Commercial e-Newsletter June 2010


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The Budget
During the election campaign, George Osborne nailed his colours firmly to the mast of a deficit reduction strategy. The emergency budget did not disappoint in that, but questions remain over whether the effect of the expenditure cuts and the mixture of tax increases and decreases will be to depress growth and to stymie the desired effect in the medium term. Time will tell.
Corporation Tax
The main rate of Corporation Tax (CT), applicable to companies with taxable profits over £1.5 million, will be reduced from 28 per cent to 27 per cent on 1 April 2011. Thereafter, it will fall a further 1 per cent each year until reaching 24 per cent on 1 April 2014.
The CT rate for small companies (those with taxable profits below £300,000) will decrease from 21 per cent to 20 per cent from 1 April 2011.
The general thrust of the changes is to make trading by means of a limited company, and basing a company in the UK, more attractive. With the implementation of the Companies Act 2006, the UK now has a much more attractive legislative and tax regime than previously.
A small change has also been made to the rules for consortium relief, whereby control and voting rights are a factor in determining the percentage of a loss that can be claimed from a consortium company. However, a company will no longer have to be UK resident to transfer its share of the consortium’s losses to another consortium member.
Further CT reforms are expected to be announced this autumn.
Capital Allowances
From 1 April 2012 for companies, and 6 April 2012 for unincorporated businesses, the rate at which capital expenditure attracts CT relief will be reduced, from 20 per cent to 18 per cent annually in the case of items allocated to the ‘main rate pool’ and from 10 per cent to 8 per cent in the case of items in the ‘special rate pool’ (such as long-life assets, integral features etc.).
The annual investment allowance will also be reduced from April 2012, from £100,000 to £25,000.
Businesses contemplating major capital investments should consider the implications of the changes carefully.
Other Changes
From 23 June, the rate of Capital Gains Tax (CGT) applying to any gains above the basic rate Income Tax band (£37,400 for 2010-11) increases from 18 per cent to 28 per cent. However, business investors will be cheered by the fact that the lifetime limit for Entrepreneurs’ Relief has been increased from £2 million to £5 million. The rate of CGT on gains qualifying for Entrepreneurs’ Relief remains at 10 per cent.
Many new businesses located in most regions of the UK will benefit from a National Insurance Contributions (NICs) ‘holiday’, whereby qualifying employers will not have to pay the first £5,000 of Class 1 employer NICs due in respect of the first 52 weeks of employment of each employee (up to a maximum of 10) hired in the first year of business. The scheme is expected to run for three years and will cover any qualifying Class 1 employer NICs that fall due during this time.
The scheme is due to start in September 2010, although this is yet to be confirmed. Businesses that commence trading on or after 22 June will be able to enjoy the benefits of the scheme: they will have to pay Class 1 employer NICs in full until the scheme is introduced but will receive a holiday of equal duration once the scheme commences.
The scheme is intended to promote private enterprise in areas where there are currently a large number of public sector employees. It will therefore not cover London, the South East and the East of England.
Full details of the scheme will be published before its introduction. There will be restrictions on the types of eligible businesses: the Government intends to restrict the scheme to ‘businesses which undertake a sufficient degree of new economic activity’. What this will mean in practice will be revealed when full details of the scheme are made available.
In addition, there are a number of proposals aimed at providing specific support for small businesses.
The standard rate of VAT is set to rise from 17.5 per cent to 20 per cent on 4 January 2011. Items which are exempt or zero-rated for VAT purposes, or on which VAT is charged at the reduced rate of 5 per cent, are unaffected.
The rates applicable to businesses using the flat-rate scheme for VAT will also change, and can be found at The turnover threshold above which businesses must leave the flat-rate scheme will be increased from £225,000 to £230,000, inclusive of VAT. This change is designed to help businesses which would otherwise no longer be eligible to participate in the flat-rate scheme.
Anti-avoidance legislation has been introduced to combat schemes which attempt to apply the current VAT rate to goods or services which will be delivered on or after 4 January 2011.
If any of the measures mentioned above apply to you and you would like advice, please get in touch. The end of the tax year is 5 April for individuals and 31 March for companies.
ICAEW Reports ‘Cautious Growth’ Expected
According to a survey by the Institute of Chartered Accountants in England and Wales (ICAEW), businesses are bullish about their prospects over the next 12 months.
In its quarterly UK Business Confidence Monitor Report for the second quarter of 2010, the ICAEW reports increased confidence compared with the same quarter last year across all industry sectors except business services and consumer services (hotels and catering, health, education, etc.).
However, the report stresses that while the recession appears to have ended in late 2009, businesses are still cautious. There has as yet been no return to the availability of credit seen in 2008 and problems with late payment by customers remain.
If you want to protect your business as the economy returns to growth, contact us for advice: having the right contractual and other arrangements in place can help reduce your business risk.
Valuer Not Liable for Valuation Inaccuracy
Valuation, as any valuer will tell you, is an imprecise art. Claims against valuers for negligent valuations are therefore notoriously difficult to sustain. Recently, the court heard a claim brought by investors in hotels that a valuer had neglected to take into account a ‘turnover rent’.
The turnover rent was calculated in such a way that the rent payable by each hotel increased if the turnover exceeded a certain figure, but it was in effect based on a ‘rolling average’ so that if the turnover was less than the target figure, the shortfall ‘rolled forward’ against the subsequent payments. The result was that the rent would not rise above the base level until the whole of the shortfall was made good.
When the valuer prepared his valuation, he did not take the shortfall provision into account in working out when the increase in rents was likely to occur.
Investors, who had invested in the hotels after an offering by an intermediary, claimed this was negligent, that the valuations were overstated as a result and that the valuer was in breach of a duty of care to them.

The court agreed that the valuer did owe a duty of care to the investors. However, there was no evidence that the intermediary had relied on the valuation. The intermediary had been informed about the shortfall clause and had created prospectuses which omitted parts of the valuer’s valuation.
In any event, the valuation produced was within a ‘reasonable bracket’ of the acceptable range of valuations. Although the valuer’s methodology could be criticised, the valuation was sufficiently accurate not to justify a claim.
Contact <<CONTACT DETAILS>> for advice on any commercial property law matter.
Referral Sites in HMRC’s Sights
HM Revenue and Customs (HMRC) have recently taken a swipe at websites which pass on enquiries to the websites of companies which engage in the selling of insurance.
Insurance contracts are exempt from VAT, but HMRC argued that the service provided by a referral website was too remote from the formation of the contract for the business to be considered as an insurance broker or agent and that the sales income from the referral website was not therefore exempt from VAT.
The case went all the way to the Court of Appeal, which ruled in favour of the business making the introductions. The Court held that in order to benefit from exemption from VAT, the trade had to exhibit ‘the characteristic functions of an agent or broker’.
Four important aspects of the Court’s ruling stand out:
·         The first is that the introduction site in this case offered more than just a ‘click through’ facility. If it had not, the income would have been classed as advertising and not exempt;
·         Secondly, the site was part of a chain, the effect of which was to bring together insurance companies and those seeking to take out contracts of insurance;
·         Thirdly, although the exemption from VAT had to be interpreted strictly, this did not mean that it had a particularly narrow or restrictive definition;
·         Lastly, whether or not a taxable person is an insurance broker or agent does not depend on what they call themselves, but on what they actually do.
The ruling raises the interesting question of what would occur if the website widened its range of referrals to include non-exempt activities. No doubt a case will appear in the fullness of time which addresses this issue.
VAT and online supplies can be a minefield. Getting it wrong can lead to substantial tax liabilities and penalties and HMRC are clearly seeking to see how far they can go in increasing their tax yield from such websites. If you have the slightest doubt about your VAT position, take professional advice.
<<CONTACT DETAILS>> can assist you on any tax matter.
FTSE 350 Directors to Face Annual Re-election
In an attempt to further improve corporate governance, the Financial Reporting Council (FRC) has introduced changes to the UK Corporate Governance Code. These include a clearer statement of the board’s responsibilities regarding risk, a greater emphasis on the importance of getting the right balance of skills and experience on the board, and a recommendation that all directors of FTSE 350 companies should be required to stand for re-election every year.
The ability of shareholders to challenge, at every Annual General Meeting, the reappointment of directors seen as underperforming will send shivers down the spines of many City board members.
The new Code can be found at
Rights and Responsibilities – Contractual Differences
The difference between rights and responsibilities under a contract is sometimes important. When a contract is transferred from one person to another, the type of transfer determines what aspects of the contract pass.
If a contract is assigned, the rights under the contract are passed on. So, for example, an author could enter into a contract to assign future royalties to someone else.
When a contract’s responsibilities are also passed on, the practical effect is that the new owner of the contract acquires all the rights and responsibilities of the former owner. This is a critical difference where there is something which must be done in order to benefit from the rights under the contract.
A recent case involving a property transaction illustrates the difference. It involved a man who had contracted to sell a property to German supermarket chain Lidl. The man had previously entered into a contract to buy the property and that contract was passed to Lidl. He was entitled to retain £100,000 of the purchase consideration until certain construction works were completed. When the works were completed, he was entitled to retain half of the further costs from the sum retained and required to pass the balance on to the original owner.
There was a similar term in his contract of sale with Lidl. However, in the case of the contract with Lidl, the company was entitled to retain the whole of the cost of the further works from the payment.
Lidl retained £100,000 from the payment to the man. When the further works were completed, he claimed that these had cost more than £200,000. He refused to pay any of the retention monies to the original owner.
The court had to decide whether the benefit which passed to Lidl under the assigned contract required it to perform the man’s obligations under the original contract. It ruled that it did not. The obligations remained for him to perform and were not passed on to Lidl.
Clear Drag-Along Clause is Binding
Getting into business is easy. Getting out of business is often where the real problems start. That is why it makes sense to have a partnership agreement (or a shareholders’ agreement if the business is a company) in place from day one.
A shareholders’ agreement will normally have a ‘drag-along’ clause, which requires the other shareholder(s) to sell their shares to a third party wishing to acquire the whole of the business when a majority of the shareholders agree.
The decisions of the courts in cases concerning such clauses have resulted in their enforceability coming under question, but a recent case has provided relief for shareholders who may wish to rely on a drag-along clause.
It involved the owner-manager of a company who wished to acquire another company. He did not have sufficient funds to do so, so sought assistance from a private investor. They formed a new holding company for the purpose of buying out the target and the target was purchased. The two men created a shareholders’ agreement, which provided that in certain circumstances the investor could require the owner-manager to acquire his shares and, if he failed to do so, the investor could sell them to a third party.
The stipulated circumstances occurred and the investor sought to invoke the disposal of his shares under the drag-along clause. The owner-manager attempted to resist the transfer of the shares. However, because the drag-along clause was very tightly worded, it was straightforward for the court to conclude that it had been complied with in full.
Says <<CONTACT DETAILS>>, “Such clauses should always be worded in clear and unequivocal language, so that there is no room for doubt as to whether or not the conditions that trigger the drag-along clause have been met.”
For assistance in all agreements between partners, shareholders or investors, contact us.
Franchise Disclaimers Fail to Persuade Court
Franchise agreements are well known for being the cause of disputes between franchisee and franchisor, so if you are considering taking on a franchise, it is important to take professional advice first.
Recently, well-known franchisor Kall Kwik UK Ltd. was in court after a new franchisee sued it because estimates provided by Kall Kwik for refitting costs turned out to be much lower than the actual figure – a difference of between £15,000 and £30,000.
Kall Kwik had used the low estimate twice, including in a cash-flow forecast. This had a disclaimer, which relieved Kall Kwik from responsibility except in the case of fraud and which advised the user to obtain independent verification of its contents.
A second disclaimer was to be found in the franchise agreement itself. This excluded liability for misrepresentation in inducing the franchisee to enter into the agreement, but not for the performance of the agreement itself.
The court found Kall Kwik was liable for the franchisee’s additional costs because the franchisee had suffered a financial loss which was reasonably foreseeable and which arose as a consequence of a breach of the duty of care that Kall Kwikowed to the franchisee.
Intellectual Property
Patent Refusal Challenge Succeeds
Scientific theories, computer programs and mathematical techniques cannot be patented and it may therefore be thought that a process which involves a computer program or the application of significant mathematics is not patentable.
However, this may not always be the case. The Forensic Science Service (FSS) – which, like the Lab of the Government Chemist, is a commercial entity, despite the seemingly ‘official’ name – has recently been successful in overturning a refusal to patent a method of modelling the extraction of DNA which allows the simulation of the process from extraction through various stages of analysis.
Despite the fact that the steps of the process are well-known in the scientific community, the conclusion of the examiner who considered the refusal to grant a patent to the FSS was that ‘while the claims included steps that could be said to fall within one or more of the categories of excluded matter, the contribution as a whole did not’.   
The application was referred back to the original examiner for further consideration.
OFCOM Proposals to Get Tough Over Copyright Violations
OFCOM has published for consultation a draft initial obligations code of practice designed to prevent online copyright infringement. The code, entitled ‘Online Infringement of Copyright and the Digital Economy Act 2010’ will:
·         enable those whose copyright has been violated to require Internet Service Providers (ISPs) to notify their subscribers if the Internet Protocol addresses associated with them are reported by copyright owners as being used to infringe copyright;
·         require ISPs to keep track of the number of reports about each subscriber; and
·         require ISPs to compile, on an anonymous basis, a list of those who are reported on above a threshold to be set in the initial obligations code.
The copyright owner will be able to apply for a court order to obtain personal details so that they can take action against those included on the list.
The draft code of practice can be found at
The consultation closes on 30 July 2010.
Search Engine Provider Not Liable for Trade Mark Use
Using a trade mark as a ‘keyword’ to aid searches using a search engine which then displays advertisements featuring other brands does not breach the rights of the trade mark owner.  
In the view of the European Court of Justice, use of the trade mark in such circumstances does not constitute ‘use’ within the meaning of the word in European law.
However, the Court ruled that the owner of such a trade mark is allowed to prevent another business from advertising goods or services identical to those covered by the trade mark if the origin of the goods is not clear.
The case centred on the use of keywords corresponding to Louis Vuitton’s trade marks in order to guide users of the Google search engine to websites not owned by the company or its authorised distributors and to display advertisements (‘sponsored links’) triggered by use of the keywords.
The crucial part of the Court’s decision was the ruling that the use as a keyword of a ‘sign identical with a trade mark’ and the organisation of advertisements displayed on the search page as a result of that keyword did not constitute use of the sign by the search engine provider where the search engine provider played no part in the creation of the keyword.
Where an advertiser creates keywords and stores them in such a way that the search engine provider has no knowledge of their use, the search engine provider is not liable for their misuse unless it becomes aware of this and then fails to take prompt action to prevent it.
We can help you ensure any website you operate complies with the applicable law.
Smell-Alikes Cannot Say What They Smell Like!
The Court of Appeal has issued its ruling in an interesting intellectual property (IP) case, involving copycat scents, which follows recent European rulings.
The case was brought by l’Oréal and other makers of luxury perfumes. They took exception to a business publishing a table showing its own brands and which luxury brands they resembled. Although the packaging of the ‘smell-alikes’ was also similar, the Court considered that this was unlikely to mislead the public so did not infringe the manufacturers’ trade marks.
However, the use of the perfume makers’ trade marks for marketing purposes to identify which ‘own brands’ had a similar fragrance was a breach of the IP of the claimants.
The ‘smell-alikes’ can continue to be sold but their manufacturers cannot say what fragrances their products are supposed to imitate.
Contact <<CONTACT DETAILS>> for advice on any intellectual property matter.
Tax Deferrals ‘Hide Insolvency’
With over 300,000 businesses now having made ‘time to pay’ arrangements with HM Revenue and Customs (HMRC), the fear is that businesses that are insolvent are using such arrangements to hide their precarious financial status.
With HMRC said to be tightening up on the availability of such arrangements, those doing business with firms which may be walking a financial tightrope should take care to control their credit risk. Government bodies are no longer preferential creditors on insolvency and the practical effect of this is that HMRC are inclined to push a firm into administration or liquidation more quickly than they would have done a few years ago if the alternative is to risk a smaller payout by letting the business continue to trade.
For advice on any insolvency issue, please contact <<CONTACT DETAILS>>.
New Employment Tribunal Fast Track Scheme
Since April 2009, the names of employers and individuals who fail to pay Employment Tribunal (ET) awards have been added to the Register of Judgments, Orders and Fines, once enforcement proceedings have been brought against them in the County Court. The Register can be searched by members of the public, banks and credit reference agencies and the move was intended to provide an incentive to settle awards on time. In the first year, details of 570 companies and individuals who have failed to make payments have been added to the Register.
Help is at hand, however, as successful claimants can now avail themselves of an extended service from High Court Enforcement Officers if the other party fails to pay an ET award. An Enforcement Officer will complete the court process and move to enforcement as soon as possible. The only cost to the claimant is a £50 court fee, to issue a writ to seize assets to the value of the amount owed, and this will be added to the sum of money owing to them.
There is a telephone advice line for people pursuing awards. The number is 0845 456 8770.
Employer Not Liable for Agency Worker’s Remarks
A recent case (May and Baker Ltd. t/a Sanofi-Aventis Pharma v Okerago) serves as a reminder to employers of the sort of problems that can arise during an international sporting event when members of their workforce support different participants.
Mrs Okerago claimed that remarks made to her by a colleague, Ms Dower, during the 2006 FIFA World Cup amounted to direct discrimination under the Race Relations Act 1976 (RRA). Mrs Okerago told the Employment Tribunal (ET) that Ms Dower, an agency worker, told her to go back home after Mrs Okerago replied ‘my country’ when asked which team she would be supporting in the competition. By not specifically investigating her grievance on this issue, she claimed that her employer had aided and abetted the discrimination.
The ET judged May and Baker liable for Ms Dower’s discriminatory remarks but this decision was overturned on appeal.
The Employment Appeal Tribunal (EAT) found that there were no adequate findings of fact in the ET’s judgment to support the ruling that Ms Dower was an employee of May and Baker, which was necessary for a finding of liability under Section 32(1) of the RRA. The ET’s finding that ‘to all intents and purposes she was treated as an employee on a day-to-day basis and acted as one’ was not a sufficient basis for finding the company liable.
In addition, the EAT ruled that there were no adequate findings of fact to support a conclusion that Ms Dower acted as an agent of May and Baker, for the purposes of RRA Section 32(2). Also, a person cannot aid another to do something that the other person has already done. The failure to investigate Mrs Okerago’s grievance and the other matters referred to by the ET all took place after the World Cup incident had already occurred and there were no findings that the company knew about Ms Dower’s remark at that time to support the suggestion that it had assisted the incident to occur.
The EAT went on to say that although the ET’s finding that by its conduct May and Baker was ‘compliant in allowing an environment to continue where such conduct could take place’, there were no findings by the ET that the company had allowed such an environment to exist prior to, or at the time of, the World Cup incident.
Says <<CONTACT DETAILS>>, “This case hinged on the fact that the complaint concerned the conduct of an agency worker, not an employee. The claimant’s case was not advanced on the basis that her employer was vicariously liable for the agency worker’s actions. The ET made no findings of fact on that point and it was not therefore open to Mrs Okerago to argue it in the EAT.”
Contact <<CONTACT DETAILS>> for advice on any employment law matter.
Health and Safety
Company Fined After Worker’s Head Crushed
Brick manufacturing company Hanson Building Products Ltd. has been fined £280,000 and ordered to pay costs of £29,204 after pleading guilty to breaching Section 2(1) of the Health and Safety at Work etc. Act 1974 following the death of a worker at its distribution plant in Coleshill in Warwickshire.
Peter Clarke, 57, was working at a 30-metre conveyor belt that carried concrete blocks from a kiln to a packaging area. He had only recently joined the company and his job was to remove sample blocks in order to carry out quality testing.
The blocks were arranged into stacks ready for packaging by manoeuvring the conveyor backwards and forwards. Mr Clarke was working next to a low bridge over the conveyor. When he leaned forward to remove some blocks for checking, another worker changed the direction of the conveyor, crushing Mr Clarke's head between the blocks on the conveyor and the metal platform. The operator of the conveyor was unable to see Mr Clarke because his view was obscured.
The Health and Safety Executive (HSE) carried out an investigation into the incident. It found that the company had failed to carry out an adequate risk assessment for the operation. The only risk that had been identified was the possibility that workers might get their fingers trapped between the blocks and the stairway leading to the platform.
HSE inspector Peter Snelgrove said, “There were no safe systems of work for removing the blocks and the company failed to supervise Mr Clarke adequately. The area where he was working was well known as a danger zone by other workers, but he had been on site for less than two weeks and nobody had told him about the risks.”
Risk assessments must be carried out systematically and all foreseeable risksconsidered. HSE guidance on risk management can be found at
Government to Review Health and Safety Laws
The Government has announced that it is to carry out a review of health and safety laws and practice.
Lord Young of Graffham, who was a cabinet minister in Margaret Thatcher’s Government, has been appointed as Adviser to David Cameron and will undertake a Whitehall-wide review of the operation of health and safety laws and the growth of the ‘compensation culture’.  
Commenting on the review, the Prime Minister said, “The rise of the compensation culture over the last ten years is a real concern, as is the way health and safety rules are sometimes applied.
“We need a sensible new approach that makes clear these laws are intended to protect people, not overwhelm businesses with red tape. I look forward to receiving Lord Young’s recommendations on how we can best achieve that.”
Contact <<CONTACT DETAILS>> if you would like individual advice on ensuring your business complies with health and safety law.
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