State aid

State aid is where a public authority gives support (in any form) to an undertaking engaged in economic activity, giving it an advantage it wouldn’t otherwise have had. When support is given out by (national/devolved/local) governments (or any organisation that is controlled by the state, eg. National Lottery) to an undertaking engaged in economic activity there are 5 tests to apply.

Is the funding:

1. granted by the state or through state resources?
2. providing an advantage the undertaking wouldn’t otherwise have?
3. selective – going to certain undertakings rather than others?
4. distorting, or threatening to distort, competition?
5. affecting trade between EU member states?

If you’ve answered ‘no’ to any of the tests, then it is unlikely that the support is state aid. You will need to keep a record of how you reached your decision for 10 years in case the European Commission (EC) decides to investigate.

If you answered ‘yes’ to all the questions then the support is likely to be state aid.

State aid is illegal

State aid may provide an advantage to businesses at the expense of its rivals, can mean loss-making businesses remain in the market longer than they should and that other businesses do not enter the market. This can ultimately mean higher prices for consumers. By controlling state aid the EC can ensure a level playing field for businesses across the European Economic Area, a dynamic and effective single market and reduced prices for consumers.

Exemptions

The EC accepts that under certain circumstances the state needs to intervene and so has published a set of guidelines, frameworks and regulations, known as the state aid rules. These set out the conditions under which public authorities can award state aid. These exemptions comprise notification, de minimis, general block exemption regulation schemes (GBER), services of general economic interest, and horizontal and sectoral regulations.

Consequences

If the EC finds funding to be illegal or incompatible, then the undertaking that has received the aid may have to pay it back with compound interest.

State aid on GOV.UK