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FEBRUARY 2008


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Tenant Beware
When there are problems relating to defects in premises that are let, the tenant will normally try to obtain redress through the repairing covenant. However, if that does not look like the best way forward, it is sometimes possible to bring an action for nuisance against a landlord who fails to take action.

In a recent case, a tenant took action against his landlord for nuisance relating to the ingress of water into his flat, alleging that this interfered with the ‘enjoyment of the property’. The problem existed before he had leased the flat, and this was the tenant’s undoing. The court held that the landlord could not be liable in nuisance for damage that pre-dated the grant of the lease. The moral for prospective tenants is ‘tenant beware’.

Put Up or Shut Up
In conducting legal disputes, it is normally important to raise the issues you want to contest at the beginning of the proceedings. Otherwise, there is a risk that the court will not allow them to be argued, or possibly that it will make an unfavourable order for the division of legal costs.

A recent case illustrates the point. A property dispute had arisen because a house builder, who had used the claimants’ land to construct a sewer, had failed to reinstate the land as required under their agreement. The land owners issued a statement of claim. The builder wished to argue that the claim was issued in the wrong court, which, in its view, did not have jurisdiction to hear the matter in dispute.

However, the acknowledgement of claim did not indicate that the matter of the court’s jurisdiction was to be argued, with the result that the Court of Appeal ruled that the house builder had accepted the jurisdiction of the court. The Court of Appeal therefore rejected the house builder’s right to argue the point.



Tax

Tax Returns – Greater Certainty
From 31 March 2008, there will be an even greater incentive to make sure corporate tax returns are lodged with HM Revenue and Customs (HMRC) on time.

From that date, returns lodged by the normal due date will only be ‘open’ for an HMRC enquiry (assuming there is no serious tax irregularity) for one year after they are filed, as opposed to the present system of one year after the due date for filing.

For example, a corporate tax return filed on 1 May 2008, which is due to be filed on 1 July 2008 will only be open for enquiry until 30 April 2009. Presently, such a return is open for enquiry until 30 June 2009.

This change is particularly beneficial for businesses which are in the course of negotiation for sale, as an early filing of the relevant return will allow comfort regarding the tax position to be obtained earlier.

The position for returns filed late is that they remain open for enquiry until the end of the quarter (the quarter dates are 31 January, 30 April, 31 July and 31 October) following the anniversary of the day on which they are filed – i.e. a return due on 1 October 2008 which is filed on 1 November 2008 will be open for enquiry until 31 January 2010.

Similar changes are being made in respect of personal tax returns.

Income Shifting Proposals – Timesheets for All?
HM Revenue and Customs (HMRC) have now unveiled proposals on ‘income shifting’ (their term) following their robust defeat in the recent ‘Arctic Systems’ case. Needless to say, the professions have greeted these with a pronounced lack of enthusiasm.

The use of joint shareholdings in ‘husband and wife’ companies and the payment of dividends rather than salaries is a well-known technique for minimising the tax burden on a family business. The practical benefit of paying dividends rather than salary is the saving of employer’s and employee’s National Insurance Contributions.

The proposals are, in simplified terms, that HMRC will regard income as being shifted when:

• a person is a party to or has power over the split of income;

• that person forgoes income and the income forgone becomes the income of another person; and

• the income shifted is by way of company distribution or partnership profit share for the year and the overall tax liability paid by the parties for the tax year is less than it would be had the arrangement not subsisted.

Where income shifting occurs, it will be the responsibility of the persons concerned to enter on their tax returns the amount of income shifted and the practical effect will be that the ‘saving’ in tax will be collected by a charge on the person forgoing income. The interesting point here is that it would appear that it will be possible for someone to be assessed to tax on income they have not received (indeed, which they have no legal right to receive) – this begs the question of what might happen, for example, in a relationship in which there is a legal arrangement (i.e. because of the shareholdings or a partnership agreement) existing which created the income shifting tax benefit and the people involved are not on good terms!

The first issue here is that the proposals will include partnerships, not just companies. This is an important point as there are many family partnerships in which the partners’ shares of income do not match their contributions to the business. The proposals are not intended to apply only to families, but could catch any arrangement where there is a significant mismatch between the contribution to the business by an individual and their ‘fully-taxable’ income from it.

The second issue is that it does appear that the proposals could catch any arrangement where salary is suppressed by a shareholder who makes a bigger contribution to the business than the others who receive dividends.

In practical terms, this will mean that it will be necessary for all businesses to know –

and be able to justify – who does what for the business and to pay a market rate for the job done, so it may well be a case of ‘timesheets for all’.

HMRC have very optimistically stated that the cost of maintaining the necessary records will be ‘negligible’ for businesses (!) and the proposals are the subject of a consultation exercise which ends on 28 February 2008. Bearing in mind the very short period between then and Budget Day (12 March 2008), expect one of two likely outcomes: either the proposals will be shown to be so ill thought out that implementation will be delayed until 2009 or the changes made by the Treasury, if any, will be minimal.

For businesses, it is sensible to consider the likely impact of the proposals and have a strategy in place. For many, the most likely outcome is an increase in their tax burden.

Making Training Costs Tax Deductible
Now that training provided by McDonald’s is to be nationally accredited, you would be forgiven for thinking that training costs aimed at improving your skills or business profits automatically qualify for tax relief, but that is not necessarily the case. The complexities of the UK tax system mean that the availability of tax relief depends on who is paying for the training and what the training is designed to achieve.

For employees who pay for their own training, tax relief will not normally be given, even if the sole purpose of the training is to make them better able to do their job. If an employee needs training as a necessity to carry out their job (so that the training is ‘wholly, exclusively and necessarily incurred’) then tax relief will be given. The key word here is ‘necessarily’, as unless the training is necessary, its cost is not deductible. Any training designed merely to enable an employee to carry out a new job does not qualify for tax relief in their hands.

Employees who pay for their own training should bear in mind that expenses paid for by them and reimbursed by their employer constitute a benefit in kind which will be taxable.

The situation as regards tax relief for training paid for by employers is very different. By and large, any training which makes their employees better able to do their jobs (and this includes very general sorts of training which may not have an immediate impact on their ability to do the work) will be allowable.

Clearly, therefore, the sensible thing for an employee to do is to get their employer to pay for their training, using a salary sacrifice if necessary.

For the self-employed, the criteria for determining if training expenses are allowable are somewhat different. Here, training expenses will be deductible for tax purposes if they are incurred ‘wholly and exclusively’ for the purposes of the trade, which is a much more liberal definition than that which applies for employees. However, a further consideration must be taken into account, which is whether the training is of the nature of an expense or an investment. If the latter (for example, the acquisition of know–how to enable new products to be developed) then, strictly, the cost is a capital item and tax relief should be claimed by way of capital allowances.

If you have a need to incur substantial training expenses, it is sensible to take professional advice on how best to structure the expenditure.

New Advisory Fuel Rates
HM Revenue and Customs (HMRC) have revised the fuel payment rates which employers can apply when reimbursing employees for business travel in their cars, or use when requiring employees to repay the cost of fuel used for private travel in company cars, without tax or NIC implications. HMRC will also accept these rates for VAT purposes although employers will need to retain the necessary VAT receipts.

For further information see http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm.



Intellectual Property

Private Copying – Copyright Relaxation on the Way?
It might well be a surprise to many, but when your child comes home from school with a bag brimming with photocopies, it might also be a bag full of copyright violations.

Similarly, copying a CD, which you have already bought, onto your mp3 player is also a breach of the copyright of the artist.

Faced with law which is ignored on such a vast scale, the Government has accepted many of the recommendations of a 2006 report on the reform of copyright law and has started a consultative process with a view to allowing limited private copying for non-commercial use of copyrighted material.

It is too early in the process to outline what form such a relaxation might take, but one possibility is that the copying technology itself may incorporate a licence or it could be that persons wishing to make private copies must hold a licence.

There is no suggestion that multiple copying or file-sharing is likely to be made lawful. The consultation closes on 8 April 2008.

Contract

Directors – Be Careful What You Sign!
The Court of Appeal recently handed down a decision which should convince directors to take great care when they sign contractual documents on behalf of their companies… because if the contract contains a misrepresentation, they can in some circumstances be held personally liable for it by the courts. The fact that the contract may not benefit the director is not a defence.

In the case in point, a company entered into a contract to pay for goods it then received. A director of the company signed the contract knowing that the company was insolvent and would be unable to pay for the goods.

The Court of Appeal ruled that the director had made an implied misrepresentation to the supplier. Since he knew the goods would not be paid for, the Court found him personally liable for the sum owed, as a result of his deceit.

The message for directors is to be careful what you sign. ‘Limited liability’ may not be limited if the court decides that the director knew that the company could not meet its obligations. This could apply in a variety of instances, for example where the company enters into a long-term agreement such as a lease of new premises.

The Companies Act 2006 places a statutory burden on directors to adhere to certain standards and consider specifically the effects of their decisions in various ways. A part-time, non-executive or even ‘shadow’ director (one who has no official position in the company but whose decisions are normally followed) can be in the firing line when things go wrong just as surely as can the full-time working directors.

Loss and Damage – Economic Damage not Physical
Misunderstandings are at the base of many legal disputes and nowhere is this more evident than in disputes involving insurance claims. Recently, a company which used scrap metal found that it had inadvertently received scrap contaminated with small amounts of radioactive plutonium.

The radioactivity itself had not caused any significant problems other than the resultant cost of disposal of the contaminated material, which had to be carried out under the controlled conditions that apply to radioactive waste.

Once the company had disposed of the radioactive material, it reclaimed the cost from its insurers, relying on a clause that insured ‘loss…or damage due to contamination…by radioactive materials utilised in the manufacturing process’.

The insurers argued that in the context of the insurance policy (an ‘all risks’ material damage policy) the clause referred to physical damage, not economic damage.

The judge, considering the policy as a whole, found it difficult to envisage that the intention would have been to cover a completely different type of loss in a policy otherwise worded to deal with damage to property. The addition of cover relating to loss due to radioactive material was to bring into cover something which would otherwise be excluded (most insurance policies exclude liability for loss due to radioactive contamination).

Nor had the cost of disposal of the radioactive material been caused by its being used in the manufacturing process per se – accordingly, the loss was not covered by the policy.

Insolvency

IVAs – New Code of Conduct
A new voluntary code of conduct for the management of Individual Voluntary Arrangements (IVAs) has been announced. In an IVA a debtor agrees to repay his or her creditors over a period of years (typically five). The new code of conduct will ensure that the processes leading to an IVA will be more transparent and will give greater certainty as regards the debtor’s home as well as greater reassurance for creditors and the debtor that the IVA applied is the best option.

The new code of conduct will incorporate the use of standard terms and conditions. The use of a standard framework is intended to allow the debtor and creditors to be more open in their dealings with one another.

The new code of conduct can be found on the Insolvency Service website at www.insolvency.gov.uk.

Competition Law

Price Fixing Brings Criminal Prosecutions
The Office of Fair Trading has announced that it is bringing the first ever criminal prosecutions for ‘cartel offences’ – more colloquially called price fixing. Three Lincolnshire businessmen have been charged with offences under Section 188 of the Enterprise Act 2002, which makes it an offence for individuals dishonestly to agree that businesses will engage in certain types of cartel activity, namely price-fixing, limiting supply or production, market-sharing and bid-rigging.

The charges resulted from an international investigation involving the authorities of several countries including the USA, where such activities are routinely dealt with as criminal offences. The arrests were made in the USA and it is likely that at least part of the reason why criminal charges have been brought in the UK was that the alleged co-conspirators were charged under US criminal law.

The progress of this case is likely to create a ‘template’ for future prosecutions.

It is not widely appreciated that anti-competitive activities can lead to criminal charges being brought against the persons responsible as well as significant fines for the businesses involved.

Data Protection

Can Big Brother Read Your E-mails?
Recently amended provisions of the Regulation of Investigatory Powers Act 2000 could further restrict the rights of organisations and individuals wishing to protect sensitive electronic information.

Part III of the Act covers the encryption of electronic data and requires holders of encrypted data to provide the means of putting this into an intelligible form when required to do so by the authorities. Failure to do so can lead to criminal charges, with a maximum sentence of up to two years in prison or five years in certain cases relating to suspected terrorism.

Many people choose to use readily available encryption programmes to encrypt their email, files, folders, documents and pictures. These same technologies can also be used by terrorists, paedophiles and others to hide their criminal activities.

If the police or other public agency suspects that data encryption is being used to conceal any kind of criminal activity, then they have the power to serve a notice on the person in control of that data, be it an individual, company director or anyone else with responsibility. The legislation has already been used to demand encryption keys from several animal rights activists.

However, the Code of Practice governing the use of such powers allows the data owner or controller ‘reasonable time’ to comply.

Data users can no longer assume that encrypting data means keeping it secret forever. Data encryption is a powerful tool that can and should be used to protect sensitive data from prying eyes. But it does not mean that public authorities cannot get at it if required.

Database Actions are Back!
Actions for breaches of database rights are not common in the UK. This is the outcome of a 2004 decision of the European Court of Justice (ECJ), which narrowed the perceived legal protection offered by the European Database Directive. The Directive protects owners of databases from unauthorised ‘extraction or re-utilisation’ of the data. Interestingly, this right also covers data placed in the public domain by the owner – so copying a database which is made available for public use by its owner would be a breach of database right.

However, the restriction to the right rests in the ECJ’s ruling that for protection to be given, the database owner must have substantially invested in the ‘obtaining, verification and presentation’ of the contents, not merely in the creation of the content of the database itself. It is this stipulation which has led to many unauthorised uses of database information not having legal consequences for those making use of it.

Recently, however, a claim for breach of the Database Directive was successful in a different context. It involved employees of a furnishing fabric company, who left to form a new company and took with them database information concerning the customers of their old company. Their ex-employers sued them for breach of confidentiality and breach of database rights.

The claim for breach of confidentiality failed, as the information taken (names, addresses, sales etc.) was in the public domain or it was built up as part of the skills and expertise expected of an employee – which could not therefore be restricted by the employers.

However, the High Court agreed that the ex-employees had breached the company’s database rights by removing the information. Furthermore, they had breached their normal right of fiduciary duty to their employers by their subsequent use of the information.

Businesses often face problems when employees leave and set up in business in competition with them. The first defence against this is an appropriately-worded service agreement which includes an enforceable restraint of trade clause. However, it will be gratifying for businesses to know that there appears to be a further remedy against ex-employees who remove confidential business information held in a database and use it for their own purposes.

Employment Law

Annual Increase in Tribunal Awards
The Employment Rights (Increase of Limits) Order 2007, which details the annual inflation-linked increase in limits on the amounts which can be awarded by employment tribunals was made on 18 December 2007 and applies where the appropriate date falls on or after 1 February 2008.

The main increases in compensation limits are:

• the maximum compensatory award for unfair dismissal has increased from £60,600 to £63,000;

• the maximum amount for a week’s pay (for calculating basic award or redundancy payment) has increased from £310 to £330; and

• the limit on the amount of guarantee payment payable to an employee in respect of any day has increased from £19.60 to £20.40.

As there is no statutory cap on the amount a tribunal can award in discrimination cases, the Order does not cover them.

The full list of the increases can be found in the Schedule to the Order at http://www.opsi.gov.uk/si/si2007/uksi_20073570_en_2.

The general tribunal system in the UK is being reformed, under the Tribunals, Courts and Enforcement Act 2007. As of 1 December 2007, tribunal chairman are now to be known as ‘employment judges’ as this more accurately reflects the nature of their role.

TUPE and ‘Offshoring’
The Employment Appeal Tribunal (EAT) has handed down a decision which will be of interest to anyone considering selling their business, or a part of their business, to a buyer from abroad.

Regulation 3(1)(a) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) states that the legislation applies when there is ‘a transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity’.

In Holis Metal Industries Ltd. v GMB, the EAT has considered the issue, previously untested in UK case law, as to whether TUPE has the potential to apply to the transfer of a business or service entity outside the UK – in this case to Israel and therefore outside the EU.

Newell, owners of the ‘Swish’ blind manufacturing business had a factory in Tamworth. There were 180 workers at the plant of whom 76 were represented by the GMB. Newell sold the track and pole manufacturing part of the business, which was due to be closed, to Holis, a company based in Israel. The 107 staff working in that part of the business were informed that the operation was to be moved to Israel and unless they agreed to move also they would be made redundant following the transfer. In the event, although some of the plant and machinery was moved to Israel, none of the employees wished to go and all were made redundant by Holis shortly after the transfer. For administrative reasons, however, the redundancy payments were paid by Newell. The GMB union claimed that there was a breach of the duty to inform and consult over the transfer. Holis sought to strike out the claim but the Employment Tribunal (ET) Chairman, in a preliminary ruling, decided that the TUPE Regulations did apply to a transfer of a business which after transfer is based outside the United Kingdom and also outside the European Union. Holis subsequently appealed against the decision.

The EAT held that TUPE can apply to transfers outside the UK, even though enforcement may present a problem. Such a decision would be in line with the aims of TUPE and, since the business was originally based within the UK, there was sufficient connection with the UK to give jurisdiction to UK courts. However, each case must be decided on the specific facts. Also, there will still be an issue as to whether the entity to be transferred has retained its identity as required under Regulation 3(1)(a). This too will depend on the facts of the individual case. Accordingly, the case was referred back to the ET.

Health and Safety

Is a Risk Assessment Necessary?
These days, health and safety issues are important considerations for the management of most firms and the potential ramifications of failing to adopt robust health and safety policies are now well known.

However, a recent case has indicated that failure to carry out a risk assessment may not necessarily undermine the contention that appropriate steps were not taken to make a procedure safe. Only if it can be shown that the employer did not take steps to make the risk associated with the operation of the procedure as low as practicable can the causal link necessary in order to make the employer liable for an injury to an employee be established. This does not necessarily mean that a formal risk assessment has to be available for the particular operation which gave rise to the injury. Also, merely breaching the Manual Handling Operations Regulations 1992 is not in itself sufficient, as to establish liability under statute law the breach must be shown to have caused the injury.

In the case in point, an employee was injured when carrying out a mechanical handling operation. The employer successfully argued the risk assessment point in the Court of Appeal. However, the evidence in this instance showed that the employer had failed to take appropriate steps to make the operation safe and thus was found liable for the injury to the employee.

Carrying out and keeping evidence of risk assessments and having in place procedures to minimise the risk of injury is generally to be recommended.


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PRESTON-ROUSE COMPANY
6 Gray's Inn Square, Gray's Inn, London WC1R 5AX
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email judith@preston-rouse.com & michael@preston-rouse.com

For more information please contact:
Judith Preston-Rouse or Nicola Manning or Michael Vann
telephone 020 7404 9725 facsimile 020 7404 9731