State Aid - your questions answered

What is State Aid?
State Aid refers to the distortion of competition between any organisations involved in economic activity across member states of the European Union. State Aid rules state that no governmental body can give financial or competitive advantage to entities within their member state unless certain exemptions apply. As a distributor of public funds, investments made by The Social Investment Business are subject to the guidelines and limitations surrounding aid.

I doubt anyone from Europe is doing the same thing as my organisation. Why do we need to worry about this?
At present the bar for assessing potential has been set quite low and so the question we have to ask is not ‘would a European entity be in competition?’ but ‘could a European entity set up a business in competition?’ The competitive context doesn’t have to exist it just has to have the potential to exist.

How do you determine if State Aid applies to my case?
When a request for a loan or grant comes in, we first apply the State Aid tests which ask about the presence of economic activity and whether there is potential for European competition. Because the bar for potential competition has been set quite low and because groups have to be engaging or about to engage in enterprise there is almost always economic activity in eligible applications to The Social Investment Business.

Next we try to understand what exemptions can be applied to the case. There are a handful of exemptions that we may be able to apply. Each case has to be looked at individually but if an exemption applies it usually means that previous aid is not a consideration and there will be no limitations on an investment from The Social Investment Business from an aid perspective.

If no exemptions apply, we must structure our investment to fall under the de minimis exemption which states that no one organisation can receive more that €200,000 of aid in a three year period.  Your offer letter from The Social Investment Business will state how much of your investment is considered aid and you may be asked to share this documentation with future public funders.

I’ve heard that organisations who are delivering statutory services can get an exemption. Isn’t everything the third sector does statutory?
There is a context in which aid to support statutory services such as hospitals and schools can be considered exempt. In the State Aid sense ‘statutory’ refers to services for beneficiaries who have ‘looked after’ status from the state. For example:

• current prisoners
• schooling for under 16s
• wards of state

Because statutory is sometimes used colloquially to mean public services of any kind, there can be some confusion. While many services that our investees are involved in are of public benefit, they are not part of a legal obligation of the state to provide them. Therefore, we cannot use the exemption. While we are familiar with most of the statutory areas, if there is any question we ask the local authority or other relevant body to verify that the service involves a statutory obligation.

I’ve heard you can get £500,000 at any one time. Is that correct?
The deminimis exemption sets the three year maximum for aid at €200,000 per organisation. Until December 2010, there is a temporary framework in place to allow up to €500,000 over a three year period. That amount is total aid and cannot be cumulated with deminimis aid. These thresholds are in place for each company with a registered number. For example, companies that are part of a group can each have their own aid threshold. State Aid should always be calculated and expressed in Euros.

How is this amount calculated?
In terms of our investment in your organisation, aid is made up of any grant we offer as well as the value of any ‘discounts’ on our loans such as a favourable interest rate (as compared to State Aid base rates set by the European Union) and capital or interest holidays. Your Investment Officer will perform this calculation using current base rates and the terms of your investment.

What will you need to ask for to assess State Aid on my case?
If we determine that State Aid applies to your case, we will need to know how much aid you have received from public bodies in the last three financial years. When you receive State Aid, the relevant public body will issue a statement documenting the aid associated with each individual investment in your organization and/or any exemptions involved. We will ask to see any such letters you have received as well as an accounting of all publically funded support in the last three years. It is extremely important that you report this support accurately and we will ask you to make a declaration to that effect.

What constitutes ‘publically funded support’?
It includes non-exempt grants, subsidies or financial considerations from the public purse or any other organisation disbursing funds on behalf of the state. This includes but is not limited to Lottery funding, Arts Council funding, Section 64 funding, grants from the Local Authority, business support from a public entity such as Business Link, tax rebates not available to all businesses and all investments from The Social Investment Business.

Why can’t I just find out my State Aid status before applying for funding?
We can really only understand the context of your business activities once you’ve applied. We will need to look at the nature of your trading activities to determine if any exemptions currently apply or were applicable in the past. We may need to look at your previous sources of public support. This involves sharing your financial records with your Investment Officer and some diligence work on their part. You could always seek legal advice if you have questions about the status of your organisation before you apply and we may encourage you to get independent advice in some situations.

What do I do if I disagree with the assessment of aid on my case?
There is at present a lack of case law on State Aid and so every decision represents our assessment of the case against the most up to date guidelines set by the European Union and the Department of Business innovations and Skills (BIS) here in the UK. As a steward of public funds and an engaged investor, it is our duty to follow those guidelines in order to protect your organisation and ours from a State Aid challenge. If you do not understand the decision taken regarding aid on your case, you should ask for clarification from your Investment Officer. If at any time something in your situation changes or a new piece of information comes to light, you should inform us immediately.

If my organisation has received income from a contract with a Local Authority is that State Aid?
No. If you had a contract or a service level agreement for work preformed and this was commissioned through a competitive procurement process, it is not aid it is earned income.

I’ve never had to think about State Aid before and always thought my organisation’s activities were exempt because of the social benefit. Why do I have to worry about it now?
State Aid is a new topic to the majority of our customers. We typically begin to work with organisations at the point where they might have previously been involved in solely charitable activities (generally not subject to aid rules as not ‘economic enough’ to pass the State Aid tests) but are interested in expanding their activities into commercial ones.

As they move into trading, their activities become subject to the rules of European competition, even though they have not yet begun to think of themselves as a commercial actor. Past grants and subsidies that were initially considered ‘legal’ may sometimes become relevant to the aid assessment.

What would happen if my organisation received ‘illegal’ aid?
The distributor of funds may be required to ‘claw back’ the monies and any interest from the recipient.

Where can I learn more about State Aid? You can consult the Department of Business Innovation and Skills (BIS) which is the authority on State Aid within the UK. Their State Aid reference page can be found on their website.