Commercial Client Spring 2006


Agency Compensation Includes Goodwill

For more than a decade, commercial agents have been entitled to seek compensation for the losses they suffer when an agency agreement is terminated by the principal. Recently, a case was heard in the Court of Appeal concerning the definition of what constitutes a loss and, in particular, whether the loss can include a loss of goodwill by the agent as a result of the loss of the agency.
The case concerned a manufacturer’s agent who represented a shoe manufacturer between 1990 and 2003. The agent was paid £7,500 in compensation, but sought a further payment for the loss of goodwill resulting from the termination. The relevant regulations are silent on the question as to how the compensation should be calculated.
The Court judged that the legislation was intended to compensate agents for the full damage they suffer, not to pay them what might be fair and reasonable in the circumstances. That in turn required the Court to look at the totality of the damage suffered, which would include any loss of goodwill.
Says <<CONTACT DETAILS>>, “The implication of this case is that terminating the contract of an agent may be more expensive than anticipated if the agent can demonstrate that goodwill which has been built up would be lost. Compensation should take account of any loss which would be suffered by the agent in the proper performance of the contract, not just in respect of future earnings. We can advise you on all contractual matters.”
Big New Contract? Beware!
For the smaller supplier, the offer of a contract from a national firm can seem irresistible, offering an instant and substantial increase in turnover and profits.
However, a recent analysis of the payment of hundreds of invoices under £5,000 submitted to eight of the UK’s largest retailers revealed that many of them fail to pay invoices within the agreed credit terms. Waitrose was the only retailer which paid all invoices on time, with Boots managing a mere 41 per cent payment on time.
Says <<CONTACT DETAILS>>, “The contracts of major retailers often contain demanding quality control, delivery and other clauses and, in practice, these can be strictly enforced by them. Late payment by the supplier is also often an issue, so before you sign a major contract make sure you take advice on the terms and also that you have adequate cash flow or the necessary finance to complete it even if the payment is late.”
Business Property Relief – More Traps for the Unwary
Most business people know that for family businesses there are generous Inheritance Tax (IHT) reliefs, which generally operate to make assets used in the business exempt or partially exempt from IHT. The reliefs take various forms, but are collectively known as business property relief (BPR).
Consider, however, the common situation whereby a business is owned by a small number of people and, in order to preserve the business in the event of the death of a shareholder before retirement, an agreement is made whereby on death the deceased’s personal representatives are required to sell their shareholding to the remaining shareholders, who are required to buy it. Such arrangements are normally funded by writing life assurance policies to cover the purchase.
Regrettably, such an arrangement will prevent the operation of BPR. This is because HM Revenue and Customs (HMRC) regard such an arrangement as a binding contract for sale on death and where such a binding contract exists, BPR is not given. This problem can be avoided by granting each side the appropriate option, rather than making the requirement to buy the shares contractual.
BPR is also not given on family company shares if the company is wholly or mainly engaged in dealing in shares or securities, dealing in land or buildings or making or holding investments. The normal practice of HMRC is to define ‘mainly’ as being ‘more than fifty per cent’. The fifty per cent test is applied to all of:
·         the capital employed;
·         employee time spent on each activity;
·         turnover;
·         profits; and
·         the overall context of the business.
In other words, a ‘whole business’ view has to be taken. Needless to say, this has led to much dispute over the years.
Lastly, a business which is too ‘cash rich’ can also face a denial of BPR insofar as it applies to the cash on the balance sheet at the date of death if this is in excess of the amount required for the purposes of the company’s business. Cash in excess of that required for the company’s future business is ‘excepted’ from eligibility for BPR. In a fairly recent case, a company which had £450,000 in its balance sheet, but which was reckoned by the tax inspector to need only £150,000, faced an IHT charge on the ‘excess’ of £300,000. One way which this type of charge may be avoided is to hold board meetings and minute the need for cash balances to be held on the balance sheet in order to finance future (stated) investment and/or trading needs.
“BPR is laden with traps for the unwary,” says <<CONTACT DETAILS>>. “If your estate includes shares in a business, take advice to make sure you maximise your tax relief. Simply assuming that BPR will apply is a dangerous strategy.”
Companies for Kids?
One of the less well-publicised clauses of the new Company Law Reform Bill, currently before Parliament, is that the minimum age for appointment as a company director in England is to be lowered to 16. However, the Secretary of State will be empowered to allow those under 16 to be a director, with different rules applying in different parts of the UK, should it be deemed necessary.
If your entrepreneurial children need the benefit of a limited liability company, or you would like to involve a minor as a director of your company, then this will soon be possible. At present, however, any shares in the company which are allocated to them will have to be held in trust for them until they reach majority.
Directors – Danger in Funding Litigation
It is not uncommon for a smaller company that wishes to undertake litigation to lack sufficient funds to do so. When this occurs, a director or directors will sometimes put the company in funds to pay the legal bills.
In such circumstances, it has been usual for directors to be protected from having to pay the other side’s costs (by a ‘non-party costs order’) if the company loses its case, unless they have acted improperly or in bad faith. The courts in such instances have traditionally looked to see if the action is bona fide and whether the actions of the directors were otherwise so exceptional as to justify making a costs order against them.
More recently, however, judicial opinion has changed. Now, the prevailing view is that if a director funds a company’s costs in an unsuccessful action, he should pay the successful party’s costs if:
·         he substantially controls the proceedings or will benefit from the action; or
·         he funds proceedings by an insolvent company either solely or substantially for his own benefit.
The decision by the court as to whether it will look to the director who has funded corporate litigation to pay the costs will depend on who is the ‘real’ litigant. If the director funding the action is in essence controlling it and it is carried out essentially for his own benefit, then he can be held liable for the other side’s costs if the case is lost.
It is no longer necessary for there to be impropriety in order for a director who funds litigation on behalf of a company to be caught for the costs of a lost case.
It is essential to take care when considering litigation, especially if you are funding all or part of the costs from your own pocket. We can advise you on all corporate and litigation matters.
Director’s Guarantee Not Unfair
An entrepreneur who challenged the Royal Bank of Scotland’s (RBS) attempt to enforce the director’s guarantee he had given was unsuccessful in persuading the court that the guarantee contained unfair contract terms.
Mr Singh’s company provided small businesses with secretarial and administrative assistance. It had incurred an overdraft of £900,000 with the bank when the company failed.
Mr Singh argued that RBS could not enforce the guarantee since he believed that he had a partnership with the bank. He considered there was an agreement whereby RBS was going to market his company’s services and that his company was induced to borrow the funds on the understanding that such a partnership existed. He argued that when the bank failed to market his business services it was in breach of the partnership agreement and caused the failure of his company. He also argued that he would not have agreed to give a director’s guarantee had the bank not agreed to market his company’s services.
This first line of argument failed to impress the court as there was no evidence of a partnership agreement since nothing was done or said which could have been interpreted as an offer of a partnership or joint venture. Furthermore, it was not reasonable for Mr Singh to believe that the bank official with whom he was dealing could commit RBS to such an agreement.
Mr Singh then sought to have the bank’s guarantee arrangement ruled unfair because it had a ‘no set-off’ clause, which he felt was unreasonable under the Unfair Contract Terms Act 1977 (UCTA). Such clauses are standard in guarantees and act to prevent a bank’s right to recovery under the guarantee being frustrated by claims against it. In other words, whatever Mr Singh’s claims against RBS might be, he had to repay the amount he had guaranteed and pursue his claims separately.
The judge could not agree with Mr Singh. The UCTA regulates contracts between sellers and consumers and is designed to protect consumers in circumstances in which there is a large preponderance of power in the hands of the seller. In this instance, RBS was selling a service to the company. Mr Singh would only have a liability under the guarantee if his company failed to repay its borrowings. The UCTA was not applicable in such circumstances. However, the court also considered what the position would be if UCTA did apply and concluded that even if it did, the ‘no set-off’ clause could not be unfair – it was not unfair for RBS to protect itself by taking additional security.
Says <<CONTACT DETAILS>>, “The serious implication of this case for directors is that if asked to sign a guarantee for the borrowing of the company, a director is unlikely to get any protection from the courts if the guarantee is one-sided. We can assist you in negotiating commercial finance of all types and advise on the wording of agreements.”
Do You Want That in a Bag?
The familiar question, ‘Do you want that in a bag?’, could strike a jarring note in the ears of Europe’s industrial plastic bag manufacturers after sixteen manufacturers in several EU countries were fined a total of 290 million euros for operating a cartel.
The fine arose after a UK manufacturer informed against the price-fixing practices in exchange for being treated leniently. This led in turn to a series of dawn raids on the premises of manufacturers, which uncovered a cornucopia of evidence of price collusion and a clear understanding that the practices were unlawful.
The cartel had operated for more than two decades in France, Germany, Spain and Benelux and undertook a variety of anti-competitive activities such as tender rigging, allocation of ‘sales areas’, sharing out of orders and the like.
Engaging in anti-competitive activity is a high-risk strategy and the evidence of a single whistleblower can, as in this case, lead to massive fines for the businesses involved. The European Commission is also seeking to persuade those who have suffered loss at the hands of cartels to take action for compensation.
Contact us for advice on complying with competition law or if your business suffers as a result of cartel activity.
European Debt Collection Problems Eased
A new system for collecting debts due from people and organisations in other EU states has been announced which, it is hoped, will make the collection of undisputed commercial debts easier to achieve. It applies to judgment debts arising since 21 January 2004 and is now in place.

Under the new system a ‘European Enforcement Order’ (EEO) can be granted by the state in which the claim is pursued and can be enforced as can any judgment debt in that state. EEOs can be used in cases involving uncontested claims only.
An uncontested claim is one which has been admitted, is the result of a judgment of the court or is a default judgment.
There are particular requirements for service of EEOs which must be complied with, so those wishing to serve an EEO or recipients of EEOs who wish to contest them should take advice as soon as possible.
For more details see

Extraneous Material Not Failure to Use Reasonable Skill
Patent applications are very sensibly required to be made with ‘reasonable skill and knowledge’, which acts as a deterrent to half-baked or incomplete applications. However, the mere inclusion of material in the patent application which is not relevant to the patent does not make the application one which fails the reasonable skill and knowledge test.
The issue was considered in a case which involved a floor covering material which was patented in Europe by a company called Unilin Beheer BV. Unilin subsequently amended the patent specification. The patent was infringed by another company, Berry Floor NV, which Unilin sued.
Berry Floor claimed that Unilin’s patent had not been prepared with reasonable skill and knowledge because the amended application failed properly to amend the description of the patent.
In the lower court, Berry Floor was successful, the judge concluding that two paragraphs of material left in the patent application should have been removed and that the failure to remove them represented a breach of the requirement to exercise reasonable skill and knowledge.
On appeal, the Court of Appeal reversed that decision. Reasonable skill and knowledge does not extend to irrelevant matter. The offending material would not mislead a skilled reader. A patentee could be deprived of its right to damages only when it had done something which might mislead. Unless Berry Floor had acted on the basis of being misled by the content of the patent, Unilin could not be deprived of its right to claim damages.
Free Government Cash for Charities
There is less than a year left for SMEs to claim a payout of £500 from HM Revenue and Customs (HMRC) and to help charities at the same time, writes <<CONTACT DETAILS>>.
HMRC will pay a payroll giving grant of up to £500 to companies in order to assist them with the cost of setting up a payroll giving scheme so that their staff can give to charities through the medium of regular deductions from their salary or wages made through the firm’s payroll.
In addition, the Government will, for the first six months of a payroll giving scheme, match employee contributions to charity through the scheme pound for pound up to a maximum of £10 per employee per month. This is in addition to the ‘grossing up’ of the contribution made by the employee, which in effect provides the charity with £1 for every 78p contributed.
To find out more about payroll giving, go to or telephone 0845 602 61786.
Further Delay on Recycling Electrical Waste
The Government has announced that it is to carry out a review of the requirements of the Waste Electrical and Electronic Equipment (Producer Responsibility) Regulations (WEEE), following the realisation that the necessary infrastructure is not yet present to enable the UK to comply with the Regulations.
Originally planned to come into effect in the UK in the summer of 2005, WEEE implementation was then delayed until June 2006. A further round of review and related consultation will now make yet another delay in implementation inevitable.
The WEEE legislation puts the obligation on producers and retailers to meet the cost of dealing with waste electrical items. Further information can be found at
Get Your VAT Right – Common Errors
HM Revenue and Customs (HMRC) have issued a list of the most common problems with VAT accounting detected by their compliance officers when they visit businesses.
Other than mere computational errors, their ‘top ten’ are:
·         claiming input tax on cars which are not used wholly for business purposes;
·         claiming input tax on purchases for personal use, such as telephone calls;
·         claiming input tax on business entertainment expenditure;
·         failing to retain proper documentation for input tax recovery;
·         not accounting for output tax on sales of goods to private individuals in other EU countries;
·         not accounting for output tax (via the ‘fuel scale charge’) for fuel used for private motoring;
·         failing to charge output tax at the correct rate;
·         failing to account for output tax on sales of business assets;
·         failing to retain proper evidence for zero-rating of export sales; and
·         getting the tax point wrong – failing to account for VAT at the right time.
HMRC have started sending out what have been described as ‘fishing letters’ to traders, pointing out ‘common mistakes’ and implying that a control visit is likely. So far these have involved businesses where there is a significant risk of loss to the Exchequer – such as those which trade just under the VAT limit and those in ‘cash trades’.
If you are concerned about the accuracy of your VAT returns or any tax matter, we suggest you take professional advice. For advice on specific VAT compliance matters, you can call the National Advice Helpline on 0845 010 9000.
Law Not to be Used to Prevent Landlord’s Exit Strategy
The House of Lords has confirmed that the Landlord and Tenant (Covenants) Act 1995 is not intended to be used to prevent a landlord from exercising an exit strategy as regards a lease.
A company called Avonridge was the head tenant of a number of shops under a lease due to expire in 2067. It granted subleases, to six tenants, which included a covenant by Avonridge to pay the rent due under the head lease, but only until such time as it had disposed of its interest in the property.
Once the subleases had been granted, Avonridge sold the head lease on to another company, thus ending its interest in the properties. The new owner subsequently disappeared, leaving the rent under the head lease unpaid.
The tenants were then faced with a bill for the rent unpaid under the head lease and sued Avonridge, claiming that the relevant clause was prohibited under the 1995 Act. The Act contains provisions which will allow the owner of a head lease to accomplish what Avonridge sought to do, but only by the service of specific notices, which did not occur in this case. It also contains anti-avoidance provisions to make void any wording in a tenancy agreement which would frustrate any other section of the Act.
The House of Lords decided that the purpose of the Act is to give both landlords and tenants an exit strategy from their lease commitments when they enter into legal assignments of their interests. It can not be used to prevent a landlord having an exit strategy which has been agreed with a tenant. The failure to follow the procedure as set out in the Act did not, in this case, invalidate the agreed terms.
Tenants with sub-tenants should consider making sure their under leases do contain clauses limiting their liability by the provision of automatic releases from their obligations if they dispose of their interest in a property. If such clauses are not present, they should follow the notice procedure laid down in the Act.
Please contact <<CONTACT DETAILS>> for advice on commercial property matters.
Obvious Mistake in Contract Not Fatal
A landlord and tenant case has potential implications for all businesses, writes <<CONTACT DETAILS>>.
It involved a landlord who was negotiating with his tenant over the renewal of a lease. The landlord inserted a clause in the lease which erroneously said ‘in the case of a notice given by the landlord, the tenant shall have paid all the rents’. As the intention was to limit the tenant’s rights to break the lease if it had not performed its obligations fully, the word ‘landlord’ was clearly an error and should have been replaced by ‘tenant’.
The tenant did not notify the landlord that the clause was incorrect and agreed to the lease as it stood. Some time later the tenant sought to break the lease. The landlord refused, saying that as it was in arrears, the tenant was therefore in breach of the clause. The tenant claimed it was not.
The case went as far as the Court of Appeal, which upheld the landlord’s claim that the lease was so obviously incorrect that justice was served by reading into it the correct wording.
A party to a contract who notices that it contains an obvious mistake so that it does not represent the true intention may well find that the courts will not support their position if the result would be illogical or unjust.
Optional Errors
People who want to buy a property but do not currently have the means to do so, or who simply want to be guaranteed the opportunity to buy it during a specified period or at some future date, will often undertake an option agreement with the owner. Under such an agreement, the prospective purchaser makes a contract (which normally involves the payment of an up-front charge) in exchange for having the legal right to buy the property at or within some future time. Options are widely used where a purchaser wishes to purchase land only if an event (normally the granting of planning permission which the prospective purchaser undertakes to obtain) occurs.
The timing of a purchase under an option agreement can be influenced by a number of factors, so options are usually for a specified period. One common trap in these cases is that the maximum period for which such an option can legally be granted is 21 years. If the option is created for a longer (or indeterminate) period, it is unenforceable. This is so even if the option must be preceded by some event, such as the granting of planning permission. Also, an option for sale of land must be registered at the Land Registry to be enforceable.
In order to purchase the land subject to the option, the purchaser must serve on the vendor a valid notice within the specified time limit. If the option is to be exercised just before the period expires, it is advisable to ensure that proof of delivery (time and/or date stamped as appropriate) is obtained. Also, the option notice must not in any way change the subject of the notice. For example, adding an offer to purchase something attached to the land which was not mentioned in the original option agreement will probably invalidate the option.
It is especially important to make sure all procedural matters are dealt with correctly as regards the notice to exercise the option. In particular, it is sensible for the purchaser of an option to make sure that where there is a ‘trigger event’, which starts the time running during which the option can be exercised, the wording of the agreement is such that the clock starts running when the purchaser becomes aware of the event, not when the event takes place. Failure to do this could result in the loss of ability to exercise an option because the prospective purchaser is unaware of the occurrence of the trigger event.
Please contact <<CONTACT DETAILS>> for advice on commercial property matters.
Pension Portability Enhanced
With increasing numbers of UK citizens choosing to live and work abroad and ever-greater numbers of foreign nationals coming to live in the UK, the Government is relaxing the tax rules applying to transfers of pensions to and from the UK.
From 6 April 2006, there will be no restrictions on residence for tax purposes for members of UK pension schemes. Also, both UK residents and non-residents will be able to transfer their pension schemes abroad without a tax charge, subject to not exceeding the Lifetime Tax Allowance (LTA). The LTA is the maximum lifetime amount of pension contribution on which tax relief can be claimed and for 2006/7 is set at £1.5m. Transfers in excess of the LTA will attract a tax charge as will other transfers if the pension is transferred to a fund which is not classified as a Qualifying Recognised Overseas Pension Scheme.
There are no restrictions on the transfer of foreign pension funds into UK-registered pension schemes. Members of non-UK schemes who have earnings in the UK can claim ‘migrant member relief’ to obtain tax relief in the UK on their pension contributions. Employers’ contributions will also qualify for tax relief. In some circumstances, transfers in excess of the LTA can be exempted from a tax charge, but claims for exemption must be made before 5 April 2009.
For more information, or to obtain the relevant forms, see or telephone 0115 974 1600.
The EU claims that pension scheme portability will free workers from worry over the possible loss of pension rights by moving to an employer in another EU country. The recent ‘Portability of Pensions’ Directive is designed to deal with issues such as the acquisition of pension rights, qualifying periods for joining pension schemes, conditions relating to dormant pension schemes and transferability of funds between schemes.
Says <<CONTACT DETAILS>>, “The rules will be welcomed by employers whose staff work trans-nationally and workers whose work takes them abroad. It widens the choice of pension providers in such cases. We can assist in all aspects of pension planning and governance.”
Proposal to Reduce Company Accounts Filing Time Limits
The Government has issued a consultation document in which it is proposed that the filing date for company accounts and corporation tax returns be made contiguous, the ultimate plan being for there to be a single filing service. Under the proposals, the date for filing accounts with HM Revenue and Customs (HMRC) for non-plc companies would be brought forward. The date on which corporation tax is due is not intended to be moved.
The intention is for the new rules to apply for accounts ending after 30 September 2007. HMRC are also proposing to reduce the period in which they can commence a formal enquiry into a company’s corporation tax return when the company files its return early.
Real Estate Investment Trusts
The Government has published its draft legislation on Real Estate Investment Trusts (REITs), which will be companies listed on the stock exchange which carry out a ‘qualifying property letting business’. Already, in his latest budget the Chancellor has announced changes to the proposals.
To qualify as a REIT, a minimum of 75 per cent of the company’s profits must be derived from property letting and three-quarters of its asset value must be in the form of assets used in the qualifying activity. An ‘entry charge’ of 2 per cent of the market value of its investment properties will be payable when a company becomes a REIT.
REITs will be exempt from corporation tax on their qualifying property rental income and will not pay corporation tax on chargeable gains arising which relate to the REIT properties. They will pay corporation tax at the usual rates on the profits arising from non-qualifying activities. They will be required in normal circumstances to distribute 90 per cent of tax-exempt profits, from which tax at the basic rate will be deemed to be withheld for both UK residents and non-residents.
For tax exemption, the REIT must contain at least three properties and no one property may exceed 40 per cent of the value of all the properties in the qualifying business.
Says <<CONTACT DETAILS>>, “The REIT structure presents an interesting opportunity for investors and property companies alike. It will be interesting to see whether there will be further changes in the legislation between now and its anticipated implementation in January 2007.”
Revised Asbestos Regulations
The new Control of Asbestos Regulations 2006 come into force on 6 April 2006. The Regulations repeal and replace existing laws on the control of exposure to asbestos and implement amendments to the European Asbestos Worker Protection Directive (AWPD). They aim to provide greater protection for maintenance workers and make changes in order to simplify the existing asbestos regulatory regime. The Regulations include measures to:
·         replace certain requirements of the Control of Asbestos at Work Regulations 2002 that only apply if a worker’s exposure to asbestos fibres is liable to exceed the action levels with a new system whereby notification to the enforcing authority will not apply to certain types of specified work where the exposure to asbestos is sporadic and of low intensity and where it is clear from the risk assessment that the control limit will not be exceeded;
·         replace the current regulation requiring employers to reduce exposure to as low a level as is reasonably practicable with a new requirement to minimise worker exposure to asbestos, in line with the wording used in the Control of Substances Hazardous to Health Regulations;
·         introduce a new asbestos fibre counting method; and
·         introduce a new single Control Limit for all types of asbestos of 0.1 f/cm³.
Additional changes to the asbestos regulatory framework include:
  • the introduction of the AWPD amendment which specifically prohibits the extraction of asbestos and asbestos products;
  • changes to the licensing rules aligning when a licence is needed with the requirement to notify work and less stringent controls on working with textured decorative coatings which contain asbestos;
  • employers using their own workers on their own premises will no longer be exempt from the licensing requirements;
  • accreditation requirements being extended to those issuing certificates at all the four stages of clearance certification; and
  • the maintenance of short-term exposure limits with a maximum peak level of 0.6 f/cm³ over 10 minutes for all types of asbestos.
An Approved Code of Practice supporting the changes in the legislation can be found at
Says <<CONTACT DETAILS>>, “Any moves to reduce exposure to deadly asbestos fibres are welcome. Sadly however, tighter laws come too late for many people exposed to asbestos earlier in their working lives who have gone on to suffer serious illness as a result.”
Tax Traps for Farmers?
HM Revenue and Customs (HMRC) seem to be taking an argumentative approach to claims for Agricultural Property Relief (APR) – using both common sense and legalistic arguments to press for denials of relief when they think it is justified.
A recent decision of the Lands Tribunal has reduced the attractiveness of buying a ‘hobby farm’ in the country for those not engaged in full-time agriculture.
Under current law, APR is given for Inheritance Tax (IHT) purposes for farmhouses to the extent of their ‘agricultural value’. That value is the value which a buyer might reasonably pay for the farmhouse if it is subject to a planning constraint limiting its future use in perpetuity to agricultural purposes only.
HMRC’s interpretation of this is that such a planning constraint limits the occupation of the farmhouse to someone who manages the farm on a day to day basis, or who is the widow, widower or dependant of such a person. Such limitations are typically applied when granting planning permission under an ‘agricultural tie’.
The Lands Tribunal accepted the correctness of HMRC’s approach and thus far there has been no appeal against the decision. This decision effectively limits the application of APR for ‘lifestyle buyers’ who are not full-time farmers.
In another dispute over APR, HMRC adopted a narrow approach based on the letter of the law, denying APR with regard to buildings used as poultry houses. Whilst it may seem self-evident that a poultry house is agricultural property, HMRC did not agree that APR applied to them because the relevant legislation states that it is due when the occupation of the building is ‘ancillary to that of the agricultural land or pasture’. The problem in this case was that there was little land which was not covered by poultry houses, which dominated the property. In HMRC’s view, the poultry houses were not ancillary to the land; the land was ancillary to the poultry houses. Accordingly, they were not eligible for APR.
“These cases show that HMRC will argue on a broad or a narrow construction of the law, depending on which suits their purposes most,” says <<CONTACT DETAILS>>. “It is essential to keep both possibilities in mind when considering IHT problems in general, not just those where APR or similar reliefs are at stake.”
Too Many Dividends
Company law provides that dividends to shareholders can only be paid out of ‘available profits’. The prohibition on paying excess dividends most commonly comes into point when a company which has paid more by way of dividend than it has made in profits becomes insolvent.
When this occurs, the excess amount of the dividend may be repayable to the company. A recent case dealt with this issue. A company was run by two people, who were its only directors and shareholders. Instead of taking full salaries, they followed the advice of their accountant and took dividends. The company was not successful however and made trading losses, to the extent that it went into insolvent liquidation. At no time had the directors been advised that the taking of the dividends was unlawful.
The liquidators demanded repayment of the dividends. The question at issue was whether the two would be required to repay the dividends in the circumstance in which they (as shareholders) did not know, or have reasonable grounds for knowing, that they were liable to repay the dividends as a legal consequence of them being paid contrary to the Companies Act.
The court took the view that the section which requires the repayment of dividends could only be brought into effect when a shareholder knew or had reasonable grounds to believe that the payment was made contrary to the provisions of the Companies Act.
“Interestingly, the court did not consider the liability of the shareholders in their capacity as directors,” says <<CONTACT DETAILS>>. “It could be argued that as directors, they should have known that the dividends were unlawful. However, the decision does provide some comfort for shareholders of companies that become insolvent and are later found to have paid dividends other than from available profits.”
TUPE Regulations 2006
On 6 April, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) come into force. These apply to any size of business and protect the employment rights of employees when their employer changes as a result of the relevant transfer of a business or a part of one. They implement the EC Acquired Rights Directive.
The main changes are:
  • a new duty on the transferor to supply specific information about the transferring employees to the new employer by providing what is termed ‘employee liability information’. This must be given at least two weeks before the completion of the transfer unless this is not reasonably practicable. The transferee will be able to claim for compensation in the Employment Tribunal if the transferor fails to provide the required information and will be entitled to not less than £500 from the transferor for each employee for whom information was not provided;
  • special provisions making it easier for insolvent businesses to be transferred to new employers – for example, allowing the parties in such situations to agree to vary contracts of employment in an attempt to assist the economic recovery of the business;
  • provisions which clarify the ability of employers and employees to agree to vary contracts of employment if, for example, the reason for doing so is an ‘economic, technical or organisational reason’ entailing changes in the workforce; and
  • provisions which clarify the circumstances under which it is unfair for employers to dismiss employees for reasons connected with a relevant transfer.
The Regulations place a duty on both the transferor and the transferee employers to inform and consult representatives of their employees who may be affected by the transfer with a view to seeking their agreement to the measures. There will be joint and several liability on the transferor and transferee for a failure to inform and consult, thus ensuring that each has a clear incentive to comply with the requirement.
The Department of Trade and Industry had considered excluding professional business services from the scope of the new TUPE Regulations but no such exemption has been included.
The new Regulations apply to transfers that take place on or after 6 April 2006 with the new employee liability information applying to relevant transfers that take place on or after 20 April. Guidance on the Regulations can be found at
Says <<CONTACT DETAILS>>, “Failure to comply with the TUPE provisions can be very expensive for businesses and it is important to take advice at the beginning of the process.”
VAT – Place of Supply of Services
With different rates of VAT applying throughout Europe, the place that a supply is made (and hence the VAT rate which is applicable) can be a very important matter.
The basic 'place of supply' rule is that in normal circumstances (and subject to some exceptions) the place of supply for a service is the place where the supplier 'belongs' – in other words, where the supplier normally does business. So, for example, if a services company based in the UK makes supplies in Germany, the 'place of supply' will normally be the UK.
One of the most important exceptions is the rule that services supplied relating to land are supplied in the country in which the land is situated. So, for example, if you retain an architect to help redesign your villa in Spain, the place of supply is Spain, even if the architect has no place of business there. This can be important as some EU countries have very low thresholds for registration, so the architect may be required to register for VAT (called IVA in Spain) to carry out the contract.
The other main exception is the provision of transport. Passenger transport is supplied in effect in the country in which the transport takes place. Freight transport, however, is supplied in the country in which the shipping commences, but the customer can, by providing the supplier with his VAT registration number, account for VAT under the 'reverse charge' system in his own country. Transport hire normally takes place where the supplier of the hire belongs, unless the hire takes place exclusively outside the EU.
Some services take place where the customer belongs. These include many professional services, banking, insurance and financial services, the supply of staff, services supplied electronically, telecommunications and several others.
Artistic and cultural services are supplied where they are performed, except for radio and television broadcasting, which are supplied where the audience belongs.
The above list is much simplified. It should therefore be evident that if you are considering undertaking trade with, in or through any EU country, a thorough look should be taken at the VAT implications.
We will be pleased to help you deal with any issues relating to trading abroad or in the UK. Contact <<CONTACT DETAILS>>.
In Brief
Age Discrimination Regulations Published
The Employment Equality (Age) Regulations 2006, which will outlaw age discrimination in the workplace, have now been published by the Department of Trade and Industry. The regulations will come into force on 1 October 2006 and can be found at
There will be no upper limit to the compensation payable if an employer is found guilty of age discrimination under the new legislation.
If you would like assistance in reviewing all your employment rules and procedures, including those relating to recruitment and retirement, contact <<CONTACT DETAILS>>.
Don’t Touch the Tacho
Goods vehicle operators are reminded that opening and interfering with a tachograph can amount to unlawfully removing the record sheet, even if the record sheet itself is not touched.
A recent case confirmed that any action which separates the record sheet from the tachograph stylus can be considered to be a withdrawal for the purposes of contravening the Transport Act 1968.
Total Smoking Ban
As has been widely reported, Parliament voted in favour of a total smoking ban in enclosed public places and workplaces in England and Wales when it was given a free vote on this issue in February. The Government intends to introduce the ban in summer 2007.
Under the Government’s plans for enforcing the ban in England and Wales, smokers who ignore the ban will face a fine of £50, whereas the fine for failing to prevent smoking has been set at £2,500. The penalty for not displaying ‘no smoking’ signs will be an on the spot fine of £200. Failure to pay could result in a maximum penalty of £1,000.
Employers who currently allow smoking in the workplace may be considering introducing a ban before this becomes law. We can advise you on implementing the change.
These articles are provided for general interest and information only.  They do not constitute legal advice. Whilst every effort is made to ensure that the content accurately reflects the law in England as at the date of its transmission, no liability is accepted for any loss or damage arising from any act or omission resulting from any information contained herein.

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