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DECEMBER 2008

The Chancellor of the Exchequer’s announcement that the standard rate of VAT would be reduced from 17.5 per cent to 15 per cent was possibly the most widely leaked Government decision in recent years and will come as welcome news to the poorest in the economy, for whom VAT creates a disproportionate impact on their spending power. The VAT change applies from 1 December 2008 until the end of 2009, so whether it will be welcomed by businesses, which will have the task of reprogramming computer systems, tills and so on twice in 13 months, remains to be seen.

However, there are changes that businesses are bound to welcome. The proposed increase in Corporation Tax, scheduled for next April, has been postponed. There are new measures to provide support for borrowing for businesses that export and the Small Business Finance Scheme is being revamped to make more funds available to the smaller business. The system for use of tax losses is being revised to be of greater benefit to loss-making companies, by allowing carry-back of losses of up to £50,000 to be extended from one to three years. A new HM Revenue and Customs Business Payment Support Service is being established in order to allow businesses in temporary financial difficulty to pay their tax bills to a timetable they can afford.

Most welcome of all is the decision to postpone the massively unpopular ‘empty property rates’ charge where the property concerned has a rateable value of less than £15,000 – which, it is claimed, will exempt 70 per cent of vacant buildings in the UK.

In addition, businesses will benefit directly from the decision to bring forward £3 billion of capital expenditure from 2010/2011.

All will not be plain sailing, however, as the Treasury (which is traditionally optimistic in its forecasts) is expecting the economy to shrink next year, despite the fiscal boost, before economic growth resumes in 2010 or 2011.

The downside is in the longer term, with plans for increased taxes and reduced personal allowances for high earners (the highest earners will receive no personal allowance at all) and higher National Insurance Contributions scheduled for future years.



General

New Rules for Websites?
Businesses that have websites may need to think again about the contact information they provide for users, following a shock ruling of the European Court of Justice (ECJ).
The reason? The desire of the ECJ to protect the interests of all consumers.

In the course of a case brought by a German consumer group against a German insurance company, which failed to give one of its customers an effective way to communicate with it, the ECJ has issued a ruling that appears to increase the minimum amount of contact information that must be displayed on all business websites. The Court ordered the insurer to make sure its telephone number appeared on its website and that an online contact form was responded to within 60 minutes.

Prior to the ruling, it appeared that a company’s website need only include its address and a contact email address. It would now seem that the requirement to provide a means for consumers to communicate effectively with the operator of the website has more far-reaching implications.

The European E-Commerce Directive requires firms to make the following permanently available on their websites:

• The name of the service provider;
• The address of the service provider’s establishment; and
• Details, including the email address, which allow the service provider to be contacted rapidly and communicated with in a direct and effective manner.

It may be thought that the requirement to allow direct and effective communication just means that any communications sent using a web-based response form must be answered within a reasonable period of time. However, the ECJ has made it clear that such a facility must be in addition to an email address, which in effect appears to make a phone number or fax number essential. This is because whilst the objective of having an effective means of communication may be served in normal circumstances via email, the ECJ envisages cases in which the consumer may not have access to email.

The rules apply to most commercial websites.

The response of the UK Government to the ruling is awaited with interest.

Whilst it can be argued that providing a prompt response to a communication is just good customer care, the new requirements regarding websites will clearly pose challenges for some organisations.

Ombudsman Sounds Warning for Pension Scheme Trustees
A recent decision of the Pensions Ombudsman sounds a warning for pension scheme trustees who breach the terms of the pension trust deed by their investment policy. It is a particular warning for trustees who may be tempted to lend scheme assets.

In the decision, three of the trustees of the Ashridge Limited Discretionary Pension Scheme were ordered to pay a total of £411,000 plus interest after being found to have knowingly committed a breach of the terms of the trust deed. The trustees had lent more than half of the scheme assets to its failing sponsor and had also made what was described as a ‘questionable’ investment in the USA – a Florida property from which no rental income arose.

The winding-up of the scheme commenced in 1996, following which a scheme member made a complaint to the Ombudsman.

This decision follows a similar one made last summer in which the trustees of the Greenup and Thompson pension scheme were ordered to pay £130,000.

In both cases, the trustees sought to rely on a clause in the trust deed that exonerated the trustees from personal liability for their actions, but failed because the breaches had been ‘knowingly committed’.

Trustees of company pension schemes who fail to take their investment duties seriously can face a nasty surprise. If you have concerns about the direction a pension scheme of which you are the trustee is taking or has taken, we can advise you.

Buyer Beware for Goods on HP
When someone unknowingly sells something that they do not own, they can be liable to the real owner of the item sold. The liability is not criminal (there is no criminal intent), but is based on the civil law of tort.

It is therefore especially important for dealers in second-hand goods, particularly valuable ones such as motor vehicles, to make sure they own them before they sell them. Attempts to sell to dealers motor vehicles which are still the subject of HP agreements are very common, so there are specialist databases, listing motor vehicles and motor bikes that are the subject of HP agreements, which can be searched by dealers.

A recent case concerned a dealer who had acquired in good faith three motor bikes that were still on HP, having checked the relevant database as is normal trade practice. The original purchaser of the motor bikes had defaulted on the HP agreements but the HP company that was the legal owner of the motor bikes had not subscribed to the database, so the bikes were not flagged as being subject to HP agreements.

The HP company sought to repossess the motor bikes and discovered that its customer had sold them to the dealer. It claimed it was entitled to recover them. The dealer argued that having followed standard trade practice by checking the database, the finance company could not claim the dealer had failed to acquire better title to the motor bikes than the HP debtor (from whom the HP company had the right of recovery).

The court ruled that the dealer had not acquired title to the motor bikes. There was no requirement for the HP company to register with the database. Accordingly, the HP company was entitled to recover the motor bikes.

This case serves as a cautionary tale for traders in second-hand assets of all kinds.



Property

EPCs – End of Transitional Provisions
Property owners are reminded that the transitional arrangements governing non-domestic Energy Performance Certificates (EPCs) come to an end on 4 January 2009.

Prior to that date, as long as the seller of a property is able to show that it was being actively marketed on the relevant commencement date (6 April 2008 for buildings of more than 10,000 square metres, 1 July 2008 for buildings of more than 2,500 square metres and 1 October 2008 for all other commercial buildings), then an EPC is not required until a contract for sale/lease is being prepared. From 4 January, that will no longer be the case.

For further information on measures to improve the energy performance of buildings, see http://www.communities.gov.uk/planningandbuilding/theenvironment/energyperformance/.



Tax

Coping With Recession – VAT Tips
The VAT man is not generally regarded with much affection by businesses but, with times getting tougher, there are several ways in which cash-flow can be eased by optimising your VAT arrangements.

The most important thing to note about VAT is that failing to pay on time leads to automatic and substantial penalties, starting at 2 per cent of the VAT due and increasing, if multiple payments are late, to 15 per cent. It is therefore important to do what you can to make sure you stay ‘on time’ with your VAT and taking advice is recommended if this is difficult.

However, there are several things you can do to reduce your VAT liability.

Firstly, you are allowed to write back the VAT payable (using the ‘bad debt relief’ provisions) on any unpaid invoice which is more than six months old. The VAT becomes due again only when it is paid.

Secondly, if you meet the necessary conditions as regards turnover, consider moving to the ‘cash accounting’ scheme if your standard rated supplies are greater than your standard rated expenses. Under cash accounting, VAT is dealt with on a receipts and payments basis – the VAT on debtors is not paid until the debt is paid. However, do think through this decision carefully as whether or not it will be beneficial depends on a variety of factors.

If you supply services on a continuing basis, you can send ‘requests for payment’, rather than invoices. No VAT is payable on a request for payment until payment is received. This has cash-flow advantages, but it does entail an increase in paperwork as when the request for payment is settled, a VAT receipt must then be issued.
If you add a charge for late payment or provide a discount for early payment, the charge made or the amount of the payment which relates to the settlement discount not taken is not subject to VAT. It may be worth rewriting your terms of trade to include a settlement discount or finance charge.

HMRC Bids to Resolve Uncertainty
HM Revenue and Customs (HMRC) have launched a consultation document, which aims to provide certainty for taxpayers that Extra-Statutory Concessions (ESCs) have the force of law.

An ESC is an exception to the tax law as written, which HMRC apply where strict application of the law would result in unfairness to a taxpayer. There are well over 100 ESCs – so many that HMRC felt it necessary to issue a booklet (IR1) with details of those currently applicable.

The problem with ESCs has always been that it is dangerous to rely on them, because HMRC can change their view of a particular circumstance and withdraw the ESC at any time. Many a taxpayer has come to grief by relying on an ESC, only to find that in the fullness of time HMRC have moved the goalposts.

Following a House of Lords case, which has questioned the degree of freedom HMRC have with regard to applying ESCs, HMRC have put all ESCs under review and withdrawn the IR1 booklet. The Government has included enabling legislation in the 2008 Finance Act to allow ESCs to have the effect of law and a consultation process has been launched, which ends in January 2009.

It is to be hoped, therefore, that the next Budget will contain provisions which will give what are currently ESCs the force of law. This was not mentioned in the recent Pre-Budget Report, however.



Company Law

Auditors Pay Price for Incorrect Share Valuation
An ex-director of a company has been awarded substantial damages against the company’s auditors, after he showed that the firm had negligently undervalued his shareholding when he was required to sell the shares back to the company on ceasing to work for it.

When he was an employee, he had purchased the shares at £250 per share. When he left the company, the auditors valued his shares at £128 each. The shares were sold to other shareholders. Later, the director discovered that other employees had been able to dispose of their shares at higher values and the company was sold for a substantial sum.

The man claimed the valuation placed on the shares by the company’s auditors was far below the proper market value at the time and that there were factors which the auditors should have taken into account in their valuation, including likely future outcomes, which they did not.
After hearing expert evidence, the court ruled that the appropriate value to have used was £635 per share, leaving the auditors facing a liability to the former director of £507 per share.

This case raises two points that are worthy of mention, The first is that had a mechanism setting out how the shares were to be valued when being repurchased been agreed and documented at the outset, there would have been no ground on which to bring an action. Secondly, it is important when giving an expert opinion to be careful to make sure it is both objective and well thought out – it may not be a very good idea for the company’s auditors to carry out the valuation in cases such as this. If you are asked for an expert opinion, it is normally a good idea to decline if the subject is one which is outside your sphere of expertise.

Intellectual Property

Resolving Patent Disputes
Patent disputes in the UK are dealt with by the UK Intellectual Property Office (UKIPO), the body responsible for the administration of intellectual property rights in the UK.

If you wish to claim that one of your patents has been infringed, commencing a claim is, in principle, quite straightforward. You simply download a form from the Internet (Patents form 2) and pay a fee of £50. The completed form is then returned to the UKIPO.

The form must show the subject matter of the claim, the facts you are using to support your claim for infringement and the remedy you seek. This is signed and accompanied by a statement of truth.

The claim is sent to the person against whom it is made and they have six weeks to dispute it and file a ‘counter-statement’. The counter-statement sets out any allegations that are admitted, any allegations that are denied and why and any that are neither admitted nor denied, but which the other side is required to prove. Any facts in the statement of claim on which the counter-statement is silent are assumed to be accepted. The counter-statement is also signed, together with a statement of truth. Failure to lodge a counter-statement will be taken as acceptance of the claim.

The UKIPO will review the evidence and consider the best way of resolving the dispute, which may be by mediation or court proceedings, and set a timetable for resolution of the matter.

The next step is the presentation by each party of the evidence on which they rely to support their statements and to contest the other party’s statement. This is called the ‘evidence round’.

The evidence round is followed by the opportunity to present your case to the hearing officer, who will issue a ruling within two months. The costs are settled on a ‘loser pays’ basis, but the loser’s contribution is limited.

The loser can appeal against the decision within 28 days.

It is important in such cases to have expert advice at each stage, as the way the process works means that it is important to make sure that the claim is properly construed at the beginning.

Contract

Court Rejects ‘Pay Twice’ Attempt
Many agreements for the sale of a company by way of a sale of the shares in the company will contain a clause that the sale consideration is to be adjusted for a change in the value of the company’s net assets between the time the agreement is reached and the date of completion. This allows the new owners of the shares to be compensated for any fall in the value of the company between the time of making the contract and its completion. Conversely, if the net asset value of the company rises during that time, the vendors receive additional compensation.

In a recent case, a company owning a portfolio of properties was sold to another company. The sale agreement included a clause which adjusted the price negotiated between the buyer and seller to take into account a change in the net asset value of the company being sold as at the time of completion. There were associated transfers of other assets, including the sale proceeds of a foreign property and the transfer of a debt.

The properties were treated for accounting purposes as being trading stock and were shown on the balance sheet at cost. The properties were worth considerably more than the balance sheet values. On completion, accounts were drawn up by the vendor which showed the properties valued at the prevailing current market values. The vendor claimed that an extra payment was due. The buyer disagreed, arguing that the deal was done at a price which was intended to reflect market values of the properties that were current at the time the deal was done.

The court agreed. It would be an absurd result for the buyer to pay for the properties twice – once as a part of the originally agreed value of the company and again by way of an ‘uplift’ calculated on the difference between the balance sheet value and the market value at the time of completion.

This is yet another example of a dispute that could have been avoided had the documentation been drafted more tightly, Fortunately, it only took a dose of common sense on the part of the judge to dismiss the case.

Insolvency

Insolvencies on the Rise
A recent report by credit analysts Experian indicates that the 16,591 business failures in the first nine months of 2008 represented a 22 per cent increase over the same period in 2007. Furthermore, the rate of failure is increasing, with nearly 6,000 failures in the three-month period ending in September.

The increase in failures was widely spread across all industry sectors, with London, Wales and Scotland having the highest failure rates.

Experian advises businesses to keep a close eye on the current payment trends of customers and to address any payment issues with good customers early on. Other danger signs are the delayed filing of annual accounts and returns and the presence of county court judgments. Getting information on the ‘people behind the company’ is also suggested where credit is being extended to small companies.

Vigilance is crucial when times are hard and businesses that do not take care over who they sell to or fail to manage properly the level of their credit risk are taking a big chance in the present business environment. We can help you collect overdue debts and tighten the terms of trade under which you make supplies or can advise you of the best steps to take if you are having difficulty making payments on time.



Competition Law

Price Comparison ‘Ads’ – Take Care
With sales difficult to find, the temptation to use unfavourable price comparison ads in order to drum up business may be tempting, but if you do, you need to take care.

The Advertising Standards Authority (ASA) recently made a ruling, against supermarket giant Tesco, which shows the danger of price comparison ads that go too far.

The advertisements in point showed a shopping trolley full of goods and made very unfavourable price comparisons with Asda, for which the strap line was ‘Why Pay More at Asda?’, and Morrisons, for which the ad had the strap line ‘Save a trolley-load of cash at Tesco’. The goods used included items that were on special offer at Tesco and these prices were compared with the normal selling price of those goods at the other stores.

Tesco argued that that the comparisons provided a snapshot of savings that could be made at Tesco and that it was clear that the advertisement applied only to the items shown.

The ASA concluded that the advertisements created the impression that Tesco was generally cheaper than its competitors and that the statement on the ads, that they included products on promotion, was not sufficient to correct that impression.

The decision is a warning to businesses that it is the overall impression of their advertising which is important, not just the statements made in it.



Employment Law

Age Discrimination and Selection for Redundancy
In Rolls Royce plc v Unite the Union, Rolls Royce contended that the length of service criterion in collective agreements relating to redundancy, entered into with the trade union, amounted to unlawful indirect age discrimination against younger employees under the Employment Equality (Age) Regulations 2006. The outcome of this case will be important for all employers considering making redundancies.

There were no issues of fact to be determined and the case was heard in the High Court at the request of both parties. It concerned two collective agreements, regarding redeployment and redundancy, which provided for an assessment matrix for use in redundancy selection. This was designed to enable the company and its employees to be able to restructure ‘flexibly and peaceably’. There were five measured criteria for which points were awarded, one of which was length of continuous service. Those with the fewest points would be selected for redundancy.

The High Court ruled that the length of service criterion adopted did discriminate against younger employees but it could be objectively justified as a proportionate means of achieving a legitimate business aim – i.e. that if a redundancy exercise were necessary, it would be carried out ‘peaceably’ and in a way that was perceived as fair. The scheme was therefore covered by Regulation 3(1) of the Employment Equality (Age) Regulations. The judge was of the view that ‘the criterion of length of service respects the loyalty and experience of the older workforce and protects the older employees from being put onto the labour market at a time when they are particularly likely to find alternative employment hard to find’.

In addition, the Court ruled that giving points for long service as one part of a redundancy selection matrix conferred a benefit on the employee concerned as it might lead to the retention of employment which would otherwise be lost. As such, it was probable that this would be regarded as reasonably fulfilling a business need, within Regulation 32(2), which simply requires the employer to justify the impact of an age related award made only to employees whose length of service exceeds five years.

This decision clarifies the position regarding the use of length of service when selecting employees for redundancy. Adopting a scheme where length of service is just one of a number of criteria used to arrive at a fair selection process is likely to enable the employer to defend an age discrimination claim. However, a scheme based solely on ‘last in, first out’ is unlikely to be justifiable.

However, the judge gave Rolls-Royce permission to appeal his ruling on the ground that it was ‘clearly an important point for both parties’.

Health and Safety

Asbestos Cancer Victims Win Landmark Ruling
A recent ruling in the High Court means that those claiming compensation for the fatal asbestos-related cancer mesothelioma could now be in line for six-figure sums.

The decision confirms that mesothelioma sufferers are able to claim compensation from the time they were exposed to the asbestos, rather than just from when the disease becomes apparent. Many years often elapse between the initial exposure to asbestos and the onset of symptoms.

A Court of Appeal decision, reached two years ago in a different legal context, led to this case. At that time, the Court ruled that insurers were only liable to pay compensation from the point at which the disease was discovered. Relying on this, some insurers tried to avoid liability under policies that covered the period when the employee was exposed to asbestos but were no longer in force at the time when they became ill.

Fortunately for sufferers of mesothelioma, however, the High Court did not consider the earlier decision of the Court of Appeal applicable. This means that the position is restored so that the date applicable for determining liability is the time of exposure to asbestos. Mr Justice Burton said, “It is plain that there is, albeit unknown to the sufferer, an injury and a disease present in his or her body well before it makes itself manifest by his finding difficulty in breathing.

However, an appeal to the House of Lords is likely.

Around 2,000 people die every year as a result of mesothelioma and it is estimated that the annual figure will rise for some years to come. Past failures on the part of those with health and safety responsibilities to protect workers from asbestos dust have resulted in what has been referred to as a ‘ticking time bomb’. Workers most at risk include electricians, laggers, motor mechanics, plumbers, joiners and builders.

The Control of Asbestos Regulations 2006 were introduced to provide all workers with greater protection from exposure to asbestos. There is now a single Control Limit for all types of asbestos of 0.1 fibres per cubic centimetre.

For health and safety information on the dangers and management of asbestos in the workplace, see
http://www.hse.gov.uk/asbestos/.



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