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APRIL 2008

Employees who breach their duty of good faith to their employer can be held to account for any resultant losses to the employer, even if the employee has not benefited personally from the breach.

A recent High Court case involved an insurance broker who backdated insurance cover notes, which allowed claims to be made by the firm’s clients who would otherwise have been uninsured. Following an investigation by the insurance company involved, the firm that employed the broker accepted that backdated cover notes had been issued and reached a settlement with the insurer, which involved paying them compensation.

The firm dismissed the broker and sued him for its losses, which were the payment made to the insurance company plus the increase in the cost of its professional indemnity insurance and other costs which had arisen by virtue of the broker’s breach of his duty of good faith.

The Court accepted that the accusations made against the broker were very serious and that the more serious these were, the higher the standard of proof had to be, especially in the absence of any evidence of any personal gain resulting from the backdating of the cover notes.

Despite the broker’s excellent past track record, the judge ruled that the evidence was compelling that he had backdated the cover notes and that this had caused each of the losses for which his ex-employer claimed. Accordingly, he was liable for the losses.



General

Residential Caravan Sites - New Model Standards
The operator of a residential caravan site is required to be licensed under the Caravan Sites and Control of Development Act 1960. The Government is proposing a new set of model standards for site operators and intends to publish these in April.

Copies will be available from the website of the Department for Communities and Local Government (http://www.communities.gov.uk).



Property

Right to Buy – Can Tenants Buy Their Commercial Property?
A recent decision of the House of Lords may have opened the door for thousands of tenants of offices and other properties originally designed to be used as homes to be given the right to buy their properties.

The Leasehold Reform Act 1967 gives a long leaseholder of a house the legal right to purchase the freehold according to a set procedure. The Act does not apply to commercial premises – but the House of Lords’ decision suggests that in some circumstances commercial tenants may acquire the right to buy the property they occupy.

The question turned on whether the premises in question were a ‘house’. The Act defines a house as premises which are designed or adapted to be lived in and which can reasonably be called a house.

In the case in point, the building was used for commercial purposes but had originally been designed as a residential property. The Lords considered that the fact that the premises themselves were not habitable was not relevant. The strict construction of the law meant that since the premises were designed to be lived in, the right to buy applied. It is quite clear from the judgment of Lord Walker that the Lords consider that a property which is of ‘mixed’ use, having been adapted for residential occupancy, would also qualify as a house for this purpose.

This decision has potentially massive implications for owners and tenants of all sorts of properties which were originally designed as houses. We are watching with interest to see what the full impact will be. Landlords thinking of giving a long lease for commercial premises which were originally designed as a residential property might want to think again until the position is clearer.

Lack of Clarity Makes Repair Responsibility Problematic
Lack of clear wording in a lease can often cause problems. A recent case dealt with who was responsible for redecorating and repairing the windows of a flat – was it the builder landlord, who had sold the 999 year leases in a property development within a Grade II* listed building, or was it the purchaser of one of the leases?

The relevant clauses required the builder to repair ‘the main structure of the building’, which was briefly defined, and to decorate ‘the exterior, including the wood and ironwork…as often as…reasonably required’.

One would reasonably think that the repair and decoration would go together but, in this case, the court ruled that the repairs were the responsibility of the tenant as the windows were not ‘part of the main structure’. The decoration of the (repaired) windows, however, was the responsibility of the landlord.

This is one of those cases where more care over the drafting of the documentation could have made it clear who was responsible for what, which would have been preferable to spending time and money later on to resolve the issue in court. We can assist you in drafting leases and related property agreements which will help prevent such problems arising.

VAT and Building – New Notice 708
HM Revenue and Customs have issued a revised version of VAT Notice 708, which is of importance to builders and property developers. It explains when each of the various rates of VAT on building work applies. The notice also deals with:

• the zero-rating of sales of buildings and long leases;
• when building materials can be zero-rated or reduced-rated at 5 per cent;
• when developers are ‘blocked’ from deducting input tax on goods that are not building materials;
• when a builder or developer needs to have a certificate from his customer;
• when a customer can issue a certificate to a builder or developer;
• what happens if you change the use of a certificated building;
• the special time of supply rules for builders; and
• when you must account for a self-supply charge if using your own labour.

The revised version can be found by searching for ‘VAT Notice 708’ on the HMRC website at http://customs.hmrc.gov.uk/.

Community Infrastructure Levy – Proposals
The Government has now issued guidance on how the community infrastructure levy is intended to work.

The first step will be taken by the local authority involved in the granting of planning applications. It will decide what infrastructure developments are necessary and obtain estimates of the likely cost. It will then decide how much of the cost should be met by each development.

The expenditure on infrastructure projects met by the levy can be with regard to past or future expenditure and need not be just for current infrastructure projects.

The levy will be payable on commencement of the development, but will be due in instalments. Failure to pay will be a criminal offence and will mean work on the site must stop. Measures are being taken to make the developer liable as well as the landowner. This is seen as being a method of ensuring collection of the levy.

Once the levy is in place the existing Section 106 arrangements will be used to fund affordable housing, site-specific expenditure and non-financial or technical matters. It is not intended that the levy will replace payments made under Section 106; the two costs will complement one another.

The guidance can be found at http://www.communities.gov.uk/documents/planningandbuilding/doc/675917. The draft regulations are due to be issued in the autumn with legislation expected to come into force in early 2009.



Tax

Expense Claims for Foreign Travel – New Rules
HM Revenue and Customs have published a new set of tables setting out benchmark scales for the claiming of accommodation and subsistence expenses for employees travelling abroad.

These include:

• a ‘room rate’ per night;
• a ‘subsistence only rate’, intended to cover the total cost of meals in a period of 24 hours, plus the cost of daily travel between the employee’s hotel and office;
• a ‘24 hour rate’. This is the sum of the ‘room rate’ and the ‘subsistence only rate’;
• an ‘over 10 hour rate’, which is intended to cover subsistence expenses for any period of more than 10 but fewer than 24 hours; and
• an ‘over 5 hour rate’, which is intended to cover subsistence expenses for any period of more than 5 but fewer than 10 hours.

For areas where benchmark rates are not available, employers may reimburse their employees’ actual accommodation and subsistence expenses, plus £4 per day to cover hotel-to-office travelling expenses.

The tables do not provide benchmark rates for other allowable expenditure that employees may incur en route – such as taxi fares. This may be claimed in addition to paying the benchmark rates.

The guide can be found at http://www.hmrc.gov.uk/manuals/eimanual/eim05255.htm.

HMRC Announce Retrospective Taxation
It is generally thought that no matter what changes HM Revenue and Customs (HMRC) decide to make to tax law, a taxpayer will at least be free from the spectre of having any change applied retrospectively. Normally, that is so, but recently HMRC have quietly announced (the decision is tucked away in the back of the HMRC Employer Bulletin for February 2008) that where a business operates a dispensation incorrectly, HMRC may revoke it retrospectively.

A dispensation is an agreement by HMRC that payments made to employees – typically involving mileage or subsistence – do not have to be entered on the employees’ forms P11 or P11D as a benefit in kind. Dispensations are applied when employees regularly make payments which they reclaim from their employers and are normally granted where:

• the amount claimed is not greater than the expenditure incurred;
• the expenditure would be allowable for tax purposes if paid directly by the employer; and
• the expenditure is reasonable.

HMRC allege that they have detected cases in which employers holding dispensations have ‘gone on to abuse the basis on which the dispensation was applied for and/or operated on’. They now advise that where there is any evidence of misrepresentation or negligence, they will consider revoking the dispensation from the date it was granted.

This has potentially very serious implications for employers who have failed to be diligent in the way they operate their systems as regards expenditure that is the subject of the dispensation. HMRC state that such action ‘should only happen if it should not have been granted in the first place or if it should have been revoked’ due to a later change.

For more information on the operation of HMRC dispensations, see http://www.hmrc.gov.uk/manuals/eimanual/EIM30050.htm.

HMRC to Target Professional Partnerships
HM Revenue and Customs (HMRC) have professional partnerships in their sights as the rules relating to the valuation of work in progress for such firms begin to be fully implemented.

Following changes, introduced in June 2005, to the basis of the valuation of unrealised profits, HMRC will now have started receiving the first accounts prepared under the new rules. HMRC have set up specialised units to examine the compliance of professional firms with the new rules. The units are staffed with experienced Tax Inspectors who are expected to look carefully for evidence of non-compliance.

If you have a dispute with HMRC, it is important to make sure you have professional representation.

Competition Law

OFT Offers Rewards for Information on Cartel Activity
The Office of Fair Trading (OFT) is in charge of enforcing competition law in the UK. It will take action if it discovers anti-competitive behaviour that harms customers and other businesses.

Cartels are prohibited under the Competition Act 1998. Any business found to be a member of a cartel can be fined up to 10 per cent of its turnover. In addition, the Enterprise Act 2002 makes it a criminal offence for individuals to participate in cartels. Anyone convicted of the offence may be given a maximum sentence of five years’ imprisonment and/or an unlimited fine.

The OFT has announced a new policy of paying financial incentives in return for information which helps it to identify and take action against illegal cartels. The policy will run for a trial period of 18 months before a decision is taken on whether to introduce it permanently. Rewards will only be paid where the information provided is accurate, verifiable and proves to be useful to the OFT in its anti-cartel enforcement work. Rewards will be calculated according to a set formula and in exceptional circumstances could be as high as £100,000.

For more information, see http://www.oft.gov.uk/advice_and_resources/resource_base/cartels/rewards.

Intellectual Property

Patent Costs to Fall in May
If you are considering making patent applications for European-wide patents and are happy about the risks of keeping your technology unprotected for another few weeks, you might want to think about delaying your application until 1 May.

The reason is that from that date, an application for a European patent will no longer have to be translated into the language of each country in which patent protection is sought, if the original patent application was submitted in English, French or German.

The change is the result of the French Government’s October 2007 agreement to ratify the earlier 2000 ‘London Agreement’, bringing it into effect from 1 May 2008.

Contract

Absence of Proof Costs Prospective Buyer £400,000
Failing to complete on a property transaction when contracted to do so can be expensive, even when the sale is by way of a transfer of shares, as a recent case illustrates.

The case involved a company which did not trade but owned a property. In order to buy it, the purchaser, which was another company, arranged to buy its shares, which would then mean it owned the property. The agreed purchase price was £4 million.

The transaction was rather unusually structured. A deposit of 10 per cent was paid by the prospective purchaser on signing the agreement. The balance of £3.6 million was due to be paid by way of payments of £800,000 on 8 February 2006 and £2.8 million on 8 April 2006.

The second tranche of the sum due was paid on time, but the final tranche was not paid. On 11 April 2006 a notice to complete was served on the purchaser, giving it until 26 April to pay the balance due. This deadline was not met. The vendor therefore rescinded the contract. It was still willing to negotiate with the prospective purchaser, but only at a higher price. Eventually, in September 2006 the vendor sold to a third party for £4.3 million.

In the event, the vendor agreed that the £800,000 second tranche was due to be returned to the failed purchaser, but refused to repay the £400,000 deposit. In court, the prospective purchaser argued that the notice of the rescission of the contract was invalid, that it was entitled to a share in the ‘extra’ profit of £300,000 the vendor had made from the eventual sale and that the vendor had not been in a position to complete on either the 8th or 26th of April 2006.

The court found that there was no substantive evidence that the property owner was not in a position to complete on either date. The notice of rescission given was valid and there was no basis under which the additional profit on the subsequent sale should be shared with the failed purchaser.

Accordingly, the deposit was not repayable.

Insolvency

Tough Going for Customers as Banks Seek Security
Recent figures from the Courts Service show that lenders of consumer credit (as opposed to mortgages) are increasingly taking steps to reduce their risk by seeking to secure their lending against the homes of credit card holders and other unsecured borrowers who have a chequered repayment history – in some cases seeking charging orders on a borrower’s home if only one payment is missed.

The number of applications made in 2006 was over 90,000, nearly six times the number made in 2000. 2007 is expected to show a further increase. That this is an attempt by the banks to obtain better levels of security is clear, as credit agency Experian recently reported that unsecured debt growth in the UK has been slowing, having risen only 9.2 per cent in the last 12 months. According to Experian, ‘The data also suggests that lenders have been implementing credit tightening policies well before the widely reported credit crunch of August 2008. It shows that growth in lending has slowed markedly across all key credit products and credit tightening on cards, loans and mortgages was already well established in advance of the so-called credit crunch’.

The increasing number of bankruptcy and winding-up petitions (up from 12,000 in 1999 to 52,000 in 2006), fuelled in part by the more beneficial bankruptcy regime created by the Enterprise Act 2002, has no doubt added to the nervousness of lenders.

What this means for businesses is that lenders are increasingly seeking to obtain extra security for existing advances and have reduced the lending risk they are willing to take, as well as seeking higher lending margins – a factor which means the recent base-rate cuts are not being passed on in full to borrowers. The use of credit cards as a source of short-term emergency finance is also becoming a riskier strategy than hitherto.

If you are experiencing difficulty in controlling your finances, contact us. The sooner you take advice, the better the likely outcome will be.

Data Protection

Data Protection Strategy
The Information Commissioner's Office (ICO) has issued a new strategy document which states that its main aim is to safeguard personal data rather than take a strict approach to enforcing the letter of data protection law. The ICO aims for ‘a sustained reduction in risk’. In practice, this will mean that its resources are to be concentrated on those areas where the greatest risk to personal data is perceived, giving priority to tackling situations where there is a real likelihood of serious harm to individuals or society.

One of the main areas of concentration is to be the unlawful trade in personal information. Other target areas include monitoring data sharing between organisations and resisting the rising tide of surveillance.

The ICO has asked for additional powers, including the power to close down

the data processing of any organisation which is considered to be operating with a serious disregard for the law, and has pressed the Government to create a new offence of recklessly or knowingly breaching data protection principles, which would be punishable by unlimited fines.

Employment Law

Amendments to the Sex Discrimination Act
Last year, the former Equal Opportunities Commission brought judicial review proceedings against the Government regarding some of the provisions of the Employment Equality (Sex Discrimination) Regulations 2005, which made amendments to the Sex Discrimination Act 1975 (SDA) in order to implement the Equal Treatment (Amendment) Directive. The Court judged that the Regulations did not fully implement the Directive and so the Government was required to make amendments to the SDA with regard to pregnancy and maternity leave, discrimination and harassment.

The Sex Discrimination Act 1975 (Amendment) Regulations 2008, which implement these changes, came into force on 6 April 2008. 

Specifically, the definition of sexual harassment has been expanded so that the causal link between the harassment and the sex of the person being harassed has been removed. The change will enable a claim to be made by someone who is not the subject of the unwanted conduct but where its effect is to violate that person’s dignity or to create an intimidating environment for them.

As regards an employer’s liability for the harassment of employees by a third party, it becomes unlawful for an employer to fail to take reasonably practicable steps to protect an employee from harassment by a third party where such harassment is known to have occurred on at least two other occasions. The person responsible for the harassment does not have to be the same on each occasion.

Changes regarding pregnancy and maternity are the removal of the requirement for a comparator who is not pregnant or not on maternity leave, when a woman brings a claim for discrimination on these grounds, and there must also be no difference between the contractual benefits allowed to women who are on compulsory, ordinary or additional maternity leave.

The amendments that the Government is required to make regarding terms and conditions during maternity leave will be brought into effect by changes to the Maternity and Parental Leave etc. Regulations 1999 and will apply to employees whose expected week of childbirth begins on or after 5 October 2008. This will provide time for businesses to prepare for these changes. The changes will affect employers who provide non-pay benefits to employees whilst on ordinary maternity leave (e.g. contractual annual leave above the statutory minimum, company cars, gym membership, mobile phones etc.) but who cease providing them during additional maternity leave. Women will also be able to bring a discrimination claim if their employer fails to pay them a discretionary bonus during their two-week period of compulsory maternity leave.

New Minimum Wage Rates Announced
The Government has announced increases in the national minimum wage rates in line with the recommendations of the Low Pay Commission. These will apply from October 2008.

The adult national minimum wage will rise from £5.52 to £5.73 an hour. The minimum rate for 18- to 21-year-olds will increase from £4.60 to £4.77 an hour and for 16- to 17-year-olds the rate will be £3.53 an hour instead of £3.40.

Health and Safety

Risk Assessments and Routine Activities
Two further cases involving breaches of the Health and Safety at Work etc. Act 1974 have highlighted the need for those with health and safety responsibilities to be vigilant in ensuring that day-to-day tasks are carried out in a way that does not put workers at risk.

The Health and Safety Executive (HSE) brought the two cases, against JCB Earthmovers Ltd. and JC Bamford Excavators Ltd., before the Crown Court on 14th March 2008, after two employees died in separate incidents whilst carrying out routine tasks. Both companies had pleaded guilty to charges at earlier court hearings.

Welder Darren Ellis was testing the fuel tank of an earthmoving machine for leaks when the inspection plate blew off, causing him fatal head injuries. The investigation into the accident revealed that he had connected a high-pressure instead of a low-pressure airline. The two airlines were similar and had identical connectors. The Court also heard that Mr Ellis was given insufficient training in how to do the job safely. JCB Earthmovers Ltd. was fined £200,000 and ordered to pay costs of £31,366.

Paul McNamara suffered fatal head injuries when he was crushed by the boom of an excavating machine. HSE’s investigation revealed that it was common practice for workers to operate the controls for the boom whilst standing outside the cab and leaning through its back window. A fault in the hydraulic system resulted in the control lever malfunctioning and this caused the boom to carry on moving, trapping Mr McNamara and inflicting fatal injuries. JC Bamford Excavators Ltd. was fined £266,000 and ordered to pay costs of £31,701.

Employers should not only ensure that suitable assessments of the risks involved in their undertakings are carried out but must also make sure that workers are trained properly and do not take short cuts when carrying out routine activities, thereby making them dangerous.

Failure to manage health and safety risks can have disastrous consequences for employees and businesses alike. A proactive approach is essential. We can advise you on the policies and procedures necessary to minimise the likelihood of an accident in your workplace that could result in prosecution or an unlimited fine.


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PRESTON-ROUSE COMPANY
6 Gray's Inn Square, Gray's Inn, London WC1R 5AX
DX 65 London/Chancery Lane
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