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As Omicron numbers surge, will the UK Government offer subsidies to protect the travel and hospitality sectors?

20 December 2021

The number of people contracting coronavirus in the UK has soared in recent days as a result of the emergence of the new, more virulent Omicron variant.  In response, the UK Government has issued new advice, including advising people to reduce social contact, wherever possible. 

This has immediately had a significant impact on certain sectors of the economy, such as travel and hospitality, which have suffered a huge wave of cancellations and expected suppressed demand in the coming months.  In this article, we consider whether public funding offers a route to effectively mitigate the impact upon such sectors and how public bodies might award Covid-19 support under the new UK Subsidy Control rules in response to coronavirus. 

The Times has reported that Rishi Sunak is holding emergency talks about a State funded bailout for pubs and restaurants, which are understood to have been significantly impacted by the Government's advice to reduce social contact. At the same time the travel sector, including airlines, have approached the Government for public funding.

Does public funding protect jobs?

The first wave of Coronavirus led to a record-breaking package of public funded support for business and the roll out of vaccines.  As Thomas Pope from the Institute for Government observes in this article:

"Throughout the pandemic, the government’s approach to economic support has been consistent. Where laws in place to limit the spread of coronavirus stopped businesses from trading or limited their profitability, it has stepped in with grants and loans for businesses and furlough support to keep employees in their jobs.

Unlike in usual recessions, the businesses that have been badly affected are not simply those with bad business models and no long-term future. Instead, they are wide swathes of businesses in sectors that simply happen to be worst affected by temporary Covid restrictions. Government support during the pandemic has both alleviated the harm caused by unemployment and business failure in the short term and kept businesses intact for the recovery."

At this time, the Government has not issued laws that mandate how people interact with one another in order to reduce levels of infection.  Instead, the Government is encouraging people to change their behaviour through guidance.  However, the same rationale should apply whether the Government is using law or guidance to achieve its objectives, if the effect on certain businesses (putting jobs at risk) is effectively the same. 

It is generally accepted that there are situations that justify intervention using public funding. This ranges from interventions which help enable businesses to thrive once the challenge has passed to those which , purely from an affordability perspective mean that the government is better off stepping in (for example applying subsidies now, rather than paying unemployment benefit later).  Provided that subsidy awards can be designed so that they are sufficiently targeted and minimally disruptive, they can benefit an economy, as shown by the UK recovering more strongly than other economies in the wake of the first wave of Coronavirus.  Not all of the subsidies awarded to address the economic impact of the first wave of coronavirus were equally effective.  Indeed, some are now seen as having been wasteful and subject to fraud.  Therefore lessons should be learned from previous public funding programmes and factored into the design of new initiatives so that these are better targeted and more effective.

UK Subsidy Control compliance

Most of the first wave of Coronavirus subsidies were delivered under EU State aid law, because they happened in Spring 2020 while the UK was still within the transitional period following its exit from the EU in which EU State aid law continued to apply with full force.  This included the EU's Temporary Framework and the UK's £70bn furlough scheme (which was used to protect c.11.7m jobs).  The latter was a "no aid" measure on the basis that although it constituted financial assistance from the State to business, it was available universally across sectors, hence regarded not to provide a selective advantage to particular businesses which is necessary to qualify as a formal subsidy.

EU State aid law has been largely disapplied, with effect from 11pm 31 December 2020, although it still applies in respect of measures within the scope of Article 10 of the Northern Ireland Protocol and that are supported through EU Structural and Investment Funds.

The new UK law derives from the EU/UK Trade & Cooperation Agreement of 24 December 2020 (TCA) as implemented directly into UK law under section 29 of the European Union (Future Relationship) Act 2020,  Although the new UK law is in many ways more permissive than under EU State aid law, designing interventions arguably requires greater care.  In particular, with the exception of all but the smallest awards (which in most cases can proceed under the cover of the Minimal Financial Assistance provisions) a substantive assessment must now be carried out by the public body awarding the support and a case built up as to how the measure applies with six "Common Principles" set out at Article 366 of the EU-UK Trade and Cooperation Agreement ("TCA"). Other compliance requirements include checking whether a measure falls within any categories that are prohibited from receiving support and checking whether there is an "appreciable risk" of creating a dispute under WTO rules.

Existing routes to provide Covid-19 business support

In most cases "no aid" routes like the furlough scheme would be equally "no subsidy" under the new UK law, for essentially the same reasons as under State aid.  This means the Government could potentially choose to re-establish furlough, although the no subsidy rationale would not work if the measure was restricted only to certain sectors (as this would then be classed as a selective advantage).  In such a situation, it would be necessary to work through the other options in the TCA in order to make the intervention lawful. Similar requirements would apply to any sector-specific grant scheme.

Existing cover for the award of new Covid-19 subsidies could also be found under the 'Business Support Allowances' that were published by the Department for Business, Energy and Industrial Strategy on 4 March 2021 (but with retrospective application to 5 January).  This includes the "COVID-19 Business Grant Allowance" ("BGA") which allows up to £1,600,000 per single economic actor, provided the relevant conditions are met, as well as the COVID-19 Business Grant Special Allowance" ("BGSA") which is more restrictive (limiting itself to the notion of uncovered fixed costs), but can in theory provide further cover for awards of up to £9m, noting also that the eligibility period for the BGSA includes from 1 March 2020 up to 31 March 2022. 

The problem with the above is that many businesses will have used up their allowances under BGA and BGSA during the previous waves of coronavirus and associated lockdowns. Therefore using this route might create a situation where some businesses are unable to be saved, because they are excluded under the proposed Subsidy Control route.  

Designing new pandemic-based awards under the new UK Subsidy Control rules

The current rules are primarily based upon the TCA. This allows interventions to be made in several different ways.  The Minimal Financial Assistance provisions at Article 364(4) of the TCA operate in a similar way to the De Minimis provisions under EU State aid rules – i.e. an award may be lawful provided that a declaration is obtained confirming that the subsidy does not breach the relevant threshold.  The threshold under the Minimal Financial Assistance provision is set at 325,000 Special Drawing Rights, which equates to around £335,000 at the current conversion rate.  In many cases, relevant hospitality and travel sector businesses will have used this already, and the previous 4 March 2021 guidance refers to this.

In terms of setting up a new scheme, there are different routes under the TCA.  A light touch approach is available where support can be shown to "compensate the damage caused by natural disasters or other exceptional non-economic occurrences" under Article 364(1) of the TCA.  Although this route sounds promising, it is unlikely to provide cover for many coronavirus-related measures.  This is because although the Covid-19 pandemic has now been recognised as an "exceptional occurrence" (albeit in EU law) in most instances the funding does not compensate a specific calculated loss.  Rather it applies a proxy rate of support that is directed to enable the business to survive and rebuild.  Therefore it is not direct compensation and therefore outside this provision. 

A more open route can be found at Article 364(3) which reads "Subsidies that are granted on a temporary basis to respond to a national or global economic emergency shall be targeted, proportionate and effective in order to remedy that emergency.  Articles 367 and 374 do not apply to such subsidies".

The comparable provisions of the EU Treaty are the basis from which all previous pandemic support measures have been drawn.  This means that temporary programmes of subsidies may be justified on a short term basis provided that a checklist of requirements can be demonstrated to have been met.  This includes that there is a national or global emergency (relatively obvious in this instance) but also requires other more detailed steps to be taken, including demonstrating that the measure is targeted, proportionate and effective to remedy the issue and that each of the six common principles have been satisfied.  This is therefore the basis under which any new scheme (or an extension of an old scheme such as increasing the allowance under the BGSA) would need to come within.

This requires significant administration on the part of the public body administering the subsidy.  Businesses receiving the subsidy should wish to be assured that the necessary steps have been taken, so that they can rely on any assistance taken being safe (NB. although it is recognised that in situations of emergency businesses are likely to want whatever government assistance is available and as quickly as possible).

Standard routes for awarding UK subsidies

Other 'standard' routes available for the award of subsidies under the TCA remain available.  A measure may be justified on the basis of being a Service of Public Economic Interest under Article 365 of the TCA or against the Common Principles at Article 366 of the TCA.  Likewise, rescue and restructuring support to designated ailing or insolvent enterprises may be awarded provided the requirements of Article 367 of the TCA are met, which include being satisfied that a suitable restructuring plan is in place and that there is a strong public policy argument in favour of keeping the relevant business(es) going.  In addition, certain sectors are subject to particular rules.  This includes subsidies for air carriers and therefore such support needs to be tailored to these requirements. 

All such subsidies may be awarded by way of an individual award or through a scheme. Surprisingly, the TCA has a different challenge period for an individual award of a subsidy and under a scheme. For a standalone award the challenge period (the time during which an interested party such as a competitor may bring a judicial review action) begins at that point specific information about the award is declared on the official website.  For a scheme it is theoretically possible to initiate the challenge period at the time the scheme is set up, rather than when subsequent awards are made.  In practice though this is very difficult to achieve, because the reduced challenge period is likely to only apply if sufficient information about the scheme has been published.  Although we await case law on this point, the level of information appears to be that required to enable any interested party to determine whether they would be affected by the granting of a subsidy under the scheme and to be able to make an informed decision as to whether to bring a challenge. This appears to require very specific information about the parties receiving a subsidy under the scheme and, at the very least, the value of each subsidy. 

Finally, EU State aid rules continue to apply in certain instances, including where a measure involves the transporting of goods from Northern Ireland into the EU.  Therefore, in such instances it will be necessary to design the rules to meet the requirements of EU State aid law.  Therefore, although the situations when such law applies are now comparatively limited, it remains important to understand how to satisfy EU State aid rules.

Finding the funding

In the first year of the pandemic, from April 2020 to 2021, the Government borrowed £299bn, the highest figure since records began in 1946.  Much of this sum was directed towards meeting increased NHS costs and delivering measures to mitigate the impact on businesses. 

The Government has already agreed to accelerate scheduled payments to the Devolved Administrations so these can be directed towards tackling issues arising from the new wave of Omicron.  This includes emergency funding of £440m to Scottish Government, £270m to Welsh Government and £150m to the Northern Ireland Executive £150m.

In England, funding may well be delivered via Local Government.  The year on year settlement for Councils has just been increased by £3.5bn (or 4%) to £53.9bn, but any coronavirus business schemes are expected to be delivered through additional funding.

The Chancellor of the Exchequer was aiming to balance the budget by 2025, but may need to push this target back as a result of Omicron.

Conclusion

As Omicron cases rise there will be significant pressure upon the Government to provide support to certain sectors, whether by extending (for example) the BGSA, or by creating some form of new sector-specific scheme.  The new Subsidy Control regime does not prevent such support being provided, but public bodies need to appreciate that different steps need to be taken to achieve compliance under the new law, as against what was previously required under EU State aid law.  By meeting the requirements of Subsidy Control law public bodies can assist the businesses they are seeking to help, by ensuring that such funding is not put at risk of recovery at a later date.

Further Reading