Business Support Programmes and Subsidy Control

Business Support Programmes are regeneration programmes focusing on Small and Medium Sized Enterprises (SMEs). They can include provision of consultancy advice, access to facilities and services for growth and diversification programmes, including start-up support. This provision can be limited geographically or directed to specific activities such as advance manufacturing or decarbonisation. It may even focus on a specific sector such as automation, biotech or digital creativity. Business Support Programmes can also involve financing of SMEs, for instance to obtain consultancy advice and know-how from third parties, upskill their own workforce or invest in their own capital assets. 

Sometimes Business Support Programmes involve an apex company providing quality assurance support to its own supply chain. More often they involve regeneration through increase in employment and skills. In either case, where public funds are used to finance Business Support Programmes, subsidy may be involved which would need to be self-assessed by the funder as reasonable, unless of course an exemption from doing so applies. A paradigm for delivery of such programmes is a State body providing a grant to a specialist service provider, who is then tasked by the grant funding agreement to deliver prescribed support to the SMEs.

Direct subsidy to intermediary

State funds are often given to a specialist service provider, such as a not for profit entity like a charity, trade association or university to deliver a Business Support Programme.  They are called Intermediaries because they are expected to be instruments in the delivery of public funding objectives to the ultimate intended beneficiaries – the SMEs. For example a local authority may provide a grant to an environmental charity to use its expertise in providing know-how to SMEs engaged in decarbonising their manufacturing processes.   A subsidy arises when an activity which is normally offered in the open market is financed by the State. The argument is that the person conducting that activity receives an unfair advantage to its competitors, and hence distorts the market by (say) cutting prices. Using this analysis, the charity in our scenario above is receiving State funds to conduct an activity offered in the open market ie. business consultancy advice. It follows that if it receives an advantage from the grant, it may be treated as receiving a subsidy.

Even as an Intermediary delivering services to third party SMEs, the charity could itself be held to receive an advantage if it:

• uses some of the grant for its own benefit, for instance develop its own training module on decarbonisation of manufacturing systems that it could sell commercially; or

• charges SMEs a full commercial rate for the consultancy services it provides them, thereby essentially getting paid twice for one service (the grant and the fee).

In these circumstances, despite the charity being a not for profit and otherwise non-commercial organisation, it may nevertheless be held to receive a subsidy since it is being State funded to deliver an activity which is delivered by (say) management consultants on a commercial basis.

In all other instances the charity as Intermediary should be able to show that the grant is applied solely towards the delivery of services to the SMEs. This can be done by segregating all transactions relating to the programme from its other activities through use of an accounting and reporting sub-routine, such as a cost or investment centre in management accounting terms. These segregated transactions can include the costs of delivering the service, including the charity’s internal administration costs allocated to it, provided all costs are benchmarked to market values and hence reasonable. Any fees received from SMEs as a contribution towards the cost (bearing in mind that based on (b) above SMEs would not in this scenario be paying the full commercial rate for the service) would be deducted from the costs of delivery and the grant applied to the difference. The grant is therefore directed to the present value of the projected net cost of the programme over its duration.

If the grant exceeds the net cost of the programme there would be an overcompensation to the charity to the amount of that excess which would effectively be an advantage to the charity. This overcompensation may potentially be a subsidy to it. However if the grant is specifically set to compensate only for the net cost of the programme over its duration, and nothing more, then subsidy to the Intermediary may be avoided, since the benefit of the grant is now treated as passing to the SMEs instead who in turn receive the advantage. 

Indirect subsidy to SMES

In the example above, the SMEs are the intended ultimate beneficiaries of the local authority grant, meaning that the Intermediary is treated as no more than a conduit for the State funds, provided it can be shown as not receiving any advantage itself. The benefit to the SME is the market value of the service it receives, less any contribution it makes in terms of discounted fees paid to the Intermediary, if at all. Where market value cannot be ascertained reliably, for instance where there is no comparative non-subsidised programme, the market bench marked overall cost of delivery as apportioned by the Intermediary among the SMEs may be used. Assessing this can often be a complex and time-consuming exercise for the Intermediary, but if it has experience of delivery of previous European Structural Funds programmes of this nature, the basic principles in assessing resources and costs set out therein may presumably be used to simplify the task.

So the SME is the eventual subsidy recipient, on the assumption that as a business it would be conducting an activity conducted in the open market. The grant would be regarded as an indirect subsidy to the SME, as it is not the immediate recipient. Indirect subsidies, such as free or discounted services or access to facilities are as much brought within Subsidy Control as direct grants. This means that in our example above, the local authority must self-assess the Business Support Programme as reasonable unless the benefit to the SMEs can be brought within an exemption.

Given the grant is now split into several SME recipients, the exemptions for smaller subsidies set out in the Minimal Financial Assistance, Service of Public Economic Interest Assistance and Streamlined Subsidy Schemes are easier to apply. Business Support Programmes therefore are a convenient means to exempt a subsidy from a detailed reasonableness analysis by splitting the subsidy into several SME recipients and applying exemptions to them.

The SME may receive benefits in different forms from the same programme, for instance free diagnostic and growth consultancy advice matched with a grant or sub-commercial loan to help it implement that advice. Where an exemption is applied, it should be applied to the sum total of the benefits in all forms from the same programme, less any contribution it makes towards services it receives (if any). In some cases, the SME may even have to consider subsidy from other unrelated programmes as well and should be in a position to declare the same accurately to the Intermediary.

Business financing

Business Support Programmes now often include Business Financing. Business Support Programmes typically include advice, services and access to facilities.

Business Financing on the other hand could include provisions of grants or sub-commercial loans to the SMEs. The Intermediary here may involve both a consultant with expertise in the area covered by the Business Support Programme and a specialist high risk and high growth financier. The approach to Subsidy Control nevertheless mirrors the considerations described above noting that the provision of financial assistance by a private or third sector Intermediary can often be regarded as a market activity in competition with banks and apexes of supply chains for instance. That said, if the benefits are shown to be passed on to SMEs, there is no advantage to the Intermediary and hence no subsidy to it.

The Intermediary in these cases is likely to be, or involve, a commercial operator like a bank or venture capitalist fund manager, whether or not it is State owned. Particular care will be needed in such cases in applying accounting segregation so that it can represent itself as a genuine conduit for the State funds to the ultimate intended SME beneficiaries. For a profit-making entity to be operating a not-for profit programme by showing the State support is applied entirely towards the cost of supporting third parties, it is normally prudent that a subsidiary legal entity is used exclusively for the delivery of the programme. This provides added transparency and reduces the risk of State funds cross-subsidising other commercial activities carried out by the Intermediary.

If instead of a grant, the State itself invests in the Intermediary, for instance through equity, loans or guarantees to a fund, then it would also need to consider if it is indirectly subsidising a co-investor by subordinating its returns to it. In the unlikely event that the State’s intervention is comparable to that of a private sector investor, the entire programme may be taken out of Subsidy Control consideration altogether under the Commercial Market Operator principle. For more information on financing through State loans and guarantees and Subsidy Control please refer to Loans and Guarantees - Subsidy Control | Hill Dickinson

Conclusion

Business Support Programmes, whether they include financing or not, tend to involve the passage of State support through an Intermediary to SMEs. If properly accounted for, the Intermediary is treated as not receiving an advantage (and hence no subsidy) on the basis that it is acting as a mere conduit in passing the benefit on to the ultimate intended beneficiaries, the SMEs. The SMEs in turn receive the benefit, which may be an actual cash grant or the interest differential in a commercial loan, or more often the value of a service or access to facilities that it receives on preferential terms to what it would otherwise receive on the open market. Once the benefit from all support measures are added together and their total value ascertained, the application of an exemption can be considered and is often administered by the Intermediary on behalf of the State body funding the programme.

Naturally there can be variations on the above theme, but the closer the structure to this paradigm, the more transparently and easily it may be addressed in Subsidy Control terms. Where an entity acting as an Intermediary has several delivery partners, they can be treated collectively as the Intermediary provided they each follow the careful segregated accounting process described above.  

This article covers an area which is complex and hence not a substitute for detailed legal and accountancy advice. For further information or guidance please contact the author.