1. Policy statement
In principle, public money should not be substituted for private capital. Where the market is willing to fund innovation, public support is not required. Where a market does not exist, but market terms could be tolerated by applicants, Innovate UK should consider whether to invest on market terms before offering any form of subsidy.
Where subsidy is required, Innovate UK always strives to deliver its innovation support under the Common Provisions and Articles of the General Block Exemption Regulation 2014 for which it has notified and been approved by the European Commission.
Where, in exceptional circumstances, it wishes to provide State aid under the de Minimis Regulation, it will only do so where equivalent aid cannot be delivered under GBER. It will apply the aid intensity limits within the relevant article of GBER or up to the cumulative aid ceiling in de Minimis, whichever is least.
Innovate UK exists to support business-led innovation and aims to encourage collaboration between large and small businesses. This is achieved with the aim of promoting growth through innovation by commercialising new, disruptive technologies that create an economic return to the UK.
Innovate UK also seeks to ensure fairness across its activities; typically, this means that opportunities are competed on a level footing, although some allowances are made for pilots and activities where the opportunity is unique. This approach has the added benefit of ensuring Innovate UK does not unfairly grant benefit on one institution over another without a rigorous process having been applied.
3. Is State aid required?
Innovate UK’s impact on gross value added (GVA) in the UK economy comes not only from the impact its funding has on the businesses it supports and their supply chains, but also from its support being additional to the market and not displacing existing commercial investment and funding.
Consideration should always be given as to whether a business and/or innovation might secure some or all the funding it needs from private sources, and whether the innovation project (deemed of sufficient quality through independent assessment) would go ahead without Innovate UK’s support.
Where an applicant business would qualify for commercial support but for the lack of market provision, consideration should be given as to whether support might be provided on market terms (through the Market Economy Operator principle).
In reality, Innovate UK recognises that many of the businesses and projects it supports would struggle to secure market funding for their activities. Where this reflects the innovation risks within their projects rather than operational and delivery risks related to the business and its team, subsidised support through State aid may be appropriate.
4.1 When should GBER be used?
GBER should always be the first option considered for any form of innovation support that is additional to the market. The aim of GBER is to provide member states with a simple mechanism for giving “good aid” without prior reference to the Commission. Whilst it needs some ex-post requirements (such as evaluation of large schemes) it is generally less difficult than delivery of notified or de Minimis schemes.
4.2 Which Article should be used?
Innovate UK’s preference is to first consider support through GBER Article 25: Aid for research and development (R&D) projects. Article 25 is the foundation for a number of Innovate UK’s schemes, including:
- SMART or open grants
- innovation loans
- investment accelerator
- Use of Article 25 is Innovate UK’s core expertise, and its operations and competitions functions are geared up to deliver programmes in this area. As such, Article 25 is the simplest route to delivering innovation support through Innovate UK.
From time to time, the nature of support being provided might not fit within Article 25, for example where aid is being provided to R&D clusters or for innovation infrastructure. In those cases, a defined operating process needs to be in place to ensure the required capacity and capability is available before a competition is opened and/or an award is made.
4.3 When GBER does not work
Only if a proposed scheme does not fit within GBER, or cannot be made to do so, should other options be considered. There are 2 options available:
- Approach the European Commission for a specific exemption, or
- Apply another State aid mechanism (such as de Minimis).
4.4 Specific exemption
Seeking a specific exemption for an individual programme is an option for schemes likely to have an ongoing role within Innovate UK’s product portfolio and for which there is strong evidence of a market gap or dysfunction outside the areas addressed in GBER. However, such an approach is likely to be time consuming, and the willingness of UK negotiators to prioritise such a request must be considered. As such, this option should be a last resort.
4.5 Other mechanisms
While there are a number of alternative routes to providing support, the chief option for Innovate UK is de Minimis, which allows for greater flexibility where small amounts of support are provided to eligible undertakings.
In considering whether to use de Minimis (having at first exhausted GBER options), it is worth considering that this creates several additional requirements of both Innovate UK and the businesses it supports. For example:
- additional diligence is required to determine the cumulative aid received by each undertaking over the previous three fiscal years
- a declaration is required at the point of commitment evidencing the aid received previously; and
- the value of the aid provided needs to be calculated against the current FX rate and at the point of commitment
Over and above regulatory compliance, Innovate UK’s policy considers that businesses receiving support through de Minimis should not receive more aid than had they been eligible for an award under GBER. For example, a micro or small single undertaking seeking support for an industrial research project should receive no more than 70% of project costs.
However, where the rationale for using de Minimis relates to GBER restrictions on eligible costs, projects costs can be more broadly defined, and aid intensity can be applied to the total value of the project.
This policy will be kept under review and the need for co-funding of innovation projects can be challenged on a programme-basis through the project authorisation form (PAF) process. The final decision will fall to the Executive Management Team.
4.6 Undertakings in difficulty (UiD)
While the ability to support businesses failing the Undertaking in Difficulty test is constrained under GBER, this concept was removed from de Minimis in 2012. While risk finance interventions require recipients to be of a suitable credit quality, no such restrictions apply to R&D focused interventions. So funding businesses that fail the UID test is possible under de Minimis.
However, in proposing support to UID companies, Innovate UK requires that their underlying viability is rigorously tested to ensure the company is adequately capitalised and sufficiently liquid to meet their co-funding commitments and complete the project.
Standard Operating Procedures (SOPs) have been developed for GBER, UiDs, Non-aid and de Minimis. These are available to internal staff and must be followed in all cases.
Applicant and organisation eligibility for competitions is determined based on general guidance under State aid specified on the competition brief and must be referred to during the application stage.
Additionally, any applicant that wishes to claim costs on a project, can access a detailed breakdown of project or eligibility costs. These costs are defined on Innovate UK’s project costs guidance.
Approved by the Innovate UK State Aid Working Group (SAWG), December 2019.