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DECEMBER 2007

One of the less well-known schemes is the Enterprise Investment Scheme (EIS), which allows an investor to subscribe for new shares in a qualifying company and to obtain tax relief on the investment at 20 per cent. If the shares are held for three years after the investment is made, any subsequent gain on them is not subject to Capital Gains Tax (CGT). EIS shares can also be used to ‘roll over’ a prior gain – deferring the resulting CGT liability until the EIS shares are disposed of.

For a company to issue EIS shares, certain conditions must be met:

• The shares cannot be quoted on a recognised stock exchange and arrangements for a flotation cannot be in progress. Note that a flotation on the Alternative Investment Market does not count for this purpose;
• There are limitations on the trades that are allowed for EIS relief. In particular, land-based, professional services and financial activities are excluded;
• The company must have fewer than 50 full-time employees;
• The gross asset value in the company’s balance sheet must be less than £7m before the issue of the EIS shares (£8m afterwards); and
• There is also a limitation of £2m in any twelve-month period on the total amount which can be raised using the EIS or similar schemes, such as Venture Capital Trust investments.

The EIS can be both a useful investment vehicle for investors not afraid of the risk involved and a source of capital for the smaller company which may find more conventional finance difficult to obtain.



General

New Money Laundering Regime
Business owners are reminded that on 15 December 2007 the Money Laundering Regulations 2007 come into effect, replacing the existing money laundering legislation. The aim of the new regime is to further restrict criminal access to the financial system, thereby deterring crime and terrorism.
A simple summary of the new rules can be found at http://www.hm-treasury.gov.uk/media/2/6/moneylaundering_guide150807.pdf.

Business Records Can be Retained on Sale of Business
One of the perennial problems when a business is sold has been the requirement by HM Revenue and Customs (HMRC) that where such a sale constitutes the ‘Transfer of a Going Concern’, the vendor has been required to transfer the records of the business to the purchaser. This has caused difficulties where the vendor has subsequently needed to have access to the records (for example, to deal with a past tax issue which has arisen after the sale).

HMRC have at long last reacted to pressure put upon them by the professions and others and have announced that as from 1 September 2007 the requirement to transfer the business records in these circumstances has been replaced by a requirement that vendors must provide purchasers with all the information necessary to enable them to comply with their VAT obligations.



Property

European Court Backs Squatters’ Rights
The European Court of Human Rights has handed down a judgment which accepts that the UK's law of ‘adverse possession’ is not a breach of the property owner's human rights.

Under UK law, anyone who is allowed unopposed occupation of a piece of land for more than twelve years can acquire the legal right to the land. This is called adverse possession. Numerous safeguards for property owners were introduced by the Land Registration Act 2002, which introduced a system of notices before the title could be transferred.

An earlier decision of the Court had indicated that to pass the legal title to land by the exercise of ‘squatters’ rights’ would breach the human rights of the original owner as the title would pass without any compensation being paid. This decision was, unsurprisingly, contested in a case in which the land concerned, which had planning permission, was estimated to be worth £10m.

The judgment will serve as a wake-up call to property owners who allow others to occupy land they own as if it were the squatters’ own land.

The system now in place, which involves giving notices to owners of land when an application to transfer the title is made, should reduce the frequency with which ownership by adverse possession is claimed. However, there is still much unregistered land in the UK and it is often difficult to ascertain the ownership of that land in order to give the required notices. Furthermore, an owner who is unable to deal with notices served, by way of infirmity or because they are absent from their home, could face particular problems if steps are not taken to oppose the registration of title.

If you have property occupied by someone else which is not the subject of a lease or licence arrangement involving a payment, take advice to make sure you are not inadvertently exposing yourself to avoidable risk.



Tax

VAT Partial Exemption Changes
HM Revenue and Customs (HMRC) have announced changes to the treatment of input VAT that will affect businesses which make exempt as well as taxable supplies.

Under the previous system, a business which purchased an asset used for both exempt and non-exempt supplies could reclaim all of the input VAT when it was purchased (called ‘Lennartz’ VAT accounting, following the leading case on the matter) and then pay output tax relating to the use of the asset during its period of use. The alternative, of claiming the same proportion of the input VAT that applied to the taxable use of the asset, was also allowable.

Modifications were made on 1 November 2007 relating to the period over which output VAT needs to be accounted for when using the Lennartz system.

Guidance to the revised rules can be found on HMRC’s website at
http://www.hmrc.gov.uk/si/2007-3099-em.pdf.

It has been announced recently that the European Union is to review the whole area of partial exemption for VAT and, in particular, is likely to abolish the availability of Lennartz VAT accounting on the purchase of freehold property.

In a further move designed to increase VAT receipts, HMRC have announced that ‘independent living units’ for the elderly that are built in the curtilege or grounds of a care home do not meet the requirements for zero-rating and their construction will therefore be subject to VAT at the standard rate.

The New CGT Regime – Who Wins and Who Loses?
The changes announced in the Capital Gains Tax (CGT) regime in the Chancellor of the Exchequer’s pre-budget report are more far-reaching than has generally been understood. In this article, we look at the impact of the changes and work out who are the winners and losers.

Losers
Business asset owners
Where a person disposes of a business asset held for more than two years, the effective rate of CGT for a higher-rate taxpayer will increase from 10 per cent to 18 per cent due to the abolition of CGT ‘taper relief’ from 6 April 2008.

According to the Tax Faculty of the Institute of Chartered Accountants in England and Wales, the abolition of indexation relief will significantly increase the CGT charge for those who hold assets acquired before 6 April 1998.

Particularly badly hit by the changes will be those who hold business assets for the longer term, for example farming businesses and furnished holiday lettings businesses.

Winners
Non-business asset owners
The current taper period for non-business assets is ten years, which complicates the situation somewhat. The application of non-business taper relief means that the minimum effective CGT rate on such assets is 24 per cent for a higher-rate taxpayer, so many higher-rate taxpayers with non-business assets are likely to be better off disposing of assets after 6 April 2008 and paying CGT at 18 per cent. However, the benefit or otherwise depends on the amount (if any) of the available ‘nil-band’ below which CGT is not payable (currently £9,200 per annum).

For basic-rate taxpayers, the effects are limited but mean that the effective tax charge on non-business assets held for five years or more rises.

What to do now
We strongly recommend that clients holding assets, especially business assets, consider their CGT position as soon as possible. Draft legislation is expected to be available at the beginning of 2008, so precise planning should be possible then. At the time of writing, a number of anomalies had been uncovered in the proposals, which are under discussion between the relevant professional bodies and HM Revenue and Customs.



Intellectual Property

Patent Protection Depends on Proof of Invention
A recent ruling by the House of Lords, in a case involving a patent, marks a significant change to UK patent law. Prior to the decision, under UK law an action brought to prove entitlement to a patent could only be commenced against someone if it could be demonstrated that they had breached the law in some way. The House of Lords ruled that this approach was incorrect and that in a claim to assert entitlement to a patent, all that is necessary is that the claimant is able to prove that he or she was the inventor of the subject of the patent. The Lords also ruled that an amendment of a claim from one of joint entitlement to a patent to one of sole entitlement did not amount to a new claim. Accordingly, the two-year limitation period on such claims did not apply.

In the words of Lord Hoffman, “The first step in any dispute over entitlement must be to decide who the inventor or inventors of the claimed invention were. Only when that question had been decided could one consider whether someone else might be entitled.”

This ruling is important as it enables those who can prove that they invented a patentable invention to claim the right to the patent or prevent someone else patenting it. This significantly advances the rights of inventors.

Company Law

Companies Act Delays
The Government has announced that most of the provisions of the 2006 Companies Act which were due to be implemented on 1 October 2008 are to be delayed until 1 October 2009.

The reason given for the delay is to allow the necessary amendments to the Government’s systems and procedures to be made.

The parts of the Act scheduled for implementation on 6 April 2008 are unaffected.
The revised implementation timetable can be seen here
http://www.berr.gov.uk/files/file42238.doc.

Dividend Waivers – Making Them Work
When a company is set up, it is common to divide the shares in it in approximately equal proportions amongst the subscribers. Whether or not this proves to be the most effective way to split them in the long run depends on a variety of factors, of which the effect on the governance of the company is normally the most significant. However, one problem which sometimes results is that where dividends are paid in proportion to the shareholding, this can lead to dividends being payable to a shareholder who does not need them or who would have to pay higher-rate tax on them.

When a shareholder does not wish to receive a dividend, this can be effected by the execution of a dividend waiver. The use of such waivers can be an effective tool in tax planning, so it is unsurprising that HM Revenue and Customs (HMRC) are generally not keen on them. Unless a dividend waiver is executed in the right way, HMRC are likely to use anti-avoidance legislation to attack the scheme.

The essential steps are:

1. The dividend waiver must be a formal election by the person entitled to receive the dividend. It must be done on paper in appropriate form and dated and witnessed;
2. The waiver must be executed before the dividend is declared; and
3. It is always better if there is a commercial reason for the dividend to be waived – this will normally be to allow the company to retain funds for some specific purpose.

It is unwise to use dividend waivers too frequently. HMRC will look more closely at arrangements which are repeated and the practical effect of which reduces the overall tax payable – for example, where the shareholder executing the waiver is a higher-rate taxpayer and the shareholder who receives the dividend is not.

Non-Cooperation Sufficient for a Bank
A director of a company who failed to cooperate with the Financial Services Regulator and (although the company was not insolvent) with the Official Receiver recently found that an order was made banning him from acting as a director.

Mr Ghassemian was a company director and ignored requests for information from the Financial Services Regulator and also the Official Receiver. When an order banning him from being a director was made by the Secretary of State, he argued that the order was invalid because the Secretary of State had no jurisdiction to make a complaint on behalf of the Financial Services Regulator and, also, that the allegation regarding non-cooperation with the Official Receiver was irrelevant since his company was not insolvent.

The High Court dismissed his appeal. Failing to cooperate with the appropriate regulators could be sufficient grounds to show unfitness to be a company director.

This case illustrates the fact that the authorities take a dim view of directors who fail to cooperate with them when they make enquiries. Company directors who receive requests from regulators and have any qualms about complying with them should ensure that they take advice regarding what level of cooperation needs to be given.

Contract

Arbitration is the Preferred Option
The Law Lords have handed down a significant judgment for people who have disputes over contracts which contain an arbitration clause. The case arose because of a dispute between businesses engaged in the chartering of ships. The ship owners brought an action for damages for conspiracy, bribery and breach of fiduciary duty relating to a charter contract that contained a clause which provided that disputes under the contract would be settled by referral to arbitration.

The ship owners argued that the arbitration clause did not apply for two reasons. Firstly, the question of whether the charters obtained by the defendants were procured by bribery was not a dispute arising under the charter contract and, accordingly, the dispute was ‘outside the agreement’. Secondly, the ship owners argued that the arbitration clause was liable to be rescinded and therefore not binding on them, because they had the right to rescind the entire contract if their allegations of bribery could be sustained.

The House of Lords could not accept these arguments. In its view, a contract was agreed by rational businesspeople who could have placed certain types of dispute outside the arbitration clause had they chosen to do so. In the words of Lord Hoffmann, “The language of the relevant clause of each charter contained nothing to exclude disputes about the validity of a contract on the ground that it was procured by fraud.”

The Lords also considered that the owners’ claim, that if they were right about the bribery they were entitled to rescind the whole contract including the arbitration clause, was flawed. An arbitration agreement can only be rendered void or voidable on grounds relating directly to that agreement. There were no grounds of challenge specific to the arbitration agreement so as to invalidate it. The claim that the main contract had been induced by bribery thus fell to be determined under the arbitration agreement.

If you are offered a contract which contains an arbitration clause, you might care to consider whether you wish to limit the application of the arbitration clause so that certain types of dispute are not covered by it.

Policy Wording Negates Claim
Yet another case illustrates the wisdom of reading through commercial insurance policies to make sure that the risks you think are covered are actually covered by the policy.

In the case in point, supermarket giant Tesco was denied the right to claim compensation for the sum of money it had to pay out to Network Rail when construction operations Tesco had carried out caused the collapse of a tunnel, thereby causing a loss of revenue to Network Rail because their trains could not use the tunnel for six weeks.

When Tesco sought to reclaim the costs from its insurers, the claim was turned down on the basis that the policy covered losses which were caused by a harm for which a liability arose in the law of tort. In particular, the policy covered losses resulting from nuisance to or trespass over the land concerned. The loss suffered by Tesco was not a loss due to a tort, so it had no right to claim on its policy.

You cannot be too careful when negotiating insurance. Make sure you read and understand the policy, particularly the limitations on cover, or you could get a nasty shock.

Retention of Title Can Include Commingled Goods
Retention of Title (ROT) clauses (also sometimes called ‘Romalpa’ clauses) are often used in contracts for the supply of goods. The effect of the ROT clause is that the goods which have been supplied remain the property of the supplier until paid for in full by the purchaser. If the buyer goes broke or fails to pay for the items, the vendor has the right to recover its property.

For discrete items such clauses are relatively straightforward, as the items which are the subject of the ROT clause are easily identifiable. Problems arise, however, when the goods subject to the ROT clause are incorporated into something else. Clearly the vendor does not own the other goods, so is the ROT clause valid?

Normally, in such cases, if the goods subject to ROT have been converted into a new product or products, the ROT clause fails. However, a recent case showed an exception to the rule. It involved a company that supplied 217 tonnes of zinc in the form of ingots to another company. Zinc is normally supplied in ingot form. The company which purchased the zinc ingots melted them and mixed them in a tank with zinc from another supplier. There was a total of 265 tonnes of zinc in the tank.

The supplier claimed that 217 tonnes of the molten zinc in the tank belonged to it under the ROT clause. Despite that fact that the actual zinc it had supplied could not be distinguished from that supplied by others, the judge agreed. Crucially, the zinc in the tank was essentially the same material (though slightly less pure) than the material originally supplied. The zinc was still identifiable and thus the ROT clause held good.

When selling goods, retention of title clauses are almost always worth including if there is a risk of non-payment and the goods themselves will be identifiable enough for the clause to be enforceable. If you supply goods, it might be worth checking that your current terms of trade incorporate best legal practice.

Insolvency

‘Pre-Pack’ Administration Gets Court Approval
Insolvency law has produced more than its share of legal argument. One contentious matter which recently came before the court was whether ‘pre-pack’ transfers of insolvent businesses can be justified.

A pre-pack occurs when an insolvent business (or a part of it) is transferred to another business and, in effect, continues to trade. At issue is whether the whole process is merely a way of the old business shedding its liabilities and continuing, leaving creditors in the lurch. Pre-packs often involve some of the members of the management team of the failed company, which can cause anger on the part of creditors of the old company who have been left out of pocket. The new business appears to outsiders to be the same as the old one, but is now shorn of its liabilities.

In the case in point, the administrators of an insolvent partnership wished to transfer the business to a new limited liability partnership for a sale price of £400,000. The administrators considered that this would be the best solution as the value of the partnership’s assets and goodwill would be maximised and there would be continuity of service to the clients of the firm. In addition, the jobs of approximately 50 employees would thereby be saved, which would in turn reduce the preferential claim on the assets of the partnership (for compensation for loss of office) which would otherwise result.

HM Revenue and Customs (HMRC) was the major creditor of the partnership, being owed over £1.7m in PAYE, VAT and National Insurance Contributions. They opposed the sale by the administrators and had the proposal been put to a vote of the creditors (such votes give creditors voting power proportionate to the sum they are owed), HMRC would have been able to defeat the proposal.

However, in such circumstances it is for the court to decide whether or not to approve the sale, not the creditors. The judge dealing with the case was particularly impressed that the sale would lead to the preservation of employment of the firm’s staff. He accepted the impartiality and expertise of the insolvency practitioners and was of the view that only very strong evidence to the contrary should be allowed to overturn arrangements made on the basis of their professional judgment.

Licensing

Changes Proposed to Procedures for Minor Amendments
The Government has announced proposals to simplify the process to vary Licensing Act Authorisations under the Licensing Act 2003, which requires licensees to apply for a new licence or variation to their existing licence in several circumstances of minor import – for example where licensable activities are varied or the plan attached to the authorisation is to be changed.

The idea is that licensing authorities should consider whether there is likely to be an impact on the licensing objectives and, if not, whether an application to vary the licence needs to be made. This should save licensees the cost of making applications for minor amendments.

The Government has just published proposals for reform which put forward three possible approaches:

1. To amend the Act to introduce a new process for minor variations, broadly defined as any variation that does not impact adversely on the promotion of the licensing objectives. The decision regarding the impact of the application will be left up to the authority. This is the Government’s preferred approach.
2. To amend the Act to introduce a new minor variations process as above, but with constraints on the freedom of discretion of the authority spelled out in the legislation.
3. To leave the system as it is.

The consultation document can be found at http://www.culture.gov.uk/Reference_library/Consultations/2007_
current_consultations/cons_minorvvariations_plcpc.
The deadline for responses is 20 February 2008.

Data Protection

What is Personal Data?
The Definition of Personal Data is contained in Section 1 of the Data Protection Act 1998. Personal Data is that which relates to a living individual who can be identified from the data, or from the data and other information which is in the possession of, or likely to come into the possession of, the data controller.

Personal data includes opinions expressed about the person and also any indication of intention, expressed by the data controller or any other person, towards the individual concerned.

Whether data is covered by the Data Protection Act as personal data depends therefore on both the nature of the data and the use to which it is, or could be, put. Clearly, the definition is capable of including a wide variety of data about a person. The leading British case on what is and what is not personal data implies a rather narrow interpretation, but a recent EU opinion implies that the definition should be interpreted quite widely.

The office of the Information Commissioner has issued a guidance note on what constitutes personal data which includes a helpful flowchart. This can be found at
http://www.ico.gov.uk/upload/documents/library/data_protection/detailed_
specialist_guides/personal_data_flowchart_v1_with_preface001.pdf.

Employment Law

Consultation on Collective Redundancies
The Employment Appeal Tribunal (EAT) has ruled that the obligation on an employer, under section 188 of the Trade Union and Labour Relations (Consolidation) Act 1992, to consult over collective redundancies extends to consultations over the reasons for the closure of a business (UK Mining Ltd. v National Union of Mineworkers). In the EAT’s view, the obligation to consult over avoiding proposed redundancies inevitably involves examining the reasons for the dismissals and that in turn requires consultation over the reasons for the closure.

This is an important decision as it overturns previously binding authority on this area of the law. One difficulty is that EC Directive 98/59/EC provides that an employer should begin consultations when ‘contemplating’ making collective redundancies, whereas this duty is given effect in domestic law as being a duty to consult where an employer ‘proposes to dismiss’ employees as redundant.

The EAT held that as domestic law now stands, the obligation to consult over the avoidance of dismissals has significantly widened the scope of the consultation obligations. In its view, in a closure context, where it is recognised that dismissals will inevitably, or almost inevitably, result from closure, dismissals are proposed at the point when the closure of the business is proposed. Where closure and dismissals are inextricably linked, the duty to consult over the reasons for the closure arises

It is important that employers are aware of this requirement to consult at an early stage in the decision-making process. Carrying out a redundancy programme always requires care and failure to consult as required can lead to an Employment Tribunal requiring the employer to make protective awards to the dismissed employees

Age Discrimination Cases on Hold
Following a Practice Directive handed down by the President of Employment Tribunals, all age discrimination cases in England and Wales that relate to dismissal on the grounds of retirement arising under regulation 30 of the Employment (Equality) Age Regulations 2006 (which provides for lawful retirement at or over age 65) are being stayed pending the ruling of the European Court of Justice on a challenge to the legality of UK retirement law made by the Heyday organisation. Heyday wants the legislation amended to give workers over 65 the same protection from discrimination as younger workers. The judgment is not expected until at least 2009.

Health and Safety

Company Road Safety – Police Get Tough
Employers who neglect to take account of the fact that their health and safety responsibilities extend to employers driving on company business should take note of a shift in the way police will investigate road accidents in future.

Research by the Health and Safety Executive shows that 20 people are killed and 250 people are seriously injured each week in traffic accidents involving someone driving for business reasons. This has prompted the Metropolitan Police and several other forces to adopt a policy of investigating company road-safety policy when an accident involving a work vehicle occurs.

Police will investigate whether the company has carried out basic checks, such as making sure employees using their own cars for business purposes have a valid driving licence, are insured to drive on business and have an MOT certificate for their vehicle. In addition, they intend to investigate the reasons for a vehicle involved in an accident being on the road.

Research by the Parliamentary Advisory Council for Transport Safety has found that employers often fail to consider the dangers posed by employees driving whilst tired. Practices such as expecting employees who drive on company business to work long hours or putting pressure on them to fulfil as many appointments as possible in a given period could be regarded as contributory factors by police investigating the reasons for an accident.

The Corporate Manslaughter Act, due to come into force in April 2008, will make it easier to bring cases against organisations that are negligent in carrying out their health and safety obligations and this causes someone’s death.


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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