Guidance

ESF Guidance on State Aid

Updated 17 March 2021

March 2021

Version 3

This document contains guidance on handling State Aid issues in projects involving European Union funds. The information contained within this document does not constitute legal advice. The Department for Work and Pensions does not accept any liability with regard to the use of the contents of this document. Links to Department of Business, Energy and Industrial Strategy (the Department with responsibility for State Aid policy within Whitehall) and to relevant European Union publications are provided at appropriate places in the text.

1. Introduction

State Aid rules aim to ensure fair competition and a single common market. Giving favoured treatment to some businesses would:

• harm business competitors

• risk distorting the normal competitive market

• hinder the long-term competitiveness of the Community

The European Community founding Treaty generally forbids State-funded aid that would favour certain businesses or goods production. The State Aid rules contribute to the effective functioning of the Single Market and European Union economic reform in 2 key ways:

• they prevent State Aid that would seriously distort competition – thereby helping to achieve a fair market for businesses in all Member States; and

• they allow State Aid that promotes economic development and other legitimate policy objectives, where this benefit outweighs any distortion of competition

State Aid is any advantage granted by public authorities through state resources on a selective basis to any organisations that could potentially distort competition and trade in the European Union.

2. Identifying whether State Aid is present

Not all public funding is State Aid. Only a measure which satisfies all of the conditions set out in Article 107(1) of the Treaty for the Functioning of the European Union (‘TFEU’) (set out at Schedule 1) is regarded as State Aid.

This guidance sets out a simplified method that applicants can use to identify whether their proposal contains State Aid. A more detailed, legally focussed, explanation can be found in the European Commission’s Notion of State Aid document.

A beneficiary will be considered in receipt of State Aid if it meets all of the tests set out in Steps 2 to 7 below (for example, if the answers to the questions are all ‘yes’). A beneficiary that fails 1 or more of the tests (for example the answer to any of the questions is ‘no’) will not be in receipt of State Aid.

It is unlawful to award State Aid except in accordance with the exemptions set out in guidance. Awarding unlawful State Aid will have a serious impact upon the Managing Authority’s error rate (making it possible that the funding programme will be suspended) and is likely to result in the recovery of the aid from the beneficiary (with compound interest backdated to the date of the award).

Step 1 – List all the potential beneficiaries of the proposal

The first step of the assessment involves making a list of all the groups of organisations and people which may benefit from the proposed project.

The State Aid test needs to be applied to all beneficiaries, whether or not it was the original intention that they would benefit. This will include the organisation receiving the subsidy as well as all of those downstream (for example suppliers and organisations helping deliver the project and those who will take advantage of the subsidised proposal). Therefore, the starting point for this list will be the Grant Recipient themselves, and then all the organisations they work with (such as delivery partners) and then the type of people and organisations they will work with through the project.

Once you have completed the list of all beneficiaries, you will then need to apply the State Aid test separately to each beneficiary, by answering the following questions (with either a ‘yes’ or a ‘no’).

Step 2 – Is there a transfer of State resources?

The State Resources are the funds, rights and assets at the state’s disposal. ^{[footnote 1]}

This means all European Social Fund (ESF) projects involve the transfer of State Resources because of the ESF grant from the Managing Authority.

Public sector bodies, including government departments and local authorities will be considered to represent the Member State. Therefore, the grant, when awarded from the Managing Authority to public sector bodies, is not classed as a transfer of resources at this level. It will still apply if the grant is awarded to non-public organisations, and will also apply to beneficiaries below the level of the public organisation. For example, if the ESF grant is awarded to a Local Authority (LA), who then use that grant to work with Small and Medium-sized Enterprises (SMEs) in their area, the LA will not have received a transfer of public resources, but the SMEs they work with, will receive that transfer of state resource.

A transfer may occur in “any form whatsoever”. Some forms common to ESF are listed below but this is not an exhaustive list:

• grants

• providing free (or reduced cost) training

• providing consultancy and expert advice

Step 3 – Is the transfer to an undertaking?

An undertaking is any entity engaged in an economic activity. ^{[footnote 2]}

An economic activity is “any activity consisting of offering goods and services on a given market”. ^{[footnote 3]}

‘Offering goods and services’ occurs when goods or services are made available to users, even if a fee is not actually charged. A market exists when there is competition with at least 1 other organisation to provide goods or services to customers.

It is irrelevant whether the organisation has charitable aims or if profits will be directed towards activities for the public good.

Additional care must be taken when applying the undertaking test to public sector organisations. The funding of many public sector activities such as the police, army, air traffic control, maritime safety and primary schools are outside the scope of the State Aid test. However, the public sector is capable of acting as an undertaking.^{[footnote 4]}

Further information on this area of State Aid law can be found in the Leipzig Halle guidance and Chapter 7 of the Commission’s Notion of State Aid guidance.

Individuals are rarely undertakings. However, an individual operating as a sole trader will be within the definition of undertaking. So for projects that work with individuals (such as unemployed people, not in Education or Employment Training (NEETs) or disadvantaged groups), then generally the answer to this question, for the participant level, is ‘no’. However, where the support is to help them start a business, or enterprise support, then they will be classed as an ‘undertaking’ once that business is set up, so for any support from that point, the answer to this test would be ‘yes’. Similarly, if the project activity is to pay for an Intermediate Labour Market (ILM) or wage subsidy, then the company that employs the individual that the subsidy relates to will be an ‘undertaking’ and will be in receipt of state resources.

In State Aid law the term ‘undertaking’ is used interchangeably with enterprise. There is no material difference: both terms relate to the entire organisation carrying out the business.

Step 4 – Does the measure provide an advantage?

An advantage means a benefit not obtained under normal market conditions.^{[footnote 5]}

Therefore, an ESF grant will always be regarded as creating an advantage because at the Grant Recipient level, it means they can offer their services and support free of charge (or cheaper) to others, and at lower beneficiary levels, means that they either don’t have to pay for the support, or receive it at a lower cost than would otherwise have been the case.

Where a public sector organisation is able to demonstrate it is acting in the same way as a Market Operator then no aid will be conferred by the transaction.

A compliant public procurement process will usually ensure that the suppliers of goods, works or services do not receive an advantage for the purposes of State Aid because their remuneration is established by the market. As an example, if the Grant Recipient is procuring goods or services, for use in their project, then for that beneficiary the answer to this test would be ‘no’.  

Step 5 – Is the advantage selective?

ESF Grant is offered through an open and transparent process for all to apply for, so at the higher level it is not selective.

However, in delivering the project the Grant Recipient may offer an advantage only to some types of undertaking, therefore the opportunity is selective. For example, a Grant Recipient is offering skills training to companies in 1 specific geographical area or for 1 sector. This would mean that they are offering an advantage to those in that geography or employment sector which is not available elsewhere, so it is selective.

Step 6 – Does the transfer have the potential to distort competition?

As Article 107(1) of the TFEU refers to the “potential” to distort competition, there is no requirement to quantify or otherwise demonstrate an actual distortion of competition across the European Union. As a result, the potential to distort competition will be present whenever the transfer of State resources appears likely to improve the competitive position of the recipient compared to other undertakings in its market.

Most public subsidies have the potential to distort competition and the circumstances where the courts have found that they don’t are specific combinations of particular characteristics including serving a highly localised market.^{[footnote 6]}

A thorough explanation with reference to the case law would need to be provided to rely on this argument.

Step 7: Is trade between Member States affected?

The European Court has interpreted Article 107(1) of the TFEU in a way that means even very small amounts of aid are capable of having an effect upon trade between Member States.

The Commission is obliged to apply the test in line with the Court’s decision making and paragraph 191 of the Notion of State Aid reads “Public support can be considered capable of having an effect on trade between Member States even if the recipient is not directly involved in cross-border trade. For instance, the subsidy may make it more difficult for operators in other Member States to enter the market by maintaining or increasing local supply”.^{[footnote 7]}

Although the effect has to be more than hypothetical, the bar is low. As a result, there are only a few highly localised and limited situations where a grant applicant has been able to persuade the Court that their proposal would not affect trade between Member States. Some of the previous decisions in this area are listed at paragraphs 197 (a) – (h) of the Notion of State Aid

Further information regarding State Aid is also available at State Aid: Commission gives guidance on local public support measures that can be granted without prior Commission approval

Conclusion

Applicants for ESF should consider State Aid compliance early on in their project design, before they submit an application, and involving experts where necessary. If the answers to the questions in steps 2 to 7 are all ‘yes’ for any beneficiary, then that beneficiary will be in receipt of State Aid; if 1 or more of them is a ‘no’ then there will be no State Aid to that beneficiary.

Given that the project is likely to be audited, it’s important to be realistic when identifying potential beneficiaries and working through steps 2 to 7. An unrealistic assessment may result in repaying more than the original grant.

The responsibility for decision making on State Aid compliance rests with the applicant although Department for Work Pensions staff may be able to signpost particular areas of State Aid law or guidance. This is because the funding agreement will require the applicant to give assurances that their project is State Aid compliant and to undertake to meet the costs of recovery of unlawful State Aid.

3. De Minimis Regulation

By way of an exemption to the general prohibition on state aid, the de minimis Regulation (Regulation (EU) No 1407/2013) enables an enterprise to receive up to €200,000 euros in aid (any public resources including European Social Fund) over 3 fiscal years. Providing such aid is given within the de minimis rules there is no requirement to notify it to the Commission.

To ensure that the requirements of the de minimis regulation are met, scheme administrators must ensure that any award of European Social Fund and other public match funding to an enterprise given under the terms of the de minimis block exemption does not breach the €200,000 (approximately £178,000 at € = 89p exchange rate) ceiling over 3 fiscal years. The Managing Authority requires the aided enterprise to keep detailed records of any de minimis aid received for 10 years. Checks will be made at initial verification meetings that organisations are aware of these rules.

Organisations using the de minimis rules must put in place a monitoring system to ensure the limit is not breached. Typically, such a monitoring system will involve:

• asking enterprises receiving support under their scheme to identify all other sources of support (either in cash or in kind) that they have received in the last 3 years

• checking if previous de minimis aid is involved, to ensure that the combined assistance does not exceed €200,000 over any 3 year rolling period. If the limit is breached, the aid may have to be reduced or refused to ensure the limit is not breached

The Department for Business, Energy and Industrial Strategy (formerly Business Innovation and Skills) State Aid branch advises writing to each recipient in the following terms:

“The assistance for […] constitutes State Aid as defined under Articles 107 and 108 of the Treaty on the Functioning of the European Union of Rome and is being granted as ‘de minimis’ aid under Commission Regulation (EU) No 1407/2013. European Commission rules prohibit any undertaking from receiving more than €200,000 euros (approximately £147,000) ‘de minimis’ aid over a rolling 3 year period. Any ‘de minimis’ aid granted over the €200,000 limit may be subject to repayment with interest. If you have received any ‘de minimis’ aid over the last 3 years (from any source) you should inform us immediately with details of the dates and amounts of aid received. Furthermore, information on this aid must be supplied to any other public authority or agency asking for information on ’de minimis’ aid for the next 3 years.”

Whilst de minimis rules are straightforward in principle they are difficult and complex to operate in practice because they are not project related and as such rely on individual enterprises being able to identify how much aid and under which schemes they have received support over a rolling 3 year period. Where enterprises have exhausted their aid ceilings under de minimis, there is no capacity for further aid through European Social Fund. The European Social Fund project granting the aid must follow up with the aided enterprise once the assistance is finished to confirm the amount of aid received.

4. General Block Exemption Regulation (GBER)

The European Social Fund Managing Authority has now notified the European Commission that the General Block Exemption Regulation (GBER) is available for European Social Fund applicants to use if appropriate.

European Social Fund applicants are reminded that Aid to individuals does not constitute State Aid. This excludes therefore nearly all Priority Axis 1 interventions. Aid to public and not-for-profit organisations, such as voluntary, charitable and cultural bodies, are not affected by State Aid rules where they are not engaged in an “economic activity”. “Economic activity” means putting goods or services on a market. It is not necessary to make a profit to be engaged in economic activity: if others in the market offer the same good or service, it is an economic activity.

For most of the 2014 – 2020 European Social Fund programme the European Social Fund and public match funding provided to providers in Priority Axis 2 may not constitute State Aid because all aid “flows through” to individuals and is not retained by the provider – this means that the test for aid is not met as there is no benefit to the intermediary. It is for the provider to be able to show that there is genuinely no benefit. However, for those elements of the programme in Priority Axis 2 which provide support to individuals in employment there may be State Aid implications because their employers are receiving support towards the costs of training. Where European Social Fund supports individuals in employment to achieve full or part qualifications this may constitute an aid and so consideration should be given to the application of any exemptions. Likewise, in Priority 1 interventions where a small and medium enterprise (SME) is paying the salary or wage costs for individuals undertaking work placements for them then there may be an aid. Prospective applicants may wish to take legal advice on these areas.

5. What the GBER covers in ESF

The GBER notification covers:

• Training Aid (Article 31 of the GBER) – Scheme number 45031
• Aid for disadvantaged workers and workers with disabilities (Articles 32 to 35 of the GBER) – Scheme Number 45030

The notification is available to European Social Fund applicants from 1 March 2016. This means that any European Social Fund activity that took place before that date cannot be covered by the GBER as the regulation is clear that the intention is that it has an ‘incentive’ effect in changing behaviours in beneficiaries.

State Aid is a very complex area and any European Social Fund applicant who is considering using either of the State Aid regulations for their project must read the Guidance on State Aid law and how it is applied to Structural Funds.

It contains copies of both the ‘De Minimis’ regulation and the GBER. It also contains many helpful hyperlinks including the very useful Department for Business, Energy and Industrial Strategy and Skills guidance and details of the aid intensity thresholds that are fundamental to the operation of the GBER.

The difference between the 2 available regulations may be stated simply – The ‘de minimis’ regulation is a financial ceiling (€200,000 in aid in a rolling 3 year period) with applicants being required to provide declarations confirming the amount of ‘de minimis’ aid received. The GBER is not a financial ceiling regulation – it is rather based on a funding percentage or aid intensity. Applicants should refer to Schedule 2 of the guidance for details of the allowable intensities for the activities permitted under the European Social Fund GBER notification. Essentially what this means is – if the allowable intensity is 50% then the enterprise must provide the other 50% of funding and this cannot be supported by European Social Fund.

European Commission rules require the Managing Authority to submit an annual report on the GBER. Applicants should tell us how much they have committed under each of the notified schemes quarterly as part of their claim. Aid is deemed to be granted when the legal obligation is put in place. So even if an applicant spends £0, they should still provide a quarterly report.

State Aid rules allow organisations to combine both de minimis and GBER.

1. Footnote 1: Joined cases C-72 and 73/91 Sloman Neptun Schiffarts AG v Seeberiebsrat Bodo Ziesemer, 1993 ECR I -887 ↩

2. Footnote 2 C-303/88 Italy v Commission 1991 ECR 1-1433 ↩

3. Footnote 3 C35/96 – Commission v Italy 1998 ECR 1-03851 ↩

4. Footnote 4: Italy v Commission, 1991 ECR I-1433 ↩

5. Footnote 5: SFEI and Others, C-39/94, Spain v Commission, C-342/96 ↩

6. Footnote 6: There are some examples at State aid: Commission gives guidance on local public support measures that do not constitute state aid ↩

7. Eventech v The Parking Adjudicator, C-518/13, ECLI:EU:C:2015:9, paragraph 67; Judgment of the Court of Justice of 8 May 2013, Libert and others, Joined Cases C197/11 ↩