State Aid

State aid regulations govern publically funded assistance (including advice and grants) provided to economic undertakings or enterprises.

Voluntary and community organisations and social enterprises need to have an understanding of these regulations since the definition of economic undertakings is broad and failure to comply can lead to the recovery of payments and potential bankruptcy.     

What is state aid?

Four Tests

To constitute a state aid, support must meet all four of the following criteria:

1. Be with state resources

Support can be direct financial payments like a development grant, or publicly funded support, like free or subsidised consultancy.

Definitions of what counts as public rather than private support revolve around government influence. As well as obvious government funding, it includes Lottery grants and European Structural Funds, like ERDF. 

2. Favour a particular undertaking or the production of certain goods

Definitions of what constitutes an economic undertaking are broad. Social enterprises are clearly included, as are any elements of charities or other regeneration organisations that are involved in trading activity. The key is the nature of the activity rather than the form of the organisation. What a business does with its profits – whether it distributes them to shareholders, uses them for social aims, or ploughs them back into the company, makes no difference in state aid terms. 

This test looks at if the support in question is open to all. It is very unlikely that regeneration based support can be shown to be open to all undertakings throughout the country, as there are usually geographical and sectoral targets to public regeneration support.

3. Distort or threaten to distort competition

In the field of regeneration, the temptation to define activity as non-economic is clear, as this won’t always be the primary purpose for the action. However, there are substantial limits to what constitutes non-economic.  All statutory services, including national education, national security and social security are all defined as non-economic.  So are the non-economic activities of charities and relief aid organisations – but when such organisations do engage in economic activities, the rules do apply, so this is not a generic opt out clause. 

However, it is important to note that public purchasing of activity or services at commercial rates do not constitute state aid, as the market has not been distorted. So Service Level Agreements with a local authority are not state aid. It is important that a tendering or other such process can be shown to have delivered an agreement at commercial rates.

4. Affect Intra Community trade

In other words affect trade between European Union member states – which the majority of regeneration activity would not be expected to do. However, this is not the case – as it has only to be shown that there is the potential to affect trade, rather than it actually being likely.

There are some activities defined as ‘local’, which are considered not to affect intra state trade. Where delivered by small enterprises, these are:

  • repair of personal and household goods
  • health and social work
  • other community, social and personal service activities
  • social services
  • construction
  • sale, maintenance and repair of motor vehicles and fuel
  • hotels and restaurants.

De minimis

The other way of showing the aid doesn’t affect intra state trade is through scale of support. This is the de minimis rule. It is probably the most commonly understood way of ensuring compliance with state aid regulations, and the first port of call for many organisations.

Currently, it allows for a cumulative total of €200,000 (November 2012) of state aid support to an undertaking over a rolling three year period. Undertakings need to keep a record of such payments, so they don’t go over the limit. The euro exchange rate to use is that published in the first Official Journal of the year (1 January), which will be valid for the whole year.

Remember that this €200,000 is a count of state aid, not necessarily all public support to an organisation, which may include funding of non-economic activity.

If you’ve looked at the four checks and found that even one of them does not apply to your particular circumstances, you aren’t in receipt of state aid. It will be worth putting a note on file to say these checks were made and how and why you reached this finding.

The Department for Business, Innovation & Skills (BIS) State Aid branch has lead responsibility within UK government for co-ordination and development of State Aid policy.

State Aid Guide: a beginners' guide (June 2010) provides further information about state aid rules.

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