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NOVEMBER 2007

The Regulations apply (with certain exceptions) to the following types of business:

• credit institutions;

• financial institutions;

• auditors, insolvency practitioners, external accountants and tax advisers;

• independent legal professionals;

• trust or company service providers;

• estate agents;

• high value dealers; and

• casinos.

It is the 'high value dealer' who is probably least likely to be aware of the impact of the new law. The legislation defines a high value dealer as 'a firm or sole trader who by way of business trades in goods (including an auctioneer dealing in goods), when he receives, in respect of any transaction, a payment or payments in cash of at least 15,000 euros in total, whether the transaction is executed in a single operation or in several operations which appear to be linked'. Clearly, this definition will cover many businesses supplying high value goods where the customer wishes to pay in cash. At the time of writing 15,000 euros is approximately £10,500.



General

Insurance Contracts - New Discrimination Law
Legislation enacting European law prohibiting sex discrimination in insurance contracts is scheduled to come into force in the UK on 21 December 2007. From that date it will be unlawful to use sex as a factor in the calculation of premiums and benefits unless the underlying actuarial data on which the premiums and benefits are based are reliable, regularly updated and available to the public.

At this stage, it is difficult to see what difference this may make to premiums for the relevant policies (life, medical, sickness and critical illness for example), but in principle it may mean that some policies for women become less expensive and some for men become more expensive.



Property

Empty Properties - Rating Change Approaches
It has for some years been a bit of an oddity that with the economy buoyant, quite generous reliefs from business rates have been available where commercial premises are unoccupied.

Ironically, a change in the law reduces these reliefs just as the economy looks to be coming off the boil.

At present, vacant non-domestic properties are generally exempt from rates for three months. After that, rates are payable at 50 per cent until the property is again in occupation. Industrial properties and storage facilities enjoy 100 per cent rate relief until re-occupied. From 1 April 2008, subject to designated exemptions, the reliefs will disappear - after three months for non-domestic properties generally and after six months for industrial and storage properties.

For landlords with property portfolios including commercial properties currently unlet, the Act provides a strong incentive to find tenants before the changes have an impact.



Tax

Taper Takes Toll
One of the more important changes announced in the recent pre-budget report was that Capital Gains Tax (CGT) taper relief, which was introduced in 1998, will be abolished with effect from the end of the current tax year. Under the new regime, all capital gains will be taxed at a flat rate of 18 per cent. Currently, capital gains are taxed at the marginal tax rate of the taxpayer, but the amount subject to CGT is reduced by the taper relief applicable, meaning that for a higher-rate (40 per cent) taxpayer benefiting from full taper relief, an effective CGT rate of 10 per cent would apply.

This will clearly have a significant effect on the amount of the after-tax receipts when business assets are sold but, more particularly, may affect the structure of some deals. It is common to tie in the management of businesses being taken over, for a period, to ensure continuity of the business under its new owners. Taper relief assisted this process, since it was possible to structure such deals so that the management of the 'sold' business received shares and then benefited from taper relief after the shares had been held for two years. This will no longer be possible.

For people who would benefit from taper relief, ensuring deals are completed by 5 April 2008 is worth considering. In most cases, unless a deal is already in negotiation, the timescale between now and the end of the tax year is too short for the process of marketing the business to sale to be completed - and in any event, most exit routes are better if there is forward planning and proper preparation of the business for sale.

At the time of writing, it looks as though the Government will yield to pressure and provide limited CGT relief through the reintroduction of retirement relief. Watch this space.

BlackBerry Tax Trap?
The scrapping in the Finance Act 2007 of the rule which allowed computer equipment worth up to £2,500 to be supplied to employees without an assessable benefit in kind arising has created an unintentional potential tax trap for businesses which supply their employees with BlackBerrys and similar PDA type devices.

The issue arises because the legislation will now create a benefit in kind charge for any device which is designed to be used with, connected to or inserted into a computer.

There is an exemption from the charge where the device has been provided in order to make it possible for the employee to carry out their duties of employment. However, if excessive private use of the device is made, a benefit in kind might well be charged.

We can expect PAYE inspectors to look for such use. Having a policy which prohibits non-essential private use of handheld devices is recommended.

When Less May Mean More (Tax)
Employers who provide free employee health checks, but not on an annual basis, should keep an eye on developments regarding the taxation of such benefits.

Due to a change in the drafting of the relevant regulations (announced on 14 August 2007), when health checks are provided free to employees, a benefit in kind now arises unless such checks are provided on an annual basis. To be tax and NI-free, from 6 April 2007 health screens and medical check-ups must be offered to all eligible employees annually in order for tax exemptions to apply. This represents a change from the previous position, which exempted from charge health checks provided free 'periodically'.

HM Revenue and Customs have reacted to the howl of protest from professional advisers by agreeing that for the rest of the current tax year (i.e. until 5 April 2008) they will not assess a benefit in kind charge for any health checks provided free by employers which would have been exempt under the previous regime.

As this represents an ideal opportunity for the Chancellor of the Exchequer to announce a 'tax cut' in the next Budget, simply by reverting to the previous treatment, it would be a brave soul who would bet against that happening. Watch this space.



Intellectual Property

No Agreement Means Software Writer Owns Copyright
A recent case has illustrated the common legal difference between intellectual property (IP) produced by a freelancer and that produced by an employee. In the case of IP produced by an employee, the rights to the IP almost invariably rest with the employer. If the IP is supplied by a contractor, in the absence of a specific contractual arrangement to the contrary the courts will normally conclude that the IP belongs to the person who created it. In these circumstances, the law of copyright states that copyright rests with the author, although the person commissioning the work gains an implied licence to use it. In some instances, however, an implied transfer of copyright to the person commissioning the creation of the IP is considered to arise.

In the case in point, a programmer was commissioned to produce software for a company. Later on, a dispute arose as to who owned the copyright. At issue was whether the IP supplied led to an assignment of copyright or the creation of an exclusive licence to use the IP. Over £40,000 of royalties were at stake, claimed by the writer of the software, based on sales of the product incorporating the software. The court ruled that the copyright rested with the writer of the software, but the person commissioning it had an exclusive licence to its use. Accordingly the royalties were payable.

Company Law

Directors' Duties Under the 2006 Companies Act
The Companies Act 2006 was designed to modernise British company law, making it 'fit for purpose' for the 21 st Century. In particular, there are several changes which affect directors. Under the Act the duties of directors are, for the first time, specifically defined. They are:

• (S 171) The duty to act within their powers (the duty to adhere to the company's constitution);
• (S 172) The duty to promote the success of the company. There are six things a director must consider here, including consideration of the company's employees, the long-term consequences of decisions, fairness to members (shareholders) and the impact of decisions on the community and environment;
• (S 173) The duty to exercise independent judgment. This is not as restrictive as it may seem, but means not being the 'yes man' of the person responsible for his or her appointment. It does not prevent having an interest in transactions nor relying on the opinion of an expert where appropriate;;
• (S 174) The duty to exercise reasonable skill, care and diligence. This duty has particular implications for non-executive directors, who can no longer afford to take a 'hands-off' approach;
• (S175) The duty to avoid conflicts of interest. This includes conflicts involving connected persons such as family members;
• (S176) The duty not to accept benefits from third parties; and
• (S177) the duty to declare an interest in transactions or arrangements. This includes the duty to declare interests of persons connected with the director.

Directors of companies should ensure that they and their fellow directors are fully aware of the provisions of the Act relating to their duties and comply with them.

Contract

Read the Policy Wording
Businesses normally carry insurance against a variety of mishaps and a recent case reiterates that it is important to make sure you read your policies and understand what is covered and what is not.

It involved a company which had a fire at its premises as a result of which pollutants were spilled into the watercourse. This necessitated a clean-up to be carried out by the Environment Agency, which also required the company to do some works.

The company claimed on its public liability insurance for the cost of both sets of remedial works. The insurers declined to pay because the relevant clause of the policy insured losses arising as a result of 'damage to property' and 'interference with...air light water or way'.

The nub of the problem was that the expenses incurred by the Environment Agency arose by operation of statute. They were not therefore damages in tort (i.e. resulting from civil wrongs), but debts. There was no wrong done which could lead to an action being taken against the company and therefore the insurance policy did not cover the cost...there was no basis under which a legal liability for damages could arise.

The company also argued that if it had failed to carry out the remedial work required by the Environment Agency, it could have faced an action for damages by a third party, so on that basis the cost of the company's work should be recoverable from the insurers. The policy, however, did not have a clause which obliged the company to mitigate losses which might fall onto the insurers. Accordingly, that loss was also not recoverable.

Most business people would undoubtedly assume that their public liability insurance would cover risks such as this, but the reality is that your insurance policy covers only what the policy document says it covers and no more. Incurring uninsured losses can have catastrophic results.

Insolvency

Insolvency Fees Ruling - Damages After Fees
A recent case involving the long-running saga of the insolvency of Leeds United FC has potential implications for employees of companies which go into administration.

The administrators of Leeds United are the 'Big 4' accountancy firm KPMG, who were appointed administrators of the club in May 2007. Leeds United was relegated to League 1 at the end of the 2006/07 season, but still had players on wages based on being in the Premier League. Wishing to be able to cut the club's payroll, KPMG applied to the court for a ruling on whether any damages payable for wrongful dismissal would rank for payment before or after KPMG's own fees for the administration. The action related to the contracts of four footballers, the unexpired portions of whose contracts were worth £2.2m. The issue for the club was that if the administrators did not accept the contracts, the club would lose its most valuable assets because the players would become free agents. If the administrators accepted the contracts, there would be a substantial liability if the players were not paid. The administrators foresaw a problem if they were to be considered to have wrongfully dismissed the players because the legislation places sums arising out of a 'debt or contract' adopted by an administrator in respect of 'wages or salary' as priority items for payment in such circumstances.

At issue was whether a liability in damages arising for wrongful dismissal was a sum arising out of debt or contract in respect of wages or salaries. In the view of the court, 'damages payable to the employee are not wages'. In similar circumstances, therefore, it is to be expected that the court would rule that damages arising out of other breaches of an employment contract would not have the preference given to wages and salaries in the insolvency legislation.

Is a Director an Employee?
When a company becomes insolvent, whether or not a shareholder and director is an employee, within the meaning of section 230 of the Employment Rights Act 1996 (ERA), for the purposes of a claim for statutory redundancy payment from the Secretary of State for Trade and Industry, can be difficult to ascertain. The Employment Appeal Tribunal (EAT) considered this issue in the case of Nesbitt and Nesbitt v Secretary of State for Trade and Industry.

Mr and Mrs Nesbitt were directors of APAC Computer Training Ltd. They managed the company on a day-to-day basis and between them owned 99.99 per cent of the shares. From the start, they had written contracts of employment with the company, in the same form as those of other company employees. They were paid salaries commensurate with their roles as the senior managers of the business but did not receive directors' fees or dividends.

In the course of 2006, the company became insolvent and on 3 July the remaining employees, including Mr and Mrs Nesbitt, were made redundant by the liquidator. The couple applied to the Insolvency Service for redundancy payments under the insolvency provisions of the ERA. Their claims were rejected on the ground that they were not employees within the meaning of the Act.

The Employment Tribunal agreed with the Insolvency Service on the basis that the Nesbitts were in joint control of the company.

The EAT overturned this decision on appeal. In its view, the fact of the Nesbitts' control over the company was not sufficient of itself to deprive them of employment status if they otherwise satisfied all the criteria for employment. Mr Justice Underhill stated, "I believe that the law is that the fact that a claimant under the employment protection legislation is a majority shareholder and a director of the company which employs him does not affect his status as employee unless the tribunal finds that the company is a 'mere simulacrum'... and thus, by the same token, that the contract between it and the putative employee is a sham."

In this case, apart from the level of control they had over the company, all the indications were that Mr and Mrs Nesbitt were employees. They had proper employment contracts (equivalent to those issued to other employees), they received all their remuneration by way of salary and they 'behaved like employees'.

One of the relevant factors to be taken into consideration in cases such as this is the contract of employment.

Licensing

Music While You Work
If you allow your staff to listen to music whilst working, the Performing Rights Society (PRS) has warned that you could be liable to pay a licence fee.

PRS is a not-for-profit organisation that licenses the public performance of music on behalf of its 50,000 composer, songwriter and music publisher members. It pays its members royalties each time a piece of their music is played in public.

According to PRS, a tariff for music in the workplace applies to 'the mechanical performance within the society's repertoire as a background to work, meals, stand-down times and breaks at work'.

PRS is taking Kwik Fit, the automotive parts repair company, to court for violating musical copyright because its mechanics play the radio loudly enough for it to be heard by colleagues and customers. In the view of PRS, this constitutes a 'performance' of the music, which requires the payment of royalties to the artists. PRS is claiming £200,000 in damages because Kwik Fit has refused to obtain the appropriate licences, claiming that the company has a policy banning the use of radios at its premises.

For those who allow music to be played at work, the situation is complicated by the fact that you may also need a licence from Phonographic Performance Ltd. (PPL). PPL collects and distributes airplay and public performance royalties in the UK on behalf of over 3,500 record companies and 40,000 performers.

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Environment

Waste Permits
Businesses that deal in waste that could potentially affect people or the environment will face a new licensing regime from April 2008. Under new Environmental Permitting Regulations, a single permit will be introduced, replacing the current Waste Management Licence and Pollution Prevention and Control regime.

The Department for Environment, Food and Rural Affairs has produced a booklet giving a basic overview of the new regime. This can be found at http://www.defra.gov.uk/corporate/consult/envpermitprog4/pdf/epp-booklet.pdf.

Employment Law

Age Discrimination - Changes to Benefits
Unlike other forms of discrimination, such as race or sex discrimination, the Employment Equality (Age) Regulations 2006 do allow a defence of justification in cases of direct discrimination, where this is 'a proportionate means of achieving a legitimate aim'.

In the first major case involving the Regulations, which were introduced in October 2006, the Employment Tribunal (ET) has dismissed a £4.5 million age discrimination claim brought against a City of London law firm (Bloxham v Freshfields Bruckhaus Deringer).

Peter Bloxham, 54, was head of restructuring at Freshfields Bruckhaus Deringer. He brought a claim of age discrimination against his former partners because he had lost out financially as a result of transitional arrangements made when the firm's pension scheme was being reformed. Had he been a year older, his retirement pension would not have been affected.

The ET found that Mr Bloxham had suffered less favourable treatment compared with partners aged 55 or over and that the treatment would be discriminatory unless justified. However, when considering the test of justification, in the ET's view, Freshfields did have a legitimate aim in reforming its pension arrangements. Without reform, the scheme in place meant that younger partners would be disadvantaged as they would contribute more but receive smaller pensions. The firm had carried out a lengthy consultation before introducing the changes and no less discriminatory method of achieving the desired reform had been put forward then or since. It therefore found that the firm not only met but comfortably passed the test. The unanimous judgment of the ET was that Mr Bloxham's complaint was 'not well founded' and it dismissed his claims of direct and indirect age discrimination.

Whilst the outcome in this case will be welcomed by employers who find themselves in a similar situation, it remains to be seen whether there will be an appeal to a higher court.

New English Language Qualifications for Migrant Workers
The Department for Innovation, Universities and Skills has launched new English language qualifications for migrant workers and employers. The new English for Speakers of Other Languages (ESOL) for Work qualifications will make it easier for migrant workers to get the practical English language skills they are likely to need in the workplace. There will be eight ESOL for Work qualifications, each having a slightly different focus and taking a different approach to assessment.

The new qualifications are shorter and more work-focused than traditional ESOL qualifications, giving learners practical English skills in essential workplace matters, such as health & safety and customer service. As well as better accuracy, efficiency and effectiveness, the new qualifications are designed to help employers benefit from improved communication and productivity and there will therefore be a fee payable for the course of study.

It is hoped that the qualifications will enable workers to improve their skills faster than through a traditional ESOL course. They are to be funded and delivered differently from traditional ESOL courses so that learners will be able to access provision quickly, bypassing the waiting lists that may exist on free ESOL courses.

The cost of the new ESOL for Work courses will continue to be funded by Government but a contribution will be required from employers, who directly benefit from the provision. The Learning and Skills Council has set the tariff for ESOL for Work at £880. In 2007/08 the fee element is £330, for which the learner or learner's sponsor (employer) is responsible. The initial take up group for the new qualifications is expected to be those people who have come to the country for work and who need skills to function in work, as well as those seeking work at the end of often short periods of employment.

Initially, the ESOL for Work qualifications will be available at Entry Level 3 and Level 1. Entry Level 3 is broadly equivalent to the standard expected of an 11 year old. Level 1 is broadly equivalent in difficulty to an English GCSE at grades D to G.

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Health and Safety

Fear of Disease Not Actionable
The House of Lords has recently issued a judgment that will be welcomed by employers. It has confirmed the earlier decision of the Court of Appeal that damages are not payable where the employer's negligence leads to anxiety or distress but no physical injury.

The decision involved a claim for compensation from employers by employees who had been diagnosed as having 'pleural plaques'. These are fibrous scar tissue in the lungs and are the result of exposure to asbestos. They are benign, but indicate that the risk of developing mesothelioma and other lung cancers is heightened. It was admitted that the exposure to asbestos was due to negligence on the part of the employers.

The claimants argued that notwithstanding the fact that they had not as yet developed an asbestos-related disease, the increased risk of so doing caused them distress. Most of the claimants sought 'provisional damages' - an award based on the probability that they would develop lung disease. The action of one of the claimants was also based on the fact that he had developed clinical depression as a result of the fear he had of developing lung cancer following his becoming aware that he had pleural plaques.

The Lords did not accept that the employer was liable in either case. Development of the plaques was insufficient basis for a claim. They were not of themselves harmful and the mere f ear of a future illness was not a factor which could of itself give rise to a claim for damages. In the case of the claimant with the psychiatric injury, the Lords concluded that the injury, though real, was not a 'reasonably foreseeable' result of the exposure to asbestos and thus also could not give rise to a claim. In the words of Lord Hoffman, " Applied to the broader question of psychiatric illness, that means that in the absence of contrary information, the employer is entitled to assume that his employees are persons of ordinary fortitude."

Woodworking - New Safety Leaflets
The Health and Safety Executive has published a new safety leaflet for woodworking businesses, on working with moulding machines, and has also updated three of its earlier leaflets dealing with noise in the timber milling industry. These are available at http://www.hsenews.com/2007/10/08/woodworking-information-sheets/.


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