Business assistance restrictions – state aid and ‘undertakings in difficulty’
Several government initiatives have been introduced to provide funding and other support to businesses impacted by COVID-19.
However, access to some of these measures may be impacted for businesses that fall within the definition of an ‘undertaking in difficulty’ as at 31 December 2019 in terms of EU state-aid rules.
EU State Aid Rules
The UK left the European Union (EU) on 31 January 2020. However, under the terms of the Withdrawal Agreement given effect to through the European Union (Withdrawal) Act 2018, the UK has entered a transition period until 31 December 2020. During this Transition Period, the EU State aid rules continue to apply in the UK. Accordingly, any aid granted during the transition period must comply with those rules.
State aid is defined as an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities. Subsidies granted to individuals or general measures open to all enterprises are not covered by this prohibition and do not constitute state aid (examples include general taxation measures or employment legislation). Wage subsides that provide a selective advantage (such as the self-employed income support scheme) do fall within the scope of state aid, although the €800,000 per undertaking ceiling noted below does not apply.
Under the EU Regulations state aid is permitted for an undertaking where it is below a de minimus limit as it is considered that below this level there is unlikely to be an effect on competition. The de minimus limit is normally €200,000 over any 3-year period.
The EU have introduced temporary measures to allow responses to the coronavirus pandemic relating to public funded aid in the forms of grants, repayable advances, tax advantages and wage subsidies for employees. Key elements of the temporary permissions are that the overall aid does not exceed €800,000 per undertaking (for aid in the form of direct grants, repayable advances or tax advantages), that the aid is granted no later than 31 December 2020 and aid may not be granted to undertakings that were already in difficulty on 31 December 2019.
Ultimately the European Court of Justice has sole competence over what is and what isn't a state aid. The only way it can be determined for certain that state aid is present is to notify a measure to the European Commission for legal certainty.
The UK Government has introduced a range of measures to support SMEs. Some of these are subject to State Aid restrictions whilst some are not. As a result, there may be impacts on eligibility to such measures.
Measures such as the job retention scheme do not constitute state aid as they are available to all businesses.
Other measures such as the Coronavirus Business Interruption Loan Scheme (CBILS) and the recently announced Coronavirus Bounce Back Loan Scheme are deemed to be subject to state aid restrictions.
Measures such as the small business support grant and the retail, hospitality and leisure grants may fall within the definition of state aid, but it is unclear, and indeed may depend on individual business circumstances whether this will have an effect on accessibility. As a result, local authority application forms for these grants indicate that they “could” be considered as state aid and require details of assistance the business has received through state aid in the previous 3 years as well as confirmation that the business was not in financial difficulty on 31 December 2019 without providing any guidance on how that is to be evaluated.
Full details of support available to businesses can be found in the ICAS Factsheet on Coronavirus Business Financial Support Programmes available to be downloaded from the Business Assistance page of the ICAS Coronavirus Hub.
State-aided measures such as CBILS importantly contain an exclusion to eligibility for any business that constitutes an ‘undertaking in difficulty’ on 31 December 2019, within the definition of:
- Article 2(18) of the General Block Exemption Regulation; or
- Article 2(14) of Agriculture Block Exemption Regulation; or
- Article 3(5) of Fishery and aquaculture Block Exemption Regulation
What is an ‘undertaking in difficulty’?
Per the above Regulations, ‘undertaking in difficulty’ means an undertaking in respect of which at least one of the following circumstances occurs:
- In the case of a limited liability company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its subscribed share capital has disappeared as a result of accumulated losses. This is the case when deduction of accumulated losses from reserves (and all other elements generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital. For the purposes of this provision, ‘limited liability company’ refers in particular to the types of company mentioned in Annex I of Directive 2013/34/EU (1) and ‘share capital’ includes, where relevant, any share premium.
- In the case of a company where at least some members have unlimited liability for the debt of the company (other than an SME that has been in existence for less than three years or, for the purposes of eligibility for risk finance aid, an SME within 7 years from its first commercial sale that qualifies for risk finance investments following due diligence by the selected financial intermediary), where more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses. For the purposes of this provision, ‘a company where at least some members have unlimited liability for the debt of the company’ refers in particular to the types of company mentioned in Annex II of Directive 2013/34/EU.
- Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors.
- Where the undertaking has received rescue aid and has not yet reimbursed the loan or terminated the guarantee or has received restructuring aid and is still subject to a restructuring plan.
- In the case of an undertaking that is not an SME, where, for the past two years:
- (i) the undertaking's book debt to equity ratio has been greater than 7.5 and
- (ii) the undertaking's EBITDA interest coverage ratio has been below 1.0.
What does this mean in practice?
The definition of ‘undertaking in difficulty’ is likely to be a barrier for many businesses looking to access many of the coronavirus business support measures that have been put in place.
The definition is understood to have been arrived at with large-scale bailouts in mind and may be unsuitable for many businesses the government measures seek to assist such as businesses that have invested heavily to grow, resulting in up-front losses, or private equity-owned companies with leveraged financing structures.
It will also be difficult for lenders, local authorities and businesses themselves to assess the viability of a business against complex EU regulations.
Many of the application processes that have been put in place require the business to self-declare that they were not an ‘undertaking in financial difficulty’ before 31 December 2019 but there is no guidance to what this means or how it is defined. Even the definition set out in the Regulations (provided under the heading What is an ‘undertaking in difficulty’?’ above) doesn’t make it clear.
Many accountants will be asked to assist their clients to apply for coronavirus support measures and it is therefore important to understand as part of that process whether the client is eligible. Facilitating access to funding to which the business is not entitled could be an offence under AML legislation.
In order to help business owners and our members to assess whether the business is an ‘undertaking in financial difficulty’ for these purposes ICAS has prepared a checklist which might be useful to document consideration of this matter. As a reminder, consideration of the ‘undertaking in financial difficulty’ test is only required when benefiting from a measure that constitutes state aid. The table below sets out our understanding of the various measure and consideration of whether they may be subject to state aid restrictions:
Employee assistance schemes
Coronavirus Job Retention Scheme|
Statutory Sick Pay Relief
Short term cash flow assistance schemes
Deferral of VAT payments|
HMRC - Time to Pay Arrangements
Business rates holiday for hospitality, leisure and retail (E&W)|
Business rates holiday for nursery businesses (England)
Business rates holiday for hospitality, leisure and retail (Scotland)
Business rates holiday for aviation industry (Scotland)
Non-Domestic Rates Relief (Scotland)
Grants for retail, hospitality and leisure businesses (E&W)|
Grants for retail, hospitality and leisure businesses (Scotland)
Support for Scottish seafood fishing industry
Small Business Grant Scheme (E&W)
Small Business Grant Scheme (Scotland)
Creative, Tourism & Hospitality Enterprises Hardship Fund (Scotland)
Pivotal Enterprise Resilience Fund (Scotland)
Sectoral specific grants
Debt assistance schemes
Bounce Back Loan|
Coronavirus Business Interruption Loan Scheme
Coronavirus Large Business Interruption Loan Scheme
Coronavirus Corporate Finance Facility
Assistance for the self-employed
Self-employed income support scheme|
Deferral of Self-Assessment payments
Newly Self-Employed Hardship Fund Grants
Visit the ICAS coronavirus hub – a central source of information and resources for members, practice and business.