The Scottish Council for Voluntary Organisations is the membership organisation for Scotland's charities, voluntary organisations and social enterprises. Charity registered in Scotland SC003558. Registered office Caledonian Exchange, 19A Canning Street, Edinburgh EH3 8EG.
Defining a subsidy
What a subsidy is
A subsidy arises where a public authority provides financial assistance, given directly or indirectly from public resources, to an enterprise in a way that confers a specific economic advantage on that enterprise over other enterprises, which is capable of affecting competition or investment in the UK or internationally. This is called the ‘four-limbed test’ and is set out in the 2022 Act.
All four parts must be satisfied for financial assistance to be a subsidy.
Importantly for voluntary organisations, many of their activities (although not all) are likely to fall outwith the scope of the subsidy control regime because they will not amount to providing goods or services on a market. This will need to be considered on a case-by-case basis.
Limb A: public resources
The financial assistance is given, directly or indirectly, from public resources by a public authority.
A “public authority” includes government bodies and non-government bodies that are performing a public function. Examples include the Scottish Government and local authorities.
“Public resources” include funds awarded from public bodies, or funds derived from a public authority which are awarded through a private body (including voluntary organisations).
Limb A will therefore apply to all public sector funding provided to voluntary organisations. It does not apply to funding received from private sources.
Financial assistance may be funds, such as a grant or loan, but it may also include “in kind” assistance such as the provision or purchase of goods, services, or property (for example a let over premises) or the waiving of funds to which the public authority is otherwise entitled (for example, writing off debt).
Limb B: economic advantage
The financial assistance confers an economic advantage on one or more enterprises.
An enterprise is any person, or group of persons, under common control that is engaged in economic activity: that is, “offering goods and services on a market”. That essentially means the entity is providing something that could reasonably be bought or sold under normal commercial conditions. The most obvious example is a trading company.
The presence of competitors is not decisive. What matters is whether the activity is market-based or could reasonably be offered on a market, even if no competitors currently exist.
An organisation can be an enterprise even if it is a voluntary organisation.
If it carries out “economic activity”, it will be considered an “enterprise” under the subsidy control regime. Voluntary organisations can therefore be enterprises, irrespective of how they are legally constituted or whether they are not-for-profit, so long as (and to the extent that) they carry out activities that involve offering goods or services on a market. Consider a voluntary organisation that provides home visits for individuals with disabilities. If the voluntary organisation is funded entirely by donations then it will not be an enterprise, and if it receives a grant to support it in providing such activities, this will not be a subsidy. But if the organisation has a contractual arrangement with a public body that commissions those services for a fee then it will be an enterprise even if service users do not make any financial contribution and even though it relies on volunteers, and any grant it receives on top of that may qualify as a subsidy.
The financial assistance will provide an economic advantage where the enterprise could not have obtained the same financial assistance on ‘market terms’. A grant is a clear example of financial assistance which confers an advantage, because the recipient does not have to give the authority anything in exchange for it. Where the recipient is giving the authority something in exchange for financial assistance, the subsidy is the difference between the terms the recipient gets from the authority and the terms it could reasonably anticipate receiving from a commercial operator. Examples include public authorities selling or leasing property at less than its valuation, or offering loans at lower interest rates than those available from banks. Competitive procurement processes can help demonstrate that the terms being offered do represent ‘market’ terms.
Limb C: specificity
The financial assistance is specific. That is, an economic advantage has been provided to one (or more than one) enterprise, but not to others.
The financial assistance has to specifically benefit the recipient. This means that it cannot be open to anybody who seeks it. In practice, this applies to funding awarded on a discretionary basis – where a public authority selects certain organisations to receive funding over others (even where it is selected through a competitive process). A grant, by nature, will typically be specific to a particular recipient (or multiple identified recipients) whereas a measure such as a tax credit, which is open to any qualifying enterprise, may not be.
Limb D: effect on competition or investment
The financial assistance has, or it is capable of having, an effect on competition or investment within the UK, or trade or investment between the UK and another country or territory.
The final limb of the test is that the financial assistance must be capable of affecting competition or investment in the UK or internationally. A purely local effect on competition (e.g. within a particular town or city) is enough for the purposes of the subsidy control regime. The effect does not need to be a negative one. If the recipient of the financial assistance is an enterprise, the assistance is very likely to be capable of impacting competition.
If funding supports services that are, or could be, provided in competition with other providers or that do, or could, affect trade with others, activity by voluntary organisations may be in scope.
In summary, financial assistance must satisfy all four criteria, or limbs, in order to be considered a subsidy. If the financial assistance fails to satisfy any of the criteria, it is not a subsidy.
Example: a subsidised café lease
A voluntary organisation runs a café that sells food and drink in competition with other cafés. It benefits from a long-term lease from a local authority at below-market rent.
Why this is a subsidy
- the café offers goods and services on a market, meaning that it is an “enterprise”
- it receives an economic advantage over other enterprises because of the discounted rent offered by the council
- the below-market rent is not available to other enterprises (because it is necessarily linked to a specific premises)
- by reducing the voluntary organisation’s costs, the financial assistance may affect its ability to compete with other cafés in the area
What is not a subsidy
The UK Government’s statutory subsidy control guidance (the “Guidance”) sets out further information on particular circumstances:
- Procurement: goods and services purchased through “appropriate procurement processes at market rate” are not subsidies, because they do not confer an advantage on the recipient.
- “Non-economic” activities: financial assistance provided for “non-economic” activities (i.e. activities that are not provided on a market) will not be subsidies because they are not provided to an enterprise. For example funding for free healthcare or education, free to access cultural activities, not-for-profit research and disaster relief would all generally be outwith the scope of the subsidy control regime, because they are not likely to constitute economic activities.
The Guidance states that “where an entity is operating pursuant to a public function in relation to activities where there is no market present, the purpose will not be economic in nature.” However, “public function” is undefined by the Guidance. The Guidance does clarify that carrying out activities with the intention of benefitting the public does not itself make the activity a public function.
Example: a local food bank
Funding is provided by a local authority to a local network of food banks for the provision of emergency food, free-of-charge, to people facing financial hardship.
As the provision of free food to those in need is not an economic activity (there is no ‘market’ for giving away food), a voluntary organisation running a food bank will not be an enterprise. Accordingly, the provision of financial assistance to such a voluntary organisation is unlikely to be considered a subsidy (but it could be, for example if the organisation also does other things).
Services that are charged-for can still be “non-economic” in nature where they are simply ‘ancillary’ to other non-economic activities, particularly in situations where the revenues from such services amount to only a small portion of funding received for the activity.
Example: subsidised community art classes
As part of its tackling loneliness strategy, a local authority awards funding to a voluntary organisation to deliver community art classes for older people. A small fee is charged to participants to help cover costs of delivery.
Charging a small fee does not make the activity “economic” if its purpose is social welfare and the service is not offered on a market. In this scenario, the aim of the voluntary organisation is to tackle loneliness within a specific group, rather than offering services on the commercial ‘market’ for art classes. Again, the financial assistance is unlikely to be considered a subsidy.
Where an organisation delivers both “economic” and “non-economic” activities, the funding for “non-economic” services should be clearly ring-fenced to avoid misclassification and ensure that it cannot be used to cross-subsidise economic activities.
The Guidance provides that a ringfenced grant to a voluntary organisation for its non-economic activities (even if the voluntary organisation also provides some goods or services on the market) would not meet the subsidy test.
Some local authorities or other public authorities may mistakenly designate activities as economic and apply subsidy control rules where it is not necessary to do so.
Voluntary organisations and Third Sector Interfaces should be prepared to question the conclusions of public authorities and commissioning teams about whether an activity is economic or not.