Cheers to 20 Years of Good Causes!

It’s been 20 years since the National Lottery’s first draw back in 1994, and since then it’s Good Causes fund has been spreading cheer across the nation by investing money into projects and charities that bring communities together, preserve heritage and provide new opportunities to people of all walks of life. To highlight some of the great work the fund has done, World Lottery Club has produced an infographic with just some of the amazing causes it’s helped over the years. Please share the infographic to help spread the word!

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Law Commission recommendations on social investment

I have featured in two articles speaking about the Law Commission’s recommendations on social investment. First in the Cambridge Network’s article entitled Barriers to Social Investment are Lifted, and second in the Private Client Advisor’s article entitled Law Commission clarifies legal framework for social investment by charities.

The Big Society and State Aid – looking a gift horse in the mouth

The Government’s Big Society programme was announced with much fanfare and is intended, in part, to open up public services allowing charities and social enterprises the opportunity to undertake to provide specific services. Many charities and social enterprises will no doubt have welcomed the programme as a means of expanding the services that they provide and allowing them to reach more beneficiaries.

What has received less attention is some of the legal detail underlying The Big Society programme, which organisations undertaking these services need to be aware of. In particular, any organisation undertaking to provide a Big Society programme should be aware of the rules relating to State Aid.

What is State Aid?

State Aid is defined in the Treaty on the Functioning of the European Union as any:

“aid granted by a Member State, or through state resources in any form whatsoever, which distorts of threatens to distort competition by favouring certain undertakings or the production of certain goods.”

There are four key elements to consider from this definition:

(i) it is granted through state resources;
(ii) it favours certain undertakings;
(iii) it distorts, or threatens to distort, competition; and
(iv) it affects trade between member states.

Taking each of these in turn:

“State resources” essentially means public funding or support. It will of course include direct support, such as grants, loans, sales at below market value and purchases at above market value, but will also include indirect support, such as tax reliefs that affect the public budget.

“Favouring certain undertakings”, means providing a benefit or advantage to an undertaking, which may include public sector and not-for-profit entities. The benefit has to be available to certain undertakings only, meaning that if the benefit is freely available it will not constitute State Aid.

“Distorting competition”, or “threatening to distort competition”, means an actual or potential improvement in the position of the benefitting body in comparison to its competitors. It is worth noting that the Department for Business Innovation and Skills states that almost all selective aid will have the potential to distort competition.

“Affecting trade between member states” means that there is a potential effect on trade between member states. Again, The Department for Business Innovation and Skills states that almost any business or economic activity is capable of affecting trade between Member States. The only conceivable exceptions are where the trade only operates at a local level not close to a member state border. For example, assistance to a local hairdressers or dry-cleaners will probably not affect trade between member states.

In simple terms, State Aid is the favourable treatment of a particular organisation by a government body or department which places that organisation at a competitive advantage.

Can you give any practical examples of State Aid?

In its guidance, the Department for Business Innovation and Skills gives examples of the most obvious types of State Aid. These include where an organisation receives a direct financial benefit from a member state. For example, where a member state provides a grant to an organisation or provides it with a tax relief, which is not otherwise available to its competitors, the member state will be providing State Aid.

Less obvious examples include situations where a member state has provided consultancy advice to an organisation, where the member state has not undertaken a full competitive tender or where a member state provides free advertising on state owned television to a particular organisation. These are all examples of indirect State Aid which any charity or social enterprise, helping to deliver The Big Society programme, could receive.

Why does this matter?

State Aid is unlawful unless The European Commission provides its approval or it is otherwise covered by an exemption. This approval must be given in advance of the State Aid being given. The European Commission can order the recovery of unlawful State Aid (plus interest) from benefitting parties and this is the case even if that may then have a detrimental effect on that party.

Therefore charities and social enterprises, particularly those involved in providing public services under The Big Society programme, need to be aware of the rules relating to State Aid. The danger is that it may be alleged that, in awarding the public service and/or funding to the organisation, the government provided unlawful state aid.

We are aware that some contracts for the award of services or grants are drafted to state explicitly that the awarding party makes no warranties as to whether the award constitutes State Aid and that it will not bear any liability if a recovery is ordered. Therefore, where unlawful State Aid is later shown to have been provided, the charity bears the risk that its funding or support may be withdrawn and a reimbursement sought.

What are the exceptions to the prohibition on State Aid?

The Treaty itself declares certain types of aid as being compatible with the general prohibition although in practice these types of aid will be rare.

The Treaty also provides that the European Commission may approve certain categories of aid as being compatible with the general prohibition on State Aid. To benefit from this approval, the organisation must make an application to The European Commission in advance of the arrangement being implemented to allow it time to decide whether it constitutes unlawful State Aid and to propose up any necessary amendments to the proposal which must be implemented.

A General Block Exemption, introduced by a European regulation, provides that certain categories of aid will not constitute unlawful State Aid and more information about this can be found in guidance produced by the Department for Business Innovation and Skills.

There is also a de minimis exemption and specific rules for Services of General Economic Interest which may mean that some arrangements are exempt from the notification requirements.

Professional advisers will be able to provide more detailed advice as to whether an exemption can apply.

What can we do to avoid falling foul of the prohibition?

Since the organisation in receipt of State Aid bears the risk of that aid later being recovered or withdrawn, the organisation must consider pro-actively whether the arrangements they are involved in might amount to unlawful State Aid.

In particular, charities and social enterprises should carry out a risk assessment to establish whether they are gaining a competitive advantage because of anything being done by a public body. Is the organisation ‘crowding out’ other commercial organisations?

If, after consideration, you believe that State Aid might be an issue then further advice should be sought. An informal approach to The European Commission may be made for a view on whether the arrangement constitutes State Aid. It may also be possible to adapt the arrangement to ensure that it either fails to meet one of the four conditions or it otherwise falls within an applicable exemption.

Summary

All organisations involved in the delivery of public services should have a basic understanding of the rules relating to State Aid. This is particularly the case for charities and social enterprises involved in the delivery of The Big Society programme and hopefully this article aids that understanding. Whilst charities and social enterprises will of course be grateful of all the support they receive it is important to understand that there may be times when support crosses over to unlawful State Aid. In order to avoid more complicated problems further down the line, it would be prudent to consider the arrangement objectively and in detail from the outset in light of the prohibition on State Aid.