Research, Development and Innovation under the Subsidy Control Act 2023

The importance of research and development to the UK economy is highlighted by the UK Government's announcement in March 2022 of £39.8 billion funding between 2022-2025 for research and development activities, its largest ever, to help it deliver its 'Innovation Strategy'. Subsidy control is one of the ways that control how grant funding can be delivered to prevent the restriction of competition and ensure the Government complies with its trade agreements.

When Do the Subsidy Control Rules Apply?

The UK's domestic subsidy control regime has been in force since January 2023. It promises a more flexible approach to subsidies and provides some welcome certainty after the interim regime of the last two years.

Subsidy control will need to be considered by universities, other higher education institutions and research organisations (HEIs) receiving grant funding for research, development or innovation projects (RD&I), entering into collaborations with commercial partners or carrying out commercial activities.

The risk of a subsidy arises where HEIs receive any form of financial assistance from public funds which confers an unfair selective advantage and distorts trade or investment within the UK or between the UK and the EU.

If an HEI is carrying out primary activities of teaching and education, independent research and development or the transfer of knowledge on a not-for-profit basis, these are treated as non-commercial activities and so the HEI will likely not be subject to the subsidy control rules, which only apply where an organisation is acting in a commercial capacity.

Increasingly however, universities may be acting in a commercial capacity through the provision of contract research services or consultancy services, renting out space, equipment or laboratories, providing workshops or training or commercialising intellectual property rights or acting through commercial subsidies.  Grant funding for these commercial activities can give rise to a subsidy, unless they are very limited and ancillary in nature.

Universities may also be at risk of flowing down subsidies to commercial partners who receive funding under a collaboration agreement or sub-contractor agreement and who stand to benefit from intellectual property rights or the development and innovation of products or services.

The Streamlined Subsidy Scheme

Normally where a potential subsidy is identified, the HEI and granting authority are required to carry out an individual compatibility assessment of the subsidy against a number of principles to identify if the subsidy is permitted or not. For higher value subsidies in excess of £10million there is a system of referral to the Subsidy Advice Unit of the Competition and Markets Authority. The Act introduces a system of mandatory referral for subsidies of over £10m given on a one-off or cumulative basis. These are known as Subsidies or Schemes or Particular Importance. Lower thresholds apply to some sensitive sectors.

The streamlined subsidy scheme for research, development and innovation provides a simplified route to compliance with the Act. It operates in a similar way to the previous general block exemption under the EU State aid rules (GBER), in that it provides a safe harbour for subsidies which meet certain conditions without the need for further self-assessment. Whilst there may be similarities between the two systems, it is important to note that the guidance on the application of the scheme states that it is not intended to be a replacement to GBER.

Indeed the scope of the published scheme is more limited both in terms of the scope of research and development categories covered and values compared with both GBER and earlier drafts of the streamlined scheme.

The scheme runs for a period of seven years to 4 January 2029.

What Is Covered By the Scheme?

There are three categories of permitted subsidies:

• Feasibility studies - This covers the costs of feasibility studies related to research, development and innovation.
• Industrial research and experimental development projects -This covers personnel costs for conducting research and project operating costs, costs of instruments and equipment, buildings and land, related to the development of new or improving existing products, processes or services.
• SME support - This covers the costs of innovation support and advisory services such as consultancy services to assist with development of a new product or service, provision of office space, testing processes, obtaining patent protection and equipment. This is a new category which did not appear in previous versions of the streamlined scheme and addresses the previous gap of innovation clusters and innovation support.

Comparison with GBER

While the scope of the three categories is broadly similar to the research, development and innovation provisions under the GBER, there are some important differences:

• The limits are significantly lower. For example, the maximum amount of subsidy for industrial research is £3 million compared with £20 million aid under GBER. Please see the table below which sets out a comparison of the maximum amount of funding and subsidy ratios (maximum percentage of funding available to project value) for the two schemes.
• There are limits on claims for eligible costs for land and equipment. This means HEIs may face high upfront costs, but the amounts recoverable will be limited to costs incurred during the project. Where equipment has any residual value beyond the project the residual value must be deducted from the eligible project costs.

However HEIs can cumulate separate subsidies for feasibility studies, industrial research and experimental development provided that the costs are different. The £3m cap is also calculated on an individual beneficiary basis rather than for the total costs of the project.

Like GBER, there are some general conditions attached to the use of the streamlined scheme. Key conditions to note are:

• where HEIs are working in collaboration with international partners or large multi-national organisations, the research, development and innovation activities must be carried out in the UK and any intellectual property rights generated can only be exploited in the UK to ensure that public funding is used for the benefit of the UK.
• any subsidy with a value of £100,000 or above must be notified on the subsidy control database.

What Is Not Covered by the Scheme?

There some notable omissions to the scope of the streamlined scheme. From a university's perspective the main omission is in relation to research infrastructures. Whilst research infrastructure such as buildings are covered where they are necessary to carry out industrial or experimental research, as mentioned above eligible costs are limited to £3 million. This means that where research infrastructure is for mixed use, the streamlined scheme may not be the most suitable route and HEIs will need to consider alternative subsidy compliant routes.

Category 2 research projects do not cover fundamental research. This is unlikely to be an issue for HEIs where they are acting in a non-commercial capacity. However it creates uncertainty for HEIs working in collaboration with commercial partners. The rationale for this in the Statutory Guidance on the UK's subsidy control regime is that commercial organisations carrying out fundamental research may fall outside the scope of the subsidy control rules on the basis they are carrying out non commercial activities to the extent the research cannot be applied to the production or sale of goods. However care will need to be taken to ensure that the allocation of any intellectual property rights generated are allocated on a fair and reasonable basis.

While the introduction of support for SMEs engaging in innovation clusters is welcomed, the streamlined scheme does not extend to HEIs, as it does under GBER, where they are operating such schemes. HEIs should take note as they may they well be treated as carrying out commercial activities where they offer innovation support services.

Conclusion

The streamlined scheme represents a change in approach and a few surprises!

In practice, the scheme is likely to be useful for universities working with commercial partners on specific research projects receiving grant funding for feasibility and subsequent research. It will require a change in culture to ensure that any subsidies over £100,000 to specific parties are published on the subsidy control database. As yet, there are only a handful of subsidies registered.

However it will not be suitable for larger scale projects which will require individual analysis of activities and assessment against the subsidy control principles.

For more information or for specialist advice on subsidy control, please contact Stephanie Rickard in our Commercial team on 0117 314 5675, or complete the form below.