Peter Parker, Partner at Wrigleys Solicitors LLP, shares his view on the funding landscape post October 2019, including some common misconceptions as well as opportunities.
With only a couple of months to go until (the next) Brexit day, charities and social enterprises are becoming increasingly concerned with what the funding and trading landscape will look like once Britain is no longer part of the EU. Here, I look at the likely applications of state aid rules in the UK post Brexit (including as a consequence of a "no deal” Brexit), and share some FAQs based on queries I’ve received over the past few months.
What is state aid?
State aid is any advantage granted by public authorities through state resources to any organisations that could potentially distort competition and trade in the European Union. It's unlawful to give state aid, unless it's been approved by the European Commission (EC), or an exemption applies.
To be state aid, a measure needs to have ALL of the following features:
- There has been an intervention, by the state or through state resources.
- The intervention gives an organisation undertaking an economic activity, an advantage on a selective basis.
- Competition has been distorted or the aid has the potential to distort competition.
- The intervention is likely to affect trade between member states.
It's important to remember that this is a four-stage test. It doesn’t simply follow that a grant given by a public authority is state aid. It’s possible that it doesn’t distort trade in the EU, but it highlights the importance of having a good understanding of the market in which an aid recipient operates - at local, national and pan-European levels.
Frequently asked questions
I've received an increasing number of queries and comments from charities & social enterprises over the past few months relating to state aid. Here's a selection:
"If we're a charity, we're unaffected by state aid because we don't undertake economic activities."
It's perfectly possible for a charity to undertake activities which are caught by state aid rules. Economic activity means putting goods or services on a market. It's not necessary to make a profit to be engaged in economic activity. If others in the market offer the same goods or services, it's an economic activity.
For example, a museum charity that charges admission fees may be undertaking an economic activity, regardless of whether its principal trading activity furthers the charity’s primary purpose. (Particularly if the charges cover the true operating costs of the museum rather than being a notional charge).
"If we're providing services to a local authority (LA) and the LA has satisfied its procurement obligations, state aid is not an issue."
The EC's general rule is that the award of a public contract will not amount to state aid, provided that it's in compliance with the EU procurement rules (introduced in the UK through The Public Contracts Regulations 2015 (PCR)). But there are exceptions to this rule.
PCR has the concept of "above threshold contracts" and "below threshold contracts" (by reference to the value of the contract), over which certain procurement obligations apply. "Above threshold contracts" require full procurement in accordance with PCR. Contracts below that threshold do not require full procurement. However, contracts from local authorities for more than £25,000 (the so called "below threshold contracts"), for which a local authority has advertised a contract award opportunity, must be published on something called Contracts Finder.
This means, that notwithstanding that an LA might have satisfied its procurement obligations in relation to a particular contract (e.g. in advertising if it’s a "below threshold" contract), if there has been no competition for the services it may be difficult to demonstrate that a normal market price has been reached. If this is the case, state aid rules may still apply to that contract.
"De minimis aid is any state aid up to EUR 200,000 we've received over the past 3 years."
De Minimis Aid is small amounts of aid which have a negligible impact on trade and competition and does not require EC approval. This is a particularly popular exemption among smaller charities who may receive state aid, in part because it makes a generally permitted basket of state aid available, and it's easy to interpret!
The total De Minimis Aid which can be given to an organisation is €200,000 over a 3-year fiscal (accounting) period. The De Minimis Aid amount takes into account all public assistance given to a single grantee as De Minimis funding over the previous 3 fiscal years. Crucially, this means that in calculating the size of the De Minimis Aid basket available to a charity at any one time, the key question to ask is how much state aid has been given as De Minimis Aid over the current and last two fiscal periods. When receiving state aid it should have been determined at the time whether that aid would be treated as De Minimis Aid and records of that aid (and its treatment) should be kept accordingly.
You might have heard of something called SGEI De Minimis Aid. This applies where a recipient is deemed to be providing a "service of general economic interest". The permitted basket for this aid is €500,000 over a 3 year fiscal year period – which will take account of any other De Minimis Aid received during that time.
State aid and Brexit
The maintenance of state aid regulation in the UK has consistently been a mandatory pre-condition set by the EU to any arrangements post-Brexit. The UK has recognised that state aid is here to stay and that establishing the Competition and Markets Authority (CMA) as an independent regulator of state aid in the UK is a necessity. At the time of this blog, the likely steps being taken are:
- The government creating a UK-wide subsidy control framework to ensure the continuing control of anti-competitive subsidies.
- The EU state aid rules being transposed into UK domestic legislation. This will apply to all sectors; and will mirror existing block exemptions as allowed under the current rules.
- If the UK were to leave the EU with no agreement, the CMA would take over state aid regulation and its enforcement within the UK. The new regime would apply to all businesses with operations in the UK – whether UK, EU or third country based. From that point:
- UK public authorities would need to notify state aid to any undertaking, through either the block exemption or through a full notification to the CMA instead of the EC.
- Existing approvals of state aid, including block exemption approvals, would remain valid and carried over into UK law.
- Any full notifications not yet approved by the EC would be submitted to the CMA.
So what does this all mean for social sector organisations in the UK?
Social sector organisations should:
- Review what funding they have received from public sources – if the terms of that funding mention state aid, understand how it was lawfully given and document it.
- Consider the effects of state aid when receiving public funding. It’s worth asking a funder whether their funding constitutes state aid before receiving it as it may not be immediately obvious!
- Have the government's state aid manual close to hand.
The views on this page are those of Wrigleys
Wrigleys is an event partner of Charity Bank’s Road to Growth events, a series of free regional events exclusively for leaders of charities and social enterprises as part of our commitment to support the social sector.
The half-day sessions this September and October will provide insight on the state of the social sector at a time of change. Panelists will share research and insights on the challenges and opportunities that exist and give examples of how charities and social enterprises are responding.