.4 Demonstrate that there is asymmetric or imperfect information

When one party involved in a transaction has access to markedly better information, a transaction that benefits society is less likely to take place. If it does take place, the terms of the transaction are likely to be less favourable for society.

The same consequences can occur when all parties involved in a transaction do not have sufficient information.

Example: small business lending that can justify subsidies in the form of loans or loan guarantees. When assessing the profitability of a farm enterprise, a bank may concentrate on the financial statements and collateral to assess its credit worthiness. The worth of the enterprise’s environment and natural capital may not be included in the accounting and assessment. This can present market failures where economically viable enterprises cannot obtain green finance from traditional lenders.

2.3.5 Demonstrate that there is an equity concern

Market incentives can also lead to unequal or unfair outcomes. Equity objectives aim to address these negative outcomes. They reduce disparities between different groups in society and between or within different geographic areas, by redistributing the benefits of economic activity.

To demonstrate an equity concern you need to:

identify an inequality and evidence it
show how a subsidy can be used to address this inequality and how the inequality would continue without the subsidy
explain why it is socially desirable to address this inequality (not all unequal situations are inequitable)

Example: activities that facilitate and increase access to the countryside, its landscapes and cultural heritage for specific groups of people. Evidence shows these specific groups of people are under-represented in terms of access to the countryside, its landscapes and cultural heritage.

2.3.6 Demonstrate that a subsidy is the appropriate policy tool

You must also show that a subsidy is the most appropriate tool to achieve the policy objective. You could use alternative tools such as advice and guidance, or regulation and enforcement. They may be more effective or lead to a fairer outcome, so you will need to use your judgement.

Example: a subsidy to encourage uptake of best practice farming methods. It pays for agriculture sustainability professionals to visit farms and assess practices, provide advice and suggest improvements.

These visits could be funded through loans, however previous experience and evidence indicate that most farmers would not apply for them. Farmers could be required through regulation to implement these methods. However, the cost of implementation may vary depending on the farm location, size, and other factors.

A blanket requirement to follow best practice may have significant negative economic effects for some farmers but only provide a small environmental benefit. Funding for the visits through a grant is deemed to be the most effective way to achieve the policy objective.

Case study relating to Assessment Framework Step 1

The Edge Habitat Scheme (EHS)

The first step taken by the public authority is to identify a market failure or equity concern that EHS will address. Studies and research show that biodiversity of both wildlife and plant species has been steadily declining in the region in which the public authority exercises control.

This decline has been linked to a range of negative economic and societal practices. After examining the potential causes of the decline, the public authority concludes that the market does not lead to an efficient outcome. The market incentivises farmers to convert important habitats into productive farmland, with the costs from subsequent loss of biodiversity not being paid by those farmers.

EHS will encourage the creation and maintenance of habitats for wildlife, insects and plant species, leading to biodiversity improvements. The public authority shows, through appropriate research it has previously carried out, that improved biodiversity is a public good. This is because it provides benefits both to farm businesses and to wider society. These benefits are not just limited to the landowner, and the enjoyment by one person does not diminish the ability of others to do the same.

Market forces alone would not incentivise an appropriate level of protection for biodiversity, as farmers could make more profit by farming field margins. The EHS satisfies Principle A because it pursues the specific policy objective of remedying a market failure.

Finally, the public authority must decide whether subsidy is the most appropriate tool for remedying the market failure. It considers giving loans or equity investment on commercial terms, or advice and guidance to explain the environmental benefits of field margins. However, as the field margins will not make the farmers any profit, these tools are deemed unlikely to cause a change in behaviour. The public authority also considers regulation that would require farmers to create habitats in the field margins. However, the analysis suggests that this could increase the risk of some farmers going out of business, due to the additional costs and foregone profits. Also, the public authority decided rewarding farmers is a better incentive for providing a benefit to wider society than creating new regulation and enforcement.

The public authority decides that subsidy is the most appropriate tool, as the farmer will forgo profit on the land given over to field margins. This loss of profit will be continuous, so should be compensated through ongoing subsidy payment.

Case study relating to Assessment Framework Step 1
The Remote Farming Scheme (RFS)

The first step for the public authority is to identify a market failure or equity concern. Within their area of control there are specific areas that are disadvantaged, suffering from income and social inequality. These areas are often rural and remote.

The public authority carries out research that demonstrates that non-remote farmers within their reference area:

are more productive
have lower costs
make greater profit than comparable remote farmers

In reaching this conclusion, the public authority uses several indicators for comparison, including:

the size of the farms
types of crop or livestock farmed
input and normal business costs
the farmers’ experience levels
average hours worked each day

This research shows that these indicators are driving social inequality in more remote regions. It also shows there is an equity rationale for maintaining the land use as farmland, as it creates more local jobs than any other feasible use of the land.

Experts on agriculture and environment are consulted and conclude that a major cause of the inequality is geographical location. Remote farmers face unique challenges related to soil, relief, aspect, climate conditions, and transportation infrastructure. These challenges negatively affect their productivity. The lower productivity is leading to these socially inequitable outcomes. This inequity is likely to continue in the absence of subsidy or some other intervention.

Having identified the difference in productivity as a driver of regional inequity, the public authority considers whether it is socially desirable to address the inequality. Addressing this regional disadvantage will support government policies to increase opportunities for less advantaged areas and reduce inequalities.

Finally, the public authority must decide whether a subsidy is the most appropriate tool for addressing the inequity. Persistent negative economic impacts due to location will require sustained support, which the public authority believes is best provided through a subsidy. Alternatively, the support could be provided through welfare payments as part of a benefits system. It is for the public authority to justify why the use of RFS is the most appropriate tool.

2.4 Assessment Framework Step 2 (Principles C & D) – designed to bring about change in economic behaviour over and above what would have occurred anyway

You should now have identified the specific policy objective for your scheme or subsidy and evidenced that a subsidy is the most appropriate tool to achieve the policy objective.

The next step is to evidence how receipt of a subsidy will change the economic behaviour of a recipient. You must decide the baseline against which to assess a change in economic behaviour of the recipient. Consider the future scenario in the absence of the subsidy.

You must then evidence that:

the subsidy will change the recipient’s behaviour in a way that supports the specific policy objective
the behaviour change will not occur without the subsidy and the change will be over and above what would have occurred anyway (a subsidy should not normally cover business as usual costs)

2.4.1 Baseline for assessing behaviour change

The baseline for assessing behaviour change is the counterfactual, which means what would happen in the absence of the subsidy. A subsidy may incentivise a recipient to undertake an activity which provides a benefit. Alternatively, failing to provide a subsidy may lead to a worsening situation. In those cases, giving a subsidy may be needed simply to maintain the status quo. The status quo is not the baseline but the situation that would have happened in the absence of subsidy.

Example: a farmer may have received subsidies for several years to maintain the quality of soil. If a public authority wants to replace this subsidy, the baseline for assessing behaviour change is what would have happened in the absence of the subsidy. In this case, it may be that the farmer would not maintain the soil quality.

2.4.2 Business as usual costs

Subsidies should not normally compensate business as usual costs. This includes those typical ongoing costs which are related to the normal day-to-day running of the agricultural business, facility, or project.

Examples of business as usual costs:

contributing towards the costs of fertiliser
covering electricity and water usage costs in intensive poultry farming
paying for the upkeep of essential fences or walls between fields

There may be cases where covering the business as usual costs can be justified where the expenditure is directly linked to the scheme or subsidy’s policy objective.

Example: a subsidy used to support the increased engagement of disadvantaged workers, in a broader range of activities, across a farm business.

2.4.3 Identifying recipients to exclude

Subsidies should not be given to any group of recipients whose economic behaviour is unlikely to change as a result. Where reasonable, you must design your subsidy to exclude such groups of recipients, where they can be identified in advance.

Case study relating to Assessment Framework Step 2

The Edge Habitat Subsidy Scheme (EHS)

Baseline for assessing behaviour change

The first step that the public authority takes is to determine the baseline for assessing change by asking, in the absence of EHS what would happen?

Research shows that in the absence of any subsidy, most farmers are not leaving field margins that comply with the requirements set out in Assessment Framework Step 3. The prevailing market incentive is to farm the margins and use any margins that exist for walking and driving on.

Bringing about the behaviour change

The next step to consider is how the subsidy will change the behaviour of recipients to achieve the policy objective.

Further analysis suggests that paying for the creation of the new field margins, as well as for their maintenance, would result in economic behaviour change among a large proportion of farmers.

The public authority designs EHS to contain the following conditions, which encourage an increase in biodiversity:

define minimum width for the margins
define the frequency and method for cutting the field margins
restrict access to prevent interference from pedestrians and vehicles
require certain types of wildflowers to be sown

The analysis shows that the introduction of EHS would lead to certain estimated number of hectares of land in aggregate being set aside to improve biodiversity.

There may be some farmers already maintaining field margins that comply with the conditions above. The public authority includes a requirement for a farm inspection at the point that EHS is applied for. Where the inspection determines that a recipient’s behaviour is unlikely to change as a result of EHS, the recipient will be excluded.

Additionally, where a recipient is required to create and maintain field margins under the agreement of a separate scheme or by law, they will not be able to claim EHS.

Business as usual costs

The public authority:

believes that maintaining these field margins would be considered a business as usual cost
believes the maintenance of these field margins is directly connected to achieving the specific policy objective of increasing biodiversity
decides that an ongoing payment to cover this business as usual cost is justified

Case study relating to Assessment Framework Step 2

The Remote Farming Scheme (RFS)

Baseline for assessing behaviour change

The first step that the public authority takes is to determine the baseline for assessing change by asking, in the absence of RFS what would happen?

The public authority gathers evidence from a range of different stakeholders (including the potential recipients, farming interest groups and affected third parties). The research shows that, in the absence of any subsidy, a large proportion of remote farmers in the area will not be able to continue operating. This financial unsustainability will lead to high rates of land abandonment.

Bringing about the behaviour change

The next step to consider is how the subsidy will change the behaviour of recipients to achieve the policy objective.

The behaviour change that RFS incentivises is continued farming in an area that otherwise would not be farmed (maintaining the status quo). Subsidising remote farmers so that they can continue operating supports the policy objective. If remote farmers went out of business this would increase inequality by making individual farmers worse off, and this could have wider adverse consequences given the contribution of farming to the economy and society of the disadvantaged region.

Business as usual costs

The public authority then considers whether RFS will cover business as usual costs. RFS does not specify what the subsidy money must be used for. It will be given to remote farmers, similar to direct payments under the EU Common Agricultural Policy. This means it is not possible to make sure the recipient will not use the subsidy to cover business as usual costs.

The public authority justifies this because the subsidy is designed specifically to keep the business in operation. This is the desired behaviour change and is necessary to achieve the subsidy’s equity rationale.

2.5 Assessment Framework Step 3 (Principles B & F) – reducing distortive impacts

Your subsidy must be designed to minimise any negative effects on competition and investment within the UK domestic market.

Where negative effects are predicted you must demonstrate that:

you have done all you reasonably can to reduce the risk
further reduction would harm the subsidy’s ability to achieve the policy objective

You should consider the following characteristics of the subsidy, to help minimise any negative effects on competition and investment within the UK domestic market.

2.5.1 Method for providing the subsidy

Subsidies can be given in many different ways, including:

grants
loans
equity investment
loan guarantees
tax breaks
the provision of products or services at below-market prices

Some of these are less likely to distort domestic competition or investment, or international trade or investment, than others. If you act in a way more similar to a rational private operator on the market (closer to the Commercial Market Operator principle), the recipient is likely to derive a smaller economic advantage, and the subsidy is likely to be less distortive.

Example: a public authority that provides a loan to purchase farm machinery, close to commercial interest rates, is less likely to distort the market than giving a grant for the same amount.

2.5.2 The range and selection of recipients

A subsidy that is accessible to only a few recipients is more likely to be distortive than a subsidy that is accessible to a broader range and larger volume of recipients. You could consider including a selection process that includes an element of competition. For example, you could select recipients based on which require the smallest subsidy or can best demonstrate that they can achieve the policy objective.

Example: a subsidy’s policy objective is to address a social inequity, namely that minorities are under-represented in farming. The subsidy will pay farmers to engage with people from under-represented groups through different activities. Some examples could be farm open days, practical demonstrations of farming methods and educational seminars at schools.

The public authority could invite the farmers to submit applications for a subsidy and make it clear it is a competitive process. This means subsidies will be allocated to those applicants who provide good evidence to demonstrate the most effective use of the subsidy to achieve the policy objective.

2.5.3 Size of the subsidy

You should consider the subsidy’s size both in absolute and relative terms. How does the size of the subsidy compare to the size of the recipient, their costs, and the value of the market of the affected product or services. Smaller subsidies are less likely to be distortive. The larger the subsidy relative to the size of the enterprise, the more likely it is to be unduly distortive. A smaller scale farm is more likely to be impacted by the subsidy in a way that leads to excessive market distortion, than a larger farming enterprise in receipt of the same value subsidy.

Where appropriate, you should use cost-modelling to determine the subsidy’s appropriate size. The subsidy should be just large enough to achieve the behaviour change required. The level of cost-modelling you undertake should depend on the size and the distortive potential of the subsidy.

If appropriate, when you design a scheme, you could offer different proportional amounts of subsidies or payment rates to different types of recipients. This would be based on transparent criteria. The giving of a proportional limited subsidy is, within the context of WTO’s subsidy control obligations, equivalent to subsidies covering income foregone plus costs.

Example: many farmers and land managers have trees on their land that are ancillary to the main use of the land. The trees provide necessary support to the land’s main usage.

A public authority wants to pay arborists to visit those farmers and land managers to assess and advise them on the health and required maintenance of the trees. To make sure the size of subsidy is appropriate, the subsidy given for the visits is linked to the number of trees to be inspected.^

2.5.4 Timespan of the subsidy

You should, where possible, aim to design time-limited subsidies.

Recurring subsidies, or those with a longer timespan, are likely to cause distortion of the market for longer, compared with one-off or time-limited subsidies.

Example: the rationale for a recurring subsidy is evidenced at the start of a project or activity. Over time the rationale becomes weaker, and recipients no longer change their behaviours due to receiving the recurring subsidy.

Example: potential new entrants to farming notice that established farm businesses are receiving recurring funding from subsidies that are not available to the new entrant. The prospect of competing against these established businesses may deter potential new entrants.

Example: a farmer receiving a recurring subsidy may choose to remain in the market when it is rational to exit. This is because the farmer expects to continue to receive recurring subsidies.

Example: a public authority forecasts that the risk of flooding from a river in their area will increase with greater adverse impacts over the coming years. Flooding of low-lying agricultural land and housing along the river’s path is expected. The public authority designs a subsidy to pay farmers, whose land adjoins the river. The subsidy is to create large soil bunds to act as a barrier to mitigate flood risk. It will have a long timespan as the integrity of the bunds must be periodically inspected. Also, repairs will be needed because they erode over time.

2.5.5 Type of costs covered

A one-off payment that covers a project’s initial investment or start-up costs is likely to be less distortive than payments for ongoing day-to-day business expenses. It also reduces the risk of continuing to fund uneconomic or obsolete projects.

2.5.6 Performance criteria

You can include clear performance criteria to improve a subsidy’s design. This can help to make sure a subsidy is targeted toward achieving its policy objective.

When you do this, you will need to set out:

the performance criteria
how to obtain the necessary information
who will conduct the performance evaluations and when
your processes for dealing with disputes
consequences for the recipient if they fail to achieve the performance criteria

2.5.7 Ringfencing

To help make sure a subsidy is targeted, and minimise the risk of negative distorting effects, consider limiting the activities or projects the subsidy can be used for. This can also help prevent the cross-subsidisation of other areas of a recipient’s business.

Example: a public authority designs a subsidy with the policy objective to reduce greenhouse gas emissions from livestock farming. One recipient is an enterprise that farms livestock, but also produces topsoil for sale to the public. The recipient uses part of this subsidy to fund the topsoil side of the business. The recipient invests in new machinery that improves productivity and reduces greenhouse gas emissions through improved efficiency.

Although greenhouse gas emissions are being reduced, a different part of the enterprise’s business is being cross-subsidised. The potential distortive effects in relation to topsoil production have not been accounted for. To prevent cross-subsidisation, the public authority could include a requirement within the subsidy agreement. For example, subsidy funds must be spent on greenhouse gas reducing activities and projects directly related to livestock farming.

2.5.8 Monitoring and evaluation

Where appropriate you should plan to have periodic reviews for any subsidies with long timespans. The reviews should evaluate whether the subsidy continues to meet the policy objective and identify any distortions to competition or investment within the UK, or international trade and investment.

2.5.9 Subsidy races

A subsidy race occurs when two or more public authorities compete to attract investments. This can lead to competing public authorities repeatedly seeking to outbid one another. It can affect the size of the subsidy offered. There may also be a risk of the subsidy not complying with Principle B, which states that a subsidy must be proportionate and limited to what is necessary. To reduce this risk, you should assess whether another public authority offers a subsidy for the same or similar investment, and whether these investments are mutually exclusive.

If this is the case you should:

do a more extensive analysis of the subsidy’s impacts (the counterfactual of where the investment would be located in the absence of the subsidy)
consider whether competing offers from different parts of the UK have increased the size of the subsidy from the original offer, and whether the subsidy can still be justified as being proportionate
consider the relative levels of disadvantage of the other areas competing for investment

Case study relating to Assessment Framework Step 3

The Edge Habitat Scheme (EHS)

The public authority carries out an assessment of the subsidy to determine the negative effects on competition and investment within the UK domestic market. The assessment considers the following characteristics of the subsidy, which are thought to be the most relevant.

Method for providing the subsidy

As explained in assessment framework step 1, the creation of field margins will not provide direct economic benefit to the recipient. It will take some of their land out of production. Also, improving biodiversity will have a benefit for wider society.
To make it beneficial for farmers to change their behaviour, the public authority considers a grant to be the best method for providing the subsidy.

The range and selection of recipients

The public authority intends to make EHS available to farmers within its reference area. Livestock farmers will be excluded from the scheme as livestock are likely to interfere with the habitats that these field margins create. Fencing off the margins to prevent interference could have the negative consequence of denying wild animals access to the fields. The public authority does not include a selection process as it wants as many farmers as possible to take part in the scheme.

The size of the subsidy

The amount of subsidy given to each recipient will depend on the amount of land given over to field margins. It is likely that larger enterprises with larger fields will receive larger subsidy. However, they will also be removing more of their land from production.

The public authority considers two questions: *- how should payment rates be calculated? * should there be a limit for maximum field margin width

The public authority carries out a simple cost model to determine the payment rates for EHS. It considers linking the type of crop grown in the field at the time of payment to the level of payment. The public authority decides against this because it could incentivise recipients to grow more expensive crops in those fields. Growing these crops may be sub-optimal for the soil type or climate, or the farmer may be inexperienced cultivating the crops. For many reasons, this could be distortive.

The public authority also considers linking payment to the crop being grown in the field at the time of initial application for EHS, but due to crop rotation this may be unfair.

Instead, the public authority requires farmers to show what crops they have historically grown in their fields. It then works out the average amount the farmer could make by farming the field margins.

The public authority then sets payment rates that are slightly lower than this average. This encourages farmers to set aside land for field margins in their less productive fields, which reduces the impact caused by land taken out of food production. The public authority also sets maximum widths for field margins, proportionate to the size of the field. This limits subsidy size and prevents entire fields being taken out of food production.

The timespan of the subsidy
Maintenance payments will be made annually. The subsidy agreement will require the recipient to maintain the field margins for the entire year after receiving payment.
The timespan of the subsidy is five years. This will provide sufficient time to discover whether the field margins are having a positive effect on biodiversity, while providing greater confidence for farm planning. When the subsidy is coming to an end, the public authority can review its effectiveness. It can then decide whether or not to create a new replacement subsidy for field margins.

The public authority recognises that EHS is a recurring subsidy, and that this may distort the market. However, it considers that the payment rates are low enough that any market distortion would be minor. Farmers wishing to leave the market are unlikely to remain in farming just for the EHS payments. Also, new entrants are unlikely to be deterred from entering the market.

Performance criteria

The public authority includes several requirements within the subsidy agreement. The field margins cannot be:

driven on
used as paths by farm staff
sprayed with insecticides
weeded (unless invasive species are discovered).

To enforce this, public authority officials will carry out a certain number of visits each year. Failure to comply with the requirements will result in fines, with future payments being reduced or scrapped.

The public authority considers setting biodiversity targets but decides against this. If the requirements in the subsidy agreement are met, the payment will be given. Public authorities will assess whether biodiversity has increased against EHS as a whole or within a particular geographical area, rather than on an individual recipient basis.

Monitoring and evaluation

Working with environmental experts, the public authority sets up biodiversity targets and periodic reviews to measure progress over the next three, five and ten years. The purpose is to evaluate how effective the EHS is in achieving its specific policy objective.

Failure to achieve the proposed targets may result in EHS being discontinued. These targets are reviewed yearly to account for changes to climate, the wider environmental situation, and other possible schemes that may be introduced.

The public authority also carries out visits to monitor compliance with the requirements of the subsidy agreement.

Case study relating to Assessment Framework Step 3

The Remote Farming Scheme (RFS)

The public authority carries out an assessment of the subsidy to determine the negative effects on competition and investment within the UK domestic market. The assessment considers the following characteristics of the subsidy, which are thought to be the most relevant.

Method for providing the subsidy

The public authority determines that regional disadvantage within their reference area, will require sustained and long-term action to address. The main purpose of RFS is simply to keep struggling farmer enterprises viable.

A rational private operator on the market is extremely unlikely to invest in these remote farms. The public authority therefore decides that a grant is the best method for providing subsidy.

The range and selection of recipients

The purpose of RFS is to help farmers who face geographical challenges on their land specifically to address regional inequality. For this reason, the public authority chooses to make RFS only available to those areas it determines are disadvantaged.

Also, the public authority carries out individual checks to exclude recipients who will not change their economic behaviour as a result of receiving the subsidy. The public authority decides which recipients are checked, and what these checks look like, based on what it believes to be reasonable.

For example, it may decide to investigate the financial situation of recipients who are within a disadvantaged area, but who have had a turnover over a certain level in the last three years.

Similarly, the public authority may want to investigate whether enterprises of a certain size operating in the area, such as large multinational enterprises, would have their economic behaviour changed by RFS.

Size of the subsidy

To work out the subsidy’s appropriate size, the public authority consults a range of experts. They analyse the negative impacts on farm productivity and profit of different features that are present on remote farms. The public authority uses this analysis to categorise the land in remote areas and determine the amount that remote farmers can receive through RFS.

For example: a remote farmer applying for RFS is located on land with several geographical challenges. These include extreme relief slopes, and wind-speeds capable of causing soil erosion. The severity of these geographical features is graded from A to F. The farmer then receives payment for their productive land that is affected. The amount of payment depends on the severity grading.

The amounts given to farmers under RFS are designed to be proportionate to achieve the policy objective. The purpose is to address regional inequality by levelling the playing field between remote and non-remote farmers.

To avoid giving an unfair advantage to one group over another, the public authority includes certain requirements and mechanisms.

These include, for example:

land must be productive and actively farmed to be eligible for compensation
progressive reduction applied to payment rates, as the amount of land that is claimed for increases

The timespan of the subsidy, and monitoring and evaluation

The timespan of the subsidy will be set for a certain number of years. At the end of this period, the public authority will review how effective the subsidy was in achieving it’s specific policy objective. It will also consider the continuing validity of the equity rationale. The public authority will then decide whether or not to create a replacement subsidy. This will prevent a situation where an area loses its disadvantaged status, but recipients continue to receive RFS subsidy because the agreement has a long timespan. The public authority also carries out visits to monitor compliance with the requirements of the subsidy agreement.

Ringfencing

Although RFS does not dictate what the subsidy must be used for, the public authority includes a requirement in the subsidy agreement that recipients can only use the funds for agriculture. The public authority gives some broad examples of expenditure that would fall within this definition, but the recipient must justify, if challenged, that they are using the funds appropriately.

2.6 Assessment Framework Step 4 (Principle G) – the balancing exercise

You should now have assessed your subsidy against Principles A, B, C, D, E and F, and have some understanding of the likely benefits and negative effects.

The final assessment is a balancing exercise. Using available evidence, you must decide whether the benefits outweigh the negative effects.

You should consider:

the benefits, only as they relate to the specific policy objective
the negative effects, particularly in relation to competition and investment within the UK and in relation to international trade and investment
the size of the benefits and the negative effects
the likelihood of these benefits and negative effects occurring

You should only consider benefits related to the specific policy objective, but all relevant negative effects should be considered. These may include impacts on climate change and carbon emissions, as well as geographical and distributional impacts.

To reach a decision, you will need to exercise judgement as it is not always feasible to quantify all the benefits and negative effects. You may need to consider qualitative as well as quantitative evidence.

The level of effort that you spend when you quantify the benefits and costs, should correspond with the possible distortive effects of your subsidy and the degree to which the benefits and costs are evenly balanced.

For further guidance on geographical and distributional impacts and schemes, read 3.100 to 3.103 in the subsidy control statutory guidance.

Case study relating to Assessment Framework Step 4

The Edge Habitat Subsidy Scheme (EHS)

Finally, the public authority must carry out a balancing exercise. The purpose is to establish that the beneficial effects of EHS toward achieving its specific policy objective (providing a public good) outweigh any negative effects. This includes, in particular, any negative effects on competition or investment within the UK and on international trade or investment.

The benefits

Through analysis, it is predicted that, as a result of EHS, x hectares of new habitat and wildlife corridors will be created in the public authority’s area of control. This will help to increase the populations of y and z species by x%, while providing a range of other environmental benefits.

Negative effects

Some minor distortion to competition is expected. Farmers with low productivity will have more incentive to join the scheme. This is because the payment they receive is more likely to exceed their expected return on farming their field margins. It is likely to cause distortion of competition, but payment rates have been designed to reduce this.

Some land used to farm food is also likely to be taken out of production. The negative effects from this are mitigated through subsidy design. The scheme will only incentivise less productive land to be given over to field margins.

Conclusion

The amounts of subsidy to be given to any one recipient will be low, and the subsidy has been designed to keep amounts relative to the size of the recipient. So, the public authority considers that possible negative effects of EHS within the UK will be low. For the same reasons it concludes that negative effects on international trade or investment will be incidental. The public authority determines that the beneficial effects of EHS toward its specific policy objective outweigh any negative effects.

Case study relating to Assessment Framework Step 4

The Remote Farming Scheme (RFS)

Finally, the public authority must carry out a balancing exercise. The purpose is to establish that the beneficial effects of RFS towards achieving its specific policy objective (reducing regional inequality) outweigh any negative effects. This includes, in particular, any negative effects on competition and investment within the UK and on international trade and investment.

The benefits

The financial assistance of the RFS is confined to areas that face regional inequality. By helping farms in these areas that face geographical challenges, RFS allows these farms to remain operational and competitive. Providing income to farmers and farm workers in remote areas can create wider benefits in the region, such as strengthened local supply chains and increased consumer spending in local businesses. Failing to provide support through RFS may lead to remote farms going out of business, increased unemployment, and greater poverty in already deprived areas.

Negative effects

RFS may allow remote farmers to stay in the market when the rational behaviour would be to leave. Although this will produce some distortion, it is expected to be minor. Remote farms facing severe geographical challenges are, by their nature, likely to be less productive than non-remote farms. RFS may allow remote farmers to offer the goods that they do produce at competitive price but will not go so far as to undercut non-remote farmers.

Conclusion

RFS is designed to address, but not exceed, the negative economic costs of regional inequality. Remote farmers will still need to pursue productivity and innovation improvements, which will not be directly subsidised by RFS, to remain competitive.

The public authority considers that the possible negative effects of RFS within the UK will be low. The risk of negative distortion to international investment and trade is also considered to be minimal.

The public authority determines that the beneficial effects of RFS toward achieving its specific policy objective outweigh any negative effects.

2.7 Defining when a subsidy scheme is made

The date a scheme is made should be the date on which the scheme’s rules were formally confirmed and put into operation. This might be, for example, when you announce an invitation for expressions of interest to be submitted for a particular fund. It could also be the date that secondary legislation, that sets out a scheme’s parameters, came into force.

Question 3

3.  Energy and environment principles

Accepted Answer

As well as being assessed against the subsidy control principles of Schedule 1 of the Act, subsidies and schemes in relation to energy or the environment must be assessed against the further Energy and Environment (E&E) principles of Schedule 2.

3.1 When the E&E principles apply

The E&E principles only apply where the subsidy’s specific policy objective, or one of its other objectives, relates to energy or the environment, or both.

You will need to assess against the E&E principles if, during your assessment of Principle A and Principle G, you are considering a reduction in environmental harm.

Example: a scheme has two policy objectives; to improve the natural environment within an area and to encourage the public to visit the area. This scheme would be in scope of the Schedule 2 E&E principles because at least one of the policy objectives relates to environment.

If the subsidy has only incidental benefits relating to energy or the environment, that are not related to the subsidy’s specific policy objective, assessment against the Schedule 2 E&E principles is not required.

3.2 Assessment against the E&E principles

If you need to assess a subsidy against the E&E principles, you still need to do an assessment against the subsidy control principles. A subsidy relating to energy or the environment must satisfy both sets of principles.

If the proposed subsidy relates to the environment but not energy, then it is likely that E&E Principles A and B will be relevant for the purpose of assessment. The other principles are unlikely to be relevant (including Principle H).

Principle A - aim of subsidies in relation to energy and environment

This principle requires that all subsidies, in relation to energy and environment, aim to incentivise the recipient to increase the level of environmental protection, compared to the level that would be achieved in the absence of the subsidy.

The term environmental protection is not defined in the Act and you may take any reasonable approach as a public authority. It is useful to consider the definition of environmental protection set out in section 45 of the Environment Act 2021.

It is defined as:

protection of the natural environment from the effects of human activity
protection of people from the effects of human activity on the natural environment
maintenance, restoration or enhancement of the natural environment
monitoring, assessing, considering or reporting on these ways of protecting the environment

The level of protection may decrease over time as long as it is increased from what it would have been in the absence of the subsidy.

Principle B - subsidies must not relieve recipients from liabilities as a polluter

This principle, also known as ‘polluter pays’, requires the party causing the pollution to bear the cost of that pollution, rather than those who suffer its effects or wider society.

If you grant subsidies in relation to energy and environment, you are advised to include a clear statement about this in the scheme or subsidy’s terms. Make it clear that receipt of the subsidy does not relieve the recipient from any liabilities arising from their responsibilities as a polluter under relevant environmental legislation.

Example: a farmer has poor vehicle maintenance procedures, leading to a major oil leak and land contamination. Under E&E Principle B, a public authority could not give the farmer a subsidy designed to pay for remediation of the land. The farmer caused the pollution and under the polluter pays principle, the farmer should pay for remediation.

Principle H - subsidies for the decarbonisation of emissions linked to industrial activities

This principle requires that subsidies for the decarbonisation of emissions linked to industrial activities in the UK, shall achieve an overall reduction in greenhouse gas emissions. It also requires subsidies to reduce the emissions directly resulting from the industrial activities.

Emissions from agriculture and agricultural land management are not related to industrial activity and so are not within the scope of this principle.

Question 4

4.  Minimal Financial Assistance

Accepted Answer

Minimal Financial Assistance (MFA) allows low value subsidies to be given to enterprises quickly. These subsidies do not have to comply with the majority of the Act’s requirements and do not need to be assessed against the principles. That is because subsidies given under MFA are very unlikely to have any appreciable distortive impacts. However, their details do need to be uploaded to the subsidy transparency database where the subsidy is for more than £100,000.

There are two prohibitions that apply to all subsidies related to goods, including to MFA:

the prohibition on giving subsidies that are contingent upon export performance
the prohibition on domestic content

For further guidance on prohibitions and conditions read chapter 5 of the subsidy control statutory guidance.

MFA is subject to cumulation rules:
A recipient can receive up to £315,000 of subsidies, under the terms of MFA, over the applicable three-year period (the current financial year and the two preceding financial years). Once an enterprise has received a total of £315,000 of subsidies under MFA, the enterprise is no longer eligible to receive further subsidies under MFA.

There is no agriculture-specific MFA, unlike the agriculture-specific de minimis under the EU’s Common Agricultural Policy (CAP). This means that under the Act, the £315,000 threshold can be used up by non-agriculture as well as by agriculture subsidies.

4.1 The MFA process for a public authority

You need to provide recipients of subsidies under MFA with a notification that includes:

that the subsidy is given under MFA
the value of the subsidy
a request for written confirmation from the recipient that receiving the subsidy will not cause them to exceed the MFA threshold

When you’ve received the confirmation you requested from the recipient, you can award the subsidy. You will also need to provide the recipient with an MFA confirmation, which is a written statement that confirms:

the subsidy is given as MFA
the date on which the subsidy is given
the gross value amount of the subsidy

You can decide the most appropriate way to provide the recipient with the MFA notification and confirmation.

For example, you could choose to use one of the following or a different method:

email
an online automated process
a form

You are also encouraged to establish whether the recipient is, or is likely to be, in breach of their MFA allowance threshold if they accept a subsidy under MFA.

4.2 Responsibilities for recipients under MFA

Recipients who receive a subsidy under MFA, must provide you with written confirmation that the amount they will receive under the subsidy will not cause them to exceed their £315,000 threshold.

When recipients receive a subsidy under MFA, they must keep a record of the following information for three years from the date they receive the subsidy:

each subsidy that they have received under MFA
the date on which it was given
the total value of the subsidy

Recipients who receive subsidies from a range of public authorities are responsible for accurate record keeping, to make sure they are not in breach of their MFA agreements.

If a subsidy is incorrectly given under MFA, because the recipient’s threshold had been exceeded, it could be challenged. This is because it does not comply with the Act’s subsidy control requirements. It could result in the need to recover the subsidy from the recipient.

4.3 When to use MFA

All subsidies given under MFA, from all public authorities and for all sectors, will count toward a recipient’s MFA threshold. If subsidies that could comply with the subsidy control principles are instead given as MFA, the threshold may quickly be reached. The recipient may receive less subsidy this way than they otherwise could have received. Also, this may negatively impact the potential to receive subsidy as MFA during an emergency.

Example of how using MFA could limit the amount of subsidy a recipient can receive

In this example, a public authority wants to give three separate subsidies to a recipient.

The total amount of these subsidies over the applicable period is:

Subsidy A - £500,000 - has been assessed as compliant against the subsidy control requirements.

Subsidy B - £300,000 - has not been assessed against the subsidy control requirements but would be compliant if assessed.

Subsidy C - £200,000 - has not been assessed against the subsidy control requirements and would not be compliant if assessed.

Now consider these two different scenarios in which you could give these subsidies to the recipient.

Scenario One

Subsidy A - assessed and given under subsidy control requirements, the recipient can receive £500,000.

Subsidy B - assessed and given under subsidy control requirements, the recipient can receive £300,000.

Subsidy C – given as MFA, the recipient can receive £200,000.

Total amount given to recipient over applicable period is £1,000,000, with £115,000 of MFA allowance remaining.

Scenario Two

Subsidy A - assessed and given under subsidy control requirements, the recipient can receive £500,000.

Subsidy B – given as MFA, the recipient can receive £300,000.

Subsidy C – given as MFA, the recipient can only receive £15,000

Total amount given to recipient over applicable period is £815,000, with £0 of MFA allowance remaining.

Conclusion

By giving Subsidy B as MFA in Scenario Two, despite it being able to comply with the subsidy control principles, the amount of Subsidy C that the recipient can receive has been reduced.

4.4 De minimis aid and UK-EU Trade and Cooperation Agreement small amounts subsidies

Any aid given on or after 31 December 2020 but before 4 January 2023:

under the EU State aid de minimis regulations
given as small amounts of financial assistance under the UK–EU Trade and Cooperation Agreement

will count toward a recipient’s cumulative £315,000 MFA allowance over the applicable three-year period.

For further guidance on Minimal Financial Assistance read chapter 7 of the subsidy control statutory guidance.

Question 5

5.  Transparency and reporting requirements

Accepted Answer

When you create or modify a scheme or subsidy, you must comply with the following obligations related to transparency and reporting:

the World Trade Organisation (WTO) Agreement on Agriculture (AoA) where the support being given is within scope of the AoA The WTO Agreement on Agriculture (Domestic Support) Regulations 2020 require you to provide details of your scheme or subsidy to the UK Coordinating Body before you adopt it
the Act requires you to upload and maintain details of your scheme or subsidy to a publicly accessible subsidy transparency database (the database)

You need to comply with the transparency and reporting obligations for both the WTO and the Act. This guidance will only explain transparency and reporting requirements under the Act.

To see what products are covered under the AoA, read Annex 1 of the World Trade Organisation Agreement on Agriculture.

5.1 After the decision to make the scheme or give the subsidy has been confirmed

You will need to decide on and justify the date you confirmed your decision to make the scheme or subsidy.

Once you’ve confirmed your decision to make the scheme or subsidy, you must upload details of the scheme or subsidy to the subsidy transparency database within three months (unless an exemption in part 3 of the Act applies. This requirement applies regardless of the amount of subsidy given or the form the subsidy or scheme takes. Individual subsidies given out under a scheme do not need to be uploaded unless they exceed £100,000. This includes subsidies given out under MFA schemes.

Read section 34 of the Act and the information listed in the Subsidy control (Subsidy Database Information Requirements) regulations 2022 for details of the information you need to upload.

For a subsidy given out as a tax measure, you must upload the information to the database within one year of the tax declaration.

Exempt schemes may not need to comply with the Act’s transparency and reporting obligations. However, they are still subject to the WTO’s reporting and transparency obligations.

5.2 Uploading information early to the database

The sooner that you upload the required details to the database, the sooner you will have legal certainty that your scheme or subsidy cannot be challenged on subsidy control grounds. Subsidy schemes may be uploaded to the database before any subsidy is given under them (as long as the scheme itself has been made).

5.3 After uploading information to the database

You must maintain all entries on the subsidy control database for six years from the date of upload. If you modify a scheme or subsidy that has already been uploaded, you must upload the modification details within three months of the date of the modification. If you modify a subsidy given as a tax measure, you must upload the details within one year of the modification.

Question 6

6.  Legacy schemes, withdrawal agreement subsidies, and permitted modifications

Accepted Answer

6.1. Legacy schemes

Schemes made before the Act came into force are referred to as legacy schemes.

Legacy schemes, and the subsidies given under them, can continue indefinitely without the need to comply with the Act’s requirements if provided for under the original terms of the scheme.

If a subsidy is given under a legacy scheme and is in scope of the WTO Agreement on Agriculture, the Act’s subsidy control transparency and reporting requirements do not apply, unless the subsidy is modified. Legacy subsidies related to trade in fish and fish products, or the audio-visual sector, are similarly exempt. For other subsidies, including agriculture related, transparency requirements do apply.

Legacy schemes that are not covered by the provisions of Part IV or Annex 2 of the World Trade Organisation Agreement on Agriculture, must comply with the transparency requirements of the Act.

6.2 Permitted modifications

In general, if you modify a scheme that’s already been made, it will be considered to be the making of a new scheme. If you modify a subsidy that’s already been given, it will be considered the giving of a new subsidy. This means you must make sure the modified scheme or subsidy complies with the Act’s requirements.

However, there are a number of permitted modifications that can be made without a scheme or subsidy being classed as new. Permitted modifications can be made both to legacy subsidies and schemes, and to subsidies and schemes that were originally given or made under the Act.

6.2.1 Permitted modification 1: increasing the budget of a scheme or subsidy up to 25%

If you increase a scheme or subsidy’s budget above 25% of its original budget, it will become subject to the Act’s requirements. The 25% limit is cumulative, you may increase the budget by 25% at once or by varying percentages of the original budget over time.

Where a scheme or subsidy’s budget is provided as a range of potential awards, the threshold is calculated as being above 25% of the maximum potential award.

Some schemes and subsidies may have a mechanism that allows its budget to increase each year. If this is the case, the baseline figure for calculating the 25% increase is the financial year in which the permitted modification is being made, on top of the built-in increase.

Example: an agro-forestry scheme made at the start of the 2012 financial year has a budget of £2,500,000. It has a mechanism within its original design that allows the budget to increase in line with inflation each year.

At the start of the 2023 financial year, the budget is £3,460,000. The public authority modifies the scheme halfway through the 2023 financial year, increasing the budget by 10%. The original budget for the purpose of the permitted modification is £3,460,000. The new budget will be £3,806,000.

Next year the public authority wants to increase the budget by 10% again. Assuming that the inflationary rise was 5%, the new budget will be: the original budget of £3,460,000 with the increase of 5% due to inflation, plus a combined increase of 20% of the original budget will be £4,325,000.

6.2.2 Permitted modification 2: extending a scheme for up to six years

You are allowed to extend a scheme’s lifespan by up to six years from the scheme’s original end date. Extensions that are longer than this are subject to the Act’s requirements.

Example: an income support scheme that starts in the 2023 financial year, with an original end date in the 2028 financial year, is extended by up to six years to the 2034 financial year. This is a permitted modification.

6.2.3 Permitted modification 3: administrative in nature

You are allowed to make modifications to a scheme or subsidy that are merely administrative in nature. You will need to determine whether the modification is administrative in nature.

Modifications that introduce substantive changes to a scheme or subsidy are subject to the Act’s requirements. To determine whether a proposed change is just administrative, rather than substantive, consider the degree to which the change alters the original terms of the scheme or subsidy.

Example: administrative modifications would include, for example, a change to a scheme’s name, or if the administration of a scheme passed from one public authority to another. You would need to update this change on the subsidy transparency database but would not need to assess against the principles.

After a scheme’s initial launch, you propose to add another condition to the receipt of a subsidy; recipients must undertake a soil test. You would need to update this change on the subsidy transparency database but would not need to assess against the principles.^

6.2.4 Permitted modification 4: made to a legacy scheme or subsidy

This applies only to modifications that are consistent with the terms of the subsidy or scheme that were in effect before 4 January 2023.

6.2.5 Permitted modification 5: modifications to withdrawal agreement schemes or subsidies made in connection to the withdrawal of the UK from the European Union

Withdrawal agreement schemes or subsidies are those to which Article 138 of the EU withdrawal agreement applies.

They may be permitted modifications in the following two scenarios:

where these modifications are made in accordance with the terms of the scheme or subsidy and all the legal requirements effective before the Act came into force
where they are intended to remedy any failure of a scheme or subsidy to operate effectively, or any deficiencies related to a scheme or subsidy, that arise due to the withdrawal of the UK from the European Union

Question 7

7.  Subsidies or Schemes of Interest and Subsidies or Schemes of Particular Interest

Accepted Answer

Read this section if you plan to give multi-million pound subsidies or create a scheme that gives multiple million-pound subsidies.

The two specific categories of subsidy with the greatest potential to cause distortive effects are Subsidies or Schemes of Interest (SSoI) and Subsidies or Schemes of Particular Interest (SSoPI).

Subsidies of Particular Interest are subsidies that amount to over £10 million in a single payment or are over £1 million and cumulate, with other related subsidies, over three financial years to more than £10 million. A scheme that allows such subsidies to be given is a Scheme of Particular Interest.

Subsidies of Interest are subsidies of between £5 million and £10 million that are not Subsidies of Particular Interest. A scheme that allows such subsidies to be given is a Scheme of Interest.

If you are making an SSoPI you must make a referral to the Competition and Markets Authority. If you are making a SSoI then you may make a voluntary referral to the Competition and Markets Authority.

If you have questions on whether your subsidy or scheme is SSoI or SSoPI you will need to read chapter 10 of the subsidy control statutory guidance.

Question 8

8:  Payments in a crisis

Accepted Answer

There may be exceptional occasions when an unforeseen incident or natural event will cause disruption to the agriculture sector. You may need to provide subsidies quickly to make sure an industry or area continues to be viable. The Act includes several mechanisms to make sure these payments are made.

There are some exemptions where a scheme or subsidy will not need to comply with the principles (for example natural disasters and other exceptional circumstances or occurrences). This is explained in section 2 of this guidance. You must decide whether the urgency and severity of a particular exceptional circumstance or occurrence means that an assessment against the principles is not feasible or appropriate, and contact the UK Government.

8.1 Exemptions

Scenarios where exemptions may apply.

8.1.1 Minimal Financial Assistance (MFA)

This exemption is likely to apply to many crisis schemes. The MFA exemption will only apply if the cumulative support of payments to individual enterprises does not exceed £315,000 over the elapsed part of the current financial year and two previous financial years.

You will need to apply the other procedural requirements for MFA. It is likely that a crisis will need to be short so that the MFA limit is not reached. However, you should consider the potential for the MFA limit to be reached. This could either be through the crisis payments you are considering, or by cumulating with other subsidies to the same recipient before or after you give the crisis payment.

For more information on Minimal Financial Assistance read section 4 of this guidance.

8.1.2 Natural disasters and other exceptional circumstances

A natural disaster includes:

earthquakes
avalanches
landslides
floods
wildfires of natural origin

These occurrences can have a significant economic impact or cost, and potentially a serious or ongoing effect on local services and infrastructure.

Other exceptional circumstances, like a major disease outbreak, are extremely rare and include situations that are unexpected or cannot be easily planned for. Although it is likely this type of exceptional circumstance will have some economic impact, the event will have other impacts. You should consider whether the exceptional occurrence has non-economic effects, such as the slaughter of animals or loss of arable land. To use this exemption, the exceptional occurrence should not only have an economic effect.

You may fully compensate a recipient for the damage caused by a natural disaster, or other exceptional circumstance, that the recipient cannot be expected to adequately plan for. It should not, as a rule, provide additional funding over and above the costs of repairing the damage.

An exemption under this section can only apply if a notice is published by the Secretary of State, declaring that the exemption applies in respect of a particular natural disaster or other exceptional occurrence. If you consider that it may apply, you should contact the UK Government as soon as possible. When using this exemption, the transparency requirements of the Act apply as normal.

For more information on transparency and reporting requirements, read section 5 of this guidance.

8.1.3 National or global economic emergencies

National or global economic emergencies are rare. Circumstances are unexpected and are likely to entail sudden and severe disruption to global economic trading relationships, or systemic risks to critical national economic or financial infrastructure.

This may include, for example, threats to essential supply chains (caused by, for example, workforce absences during the Covid-19 pandemic in 2020).

An economic recession, by itself, or a global economic downturn more generally, are not national or global economic emergencies, where they are within the range of a cycle of normal economic fluctuations.

Subsidies given in relation to national or global economic emergencies remain subject to subsidy control requirements more generally. They include assessment against the subsidy control principles and the transparency requirements. However, provided that the subsidy is given on a temporary basis, the prohibitions and restrictions under the Act do not apply to a subsidy given for this purpose.

For further guidance on payments in crisis, read chapter 8 of the subsidy control statutory guidance.

Similar to an exemption for a natural disaster, a subsidy of this kind can only be given if a notice is published by the Secretary of State stating that the exemption applies due to a particular emergency. If you consider that it may apply, you should contact the UK Government as soon as possible.

Case Study: Emergency Support Scheme

A large-scale disease outbreak, contained to a 20-mile radius, has destroyed a large proportion of farm crops and grazing area. Favourable soil conditions have highly concentrated one particular agriculture sector in this area and there is now a potential threat to the viability of that sector.

A public body wishes to provide a grant to cover some of the losses to make sure that businesses can continue to be viable following the clean-up operation.

The purpose of the scheme is to support businesses through the clean-up and enable them to continue trading. This money is required urgently to prevent defaults on loans and contracts, eroding the supply chains of businesses not within the affected area.

It was determined that streamlining the process to make sure support was received in a timely manner was vital, so the public authority looks at the Subsidy Control Act exemptions.

As the event meets the definition of ‘other exceptional circumstances’ within the ’natural disaster or other exceptional circumstances’ exemption, the public authority contacts the subsidy control teams in Defra and BEIS in the UK Government. The BEIS Secretary of State agrees that an exceptional circumstance has occurred and publishes a notice to that effect.

The public authority can set the scheme up once this has been declared and will have to make sure that all payments made to businesses are added to the database.

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1. Determine whether the support is a subsidy

1.1 Limb A - are you a public authority and is the financial assistance being given from public resources?

1.2 Limb B - does the financial assistance confer an economic benefit on an enterprise?

1.3 Limb C - is the financial assistance specific?

1.4 Limb D - is the financial assistance capable of influencing competition and investment in the UK, or trade and investment between the UK and another country or territory, or both?

2. Design subsidy to ensure compliance with the subsidy control principles

2.1 Subsidy control principles overview

2.1.1 Assess a subsidy against the principles using the assessment framework

2.2 Case studies

2.3 Assessment Framework Step 1 (Principles A & E) – pursues a specific policy objective and is an appropriate policy instrument

2.3.1 Establish whether a market failure exists

2.3.2. Demonstrate the existence of externalities

2.3.3 Demonstrate that there are public goods

2.3.4 Demonstrate that there is asymmetric or imperfect information

2.3.5 Demonstrate that there is an equity concern

2.3.6 Demonstrate that a subsidy is the appropriate policy tool

2.4 Assessment Framework Step 2 (Principles C & D) – designed to bring about change in economic behaviour over and above what would have occurred anyway

2.4.1 Baseline for assessing behaviour change

2.4.2 Business as usual costs

2.4.3 Identifying recipients to exclude

2.5 Assessment Framework Step 3 (Principles B & F) – reducing distortive impacts

2.5.1 Method for providing the subsidy

2.5.2 The range and selection of recipients

2.5.3 Size of the subsidy

2.5.4 Timespan of the subsidy

2.5.5 Type of costs covered

2.5.6 Performance criteria

2.5.7 Ringfencing

2.5.8 Monitoring and evaluation

2.5.9 Subsidy races

2.6 Assessment Framework Step 4 (Principle G) – the balancing exercise

2.7 Defining when a subsidy scheme is made

3. Energy and environment principles

3.1 When the E&E principles apply

3.2 Assessment against the E&E principles

4. Minimal Financial Assistance

4.1 The MFA process for a public authority

4.2 Responsibilities for recipients under MFA

4.3 When to use MFA

4.4 De minimis aid and UK-EU Trade and Cooperation Agreement small amounts subsidies

5. Transparency and reporting requirements

5.1 After the decision to make the scheme or give the subsidy has been confirmed

5.2 Uploading information early to the database

5.3 After uploading information to the database

6. Legacy schemes, withdrawal agreement subsidies, and permitted modifications

6.1. Legacy schemes

6.2 Permitted modifications

6.2.1 Permitted modification 1: increasing the budget of a scheme or subsidy up to 25%

6.2.2 Permitted modification 2: extending a scheme for up to six years

6.2.3 Permitted modification 3: administrative in nature

6.2.4 Permitted modification 4: made to a legacy scheme or subsidy

6.2.5 Permitted modification 5: modifications to withdrawal agreement schemes or subsidies made in connection to the withdrawal of the UK from the European Union

7. Subsidies or Schemes of Interest and Subsidies or Schemes of Particular Interest

8: Payments in a crisis

8.1 Exemptions

8.1.1 Minimal Financial Assistance (MFA)

8.1.2 Natural disasters and other exceptional circumstances

8.1.3 National or global economic emergencies

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