Companies Act 2006 Overview

The Companies Act 2006 became fully effective from October 1st 2009. It is the principal source of law relating to the conduct of companies incorporated in England and Wales.

Companies House provides useful information on the Act on its website.

The Institute of Directors has published useful guidance on the rights and responsibilities of directors.

Disputes in the EU - Rules on Applicable Law

Where a dispute has a foreign element, one of the common problems is deciding under what jurisdiction legal action should be taken. This is avoided in many commercial contracts by specifying the applicable law in the contract, but in consumer contracts there is often no such clause. When the action arises because of a non-contractual issue, the problem is even more difficult.

The EU has set out regulations aimed at clarifying the issue of where action should be taken with regard to a range of non-contractual obligations in civil and commercial matters, excluding actions involving government bodies. These harmonise the rules for deciding jurisdiction across the EU (excluding Denmark), but also allow for the parties to elect for a specified jurisdiction to apply in certain circumstances. There is no freedom of choice in some types of action, for example those involving intellectual property and competition law.

The key concept is that the jurisdiction applicable will depend on the place where the damage occurs, or is likely to occur. This may well be different from the country in which the event giving rise to the action took place. There are some exceptions to this, however, the main one being that if both parties to a dispute are habitually resident in the same country, that country’s law will apply, no matter where the event took place.

Another exception will be where the event giving rise to the action is inextricably linked with a particular country, in which case the law of that country will apply.

Financial Fraud - What Not to Do!

With recent surveys showing that instances of employee fraud are still on the increase, and HMRC showing regrettable lack of ability to safeguard personal data, eliminating poor security practices which make fraud easier is becoming even more important.

The following practices are not uncommon and create a significant risk of fraud:

Leaving signed blank cheques for use when the signatory is away. The risks inherent in this practice are clear. It is preferable to have a second signatory who is required to sign checks when another signatory is absent.

Rotating signatures. If a number of people can sign cheques, a fraudster can ‘rotate’ the signing of cheques, which makes the exercise of effective supervision very difficult. This is particularly common in frauds involving withdrawals of cash.

Electronic passwords and  transfers. The absence of checks at the bank makes the need to have very tight security procedures over electronic transfers all the more important.

Delegated authority without control. It is essential to have controls in place where certain areas of the business are under the sole control of one person. Check that all payments for services or goods received are correctly made and constitute proper value for money. One of the easiest employee frauds to get away with for year after year is the ‘kickback’ from a complicit supplier. Make sure that purchasing decisions are subject to periodic value for money testing and if the payments made are more than the market rate, find out why.

Employees who insist that all ‘their’ paperwork is left untouched until their return from holiday. This is a clear warning sign that they do not wish to have their work scrutinised by other people. Find out why.

Not counting noses. With the large number of people gaining employment temporarily in the UK, it may be a simple matter to continue to pay an employee who has left, who then shares the income with the employee facilitating the fraud. The number of names on the payroll should be the same as the number of people employed. Make sure it is.

Buying from and selling to the same firm. It may sound like good sense to deal with a customer that is also a supplier on a single account. It normally is – but one danger is the possibility of a fraud where purchases are either fictional or delivered elsewhere. Because there are entries on both sides of the account, they may go unchecked. The cheque written agrees with the total on the ledger account, but is that verified?

Concentrating on big items only. The essence of the most successful long-term fraud is that it does not attract attention. It is the smallness and regularity of the transaction which establishes it as ‘part of the furniture’ and makes detection less likely. Make sure that ‘small’ accounts are reviewed, at least on a test basis.

If any of the above practices go on in your organisation, it is time to take action to rectify them. Remember, most internal frauds are carried out by highly trusted employees.

The enterprising and corrupt employee has a great advantage over most criminals – a detailed knowledge of the control systems of the organisation which is being defrauded. Make sure you act to protect your business.

It is also worth mentioning that some insurance policies do not cover employee fraud, or offer minimal cover.

Tips on how to spot employee fraud.

See our article on the Fraud Act 2006

Remedies for Breach of Contract

Having the right contract is always a good idea, but no matter how much protection it offers, no contract can prevent a breach of contract by the other party.

If you enter into a contract and it is breached, there are several possible remedies available to you. Breaches of contract occur when one party refuses to perform their obligations under the contract or performs them defectively.

Repudiation

If the other party breaches a condition of the contract, you may be able to 'repudiate' the contract to terminate it and claim damages for your loss - or to 'affirm' the contract and claim damages. When the breach of contract is the breach of a warranty in the contract, the restitution is by damages alone.

Damages

If the contract specifies the amount to be paid if the other side breaks the contract, you will be entitled to what are termed 'liquidated damages'. This type of clause is most often found in the manufacturing and building industries, where penalty clauses for late completion are common.

Damages are essentially of two types and are intended to restore the claimant to the position they would have been in had the contract been performed satisfactorily. In the UK  there is no concept of 'punishment' in damages, so the settlements reflect the actual loss only.

General damages are awarded for unquantifiable losses, such as loss of amenity, physical inconvenience and so on. Special damages are awarded for quantifiable losses, such as loss of profits.

In order to sue successfully for damages arising out of a breach of contract, you must demonstrate that there was a contract in existence, that the other side failed to perform their part of the bargain satisfactorily and that you suffered a loss as a result. You are also expected to take reasonable steps to reduce the impact of the breach i.e. to 'mitigate your loss'.

Under English law, in a court action for damages the loser normally pays the costs of both parties and most cases settle before they get to court. More recently, it has become possible to undertake litigation on a 'no win, no fee' basis for many types of action.

Specific Performance

A less commonly used remedy is ‘specific performance’ – where one party goes to court to obtain an order of the court that the other party will specifically carry out their contractual obligations.

It Wasn't in the Contract

A common problem in contract disputes is that matters that create disagreement are sometimes not referred to specifically in the contract. However, as well as the express terms of a contract, there are also terms that are implied that is, they apply without being specifically stated.

The main implied terms of contracts are those imposed by statute. For example, the Supply of Goods and Services Act 1982 and the Sale & Supply of Goods to Consumers Regulations 2002 imply several terms into contracts for sale. For example, it is an implied term that goods sold 'are of a satisfactory quality'. Similarly, there are a number of provisions in the Unfair Contract Terms Act which will mean that unfair terms in a contract can be avoided.

The courts are generally disinclined to meddle in contracts, but may deem a contract to include a term if it is necessary for the performance of the contract and may likewise strike out any clause which is unreasonable.

Recent cases have confirmed that the courts will not act to introduce 'commonsense' clauses to contracts which are agreed, simply to reflect normal business practice, nor will the court accept that terms defined in a contract which were expressed in different terms in the negotiations leading up to the contract should be replaced by the pre-contractual terms as agreed: proof, were it necessary, that care should be taken at each step and you should never sign anything which hasn't been read carefully.

Bribery Act Guidance

The Government provides guidance for businesses on complying with the Bribery Act 2010, which came into force on 1 July 2011. The Act was originally scheduled to take effect in April 2011, but its implementation was delayed to allow the final version of the guidance to be completed.

Section 7 of the Act makes it an offence for a commercial organisation to fail to prevent bribery. A business can provide a defence by showing that it had in place adequate procedures to prevent bribery from taking place, however, and the guidance details the approach that should be taken when implementing such procedures. The overriding point is that these should be proportionate in view of the likelihood of bribery occurring, which will depend on the size of the business and the countries and markets in which it operates. Although the principles remain similar to those in the draft guidance, published in September 2010, the advice in the final version is more detailed.

Section 14 of the Act provides that where an offence is committed with the consent or connivance of a senior officer of an organisation, that person (as well as the body corporate or partnership) is guilty of the offence and liable to be proceeded against and punished accordingly.

Under Section 11 of the Act, the maximum penalty for individuals is 10 years’ imprisonment or an unlimited fine, or both. The maximum penalty for commercial organisations is an unlimited fine.

The guidance includes case studies to illustrate what approach businesses might take in certain situations and can be found here. There is also a ‘quick start guide’ to the Act.

The first prosecutions under the Act were brought in 2012. In both cases, the prosecutions involved corruption of public officials.

New Contract, New Danger

Every business needs customers, but every customer, especially a new one, represents a risk to your business. It is a very serious issue but there are many things you can do to make sure that you increase your chances of getting paid.

Clearly, the precautions to be taken will depend on the credit given, but for a business with a gross profit margin of 25p in the pound, every 1 pound of bad debt will eat up all the profit in the next 3 pounds worth of sales. Most businesses with bad debt problems do not follow these simple guidelines:

• Try not to give credit to people who don't deserve it. Trade references can be taken. Beware the company who keep a few trade accounts "sweet" and are a problem to the rest. Obtain a commercial credit rating through a credit agency;
• Make sure the contract under which the sale is made protects you. In particular, make sure that there are clauses allowing you to charge interest at an unattractive rate from the time the debt goes overdue. Alternatively, offer very attractive early settlement discounts. A company that does not take a 5 per cent discount for settling within a month is not showing good business sense. If they don't take it, why not? Make sure you have a proper paperwork path to prove you supplied what you say you did, when you say you did and that the customer agrees that it was satisfactory;
• If you can, incorporate a "reservation of title" clause in your conditions of sale. This may allow you to reclaim any goods for which payment has not been made, should the debtor's business fail or not make payment;
• Operate strict credit control. If a customer has overdue debts, do not give them more credit, no matter how good the sob story. This is one of the cardinal errors of firms with bad debt problems. Document all contacts and enforce systematic collection procedures;
• Consider commercial credit insurance. Insuring one's debt book can be good business;
• If a debtor is becoming a problem, take advice as quickly as possible, before the problem spirals out of control;
• Never suspend common sense. If you gain a new customer, does the explanation they give for switching to you really stack up? If not, be careful and keep the credit limit (if any) low. If you have contacts in their line of business, ask around. If practical, try to visit their business. Does it look orderly and well run? Do they seem on top of things?

Recent changes in the VAT rules can make dealers in electronic good responsible for failure to pay VAT due by the businesses with which they deal (so-called 'missing trader fraud'), unless reasonable steps are taken to confirm their bona fides. HMRC has published a guidance document on spotting missing trader fraud.

Making Retention of Title Work

Prior to the recession, Retention of Title (RoT) clauses probably received less attention than they should have from many businesses. However, RoT is now back in the spotlight.

An effective RoT clause will normally allow you to recover the goods you have supplied (assuming they are identifiable and have not been incorporated within other goods) if they are not paid for.

If you are worried about the ability of your customers to pay for the goods you supply, here is a short guide to making RoT clauses operate effectively:

1. Make sure it is clear in your terms of trade that title in the goods you sell does not pass to the buyer until they are paid for and that your customer is aware that this is the case;
2. Make sure all goods are signed for and confirmed as being in good condition on arrival;
3. Make sure separate deliveries of goods are identifiable if possible – this will help if some goods are paid for and others of the same type are not. Use of an ‘all monies’ clause (in which title to goods only passes when the account is fully paid) may be of assistance; and
4. Make sure that any issues regarding quality are dealt with promptly and are fully documented, so the fact that there are no outstanding issues relating to the goods supplied is well evidenced.

Companies Act Model Articles - Think First

However, before you rush off and buy an ‘off the shelf’ company, pause to consider this – it is usually much more sensible to start with the right articles than to amend ‘standard’ articles to say what you mean later.

Articles tend to be of little importance to directors and shareholders until the company has ‘grown up’ a bit – by which time vested interests can be strong and changes to the internal regulations, such as alteration of share capital rights and so on, can be difficult and full of hidden pitfalls. These sorts of issues can prove a disaster when there are discussions ongoing relating to the retirement of director-shareholders or a proposed purchase of the business or of a shareholding in it.

Retirement Planning and Your Business

It is arguable that the whole point of any business should be to enable the owners to retire when they want and with the lifestyle they want on retirement. Of course, enjoying it as you go along is a good idea too, but retirement comes to most of us eventually and for the self-employed, the sale of their business is often the main source of capital on which to finance their retirement.

One of the implications of this is that the retirement from the business should be carefully planned: after all, your whole future depends on doing that part as well as you can.

In this article we are looking at the situation where a business is built up and is not going to be passed on to other business partners or family members. Although some of the considerations are the same, there are also significant differences when the disposal is an 'arm's length' transaction.

The first priority is to make sure that if the business is to be sold, it is sold for as much as possible. The key to this is to make the buyer confident that they are not buying a 'pig in a poke'. Get your books up to date, looking tidy and try to make the business as profitable as you can in the few years before sale. Make sure you can explain any 'oddities'. Make sure there are no liberties taken with the law or tax authorities.

An essential part of this process is to ensure that all your contractual, employment and health and safety procedures are in good order and up to date.

Don't forget the inheritance tax implications of having a significant capital sum added to your estate. To maximise the amount you get for your business is good practice, but to keep the benefits in your family and minimise the eventual Inheritance Tax requires forethought and good advice.

The contract for sale is a critical document to get right. Most vendors prefer to have a 'clean break' rather than opt for an 'earn out', but if the latter is adopted, it must be clear and unequivocal . The more loose ends there are the more there may be to argue about later.

There is a lot of tax planning to be done before any sale, so make sure you take advice when you are contemplating retirement and sale. Don't wait until the point when you put the business on the market or start negotiations. While there are generous reliefs for Inheritance Tax and also for Capital Gains Tax, there are also qualifying conditions that must be fulfilled.

Among the planning devices that can be used are:

• Emigration in the year of sale, where the intention is to reside abroad permanently;
• Payment of a pre-sale dividend, to reduce the value of a company's shares;
• Delaying the sale until the next tax year to increase tax exemptions;
• Transfer of assets to spouse pre/post sale to minimise CGT, IHT and income tax on invested income;
• Payment of a single premium into your pension policy.

Letters of Intent - Getting Them Right

What Is a Letter of Intent?

Letters of intent, commonly referred to as 'heads of agreement', are used to indicate the terms under which two or more people intend to enter into a contractual relationship when doing business together.

The term 'letter of intent' has no legal significance. However, the courts have often treated so-called letters of intent as contracts capable of being enforced, so care must be taken when drafting them.

One legally binding clause that is normally included in a letter of intent is the confidentiality clause in which it is agreed that confidential information acquired during negotiations will not be disclosed to any third party or otherwise used.

Why Use Letters of Intent?

Many letters of intent are really a mechanism by which the parties to a deal give each other reassurance of their intentions. They provide strategic guidance as to how a deal is to be done. They are also useful when outsiders need to be brought into the picture. For example, a takeover deal may need to be financed by institutional investors. The letter of intent is a valuable tool for them in their decision-making.

A letter of intent can be submitted to the relevant authorities in order to obtain a clearance that a particular way of structuring a deal will not cause problems: for example, obtaining a tax clearance from the Inland Revenue.

What Problems Might Arise?

Letters of intent can present problems. Unless drafted carefully, a letter of intent can create a contract, enforceable in the courts. For example, the use of the words 'subject to contract', which normally operate to show that contractual relations will be created later, are not always effective in this regard. Similarly, the courts have ruled on several occasions that work done following agreement of a letter of intent should be paid for at a reasonable rate, when the anticipated contract did not materialise.

If negotiations fail, there may be a damaging 'loss of face' if details have been disclosed to third parties.

In addition, UK tax law will often catch 'arrangements' in which a series of predetermined steps is carried out with the effect that tax payable is reduced. The existence of a letter of intent could justify the tax authorities arguing that an arrangement was in effect. This can be of particular importance in management buyouts, sales of businesses and similar deals.

What Should be Included?

Normally, letters of intent should contain the following clauses:

• a statement of the law under which the letters are drafted;
• a statement that they are not binding, or clear identification of any parts that are intended to be contractually binding;
• any provisions for non-completion (e.g. where one side must do work to progress the deal, and whether they will be compensated for this);
• a 'lock out' clause is common, in which the parties agree not to have negotiations with competitors for a period;
• a non-disclosure ('confidentiality') clause defining to whom (if anyone) disclosure of terms can be made.

Recently, the court issued guidance regarding when letters of intent might most usefully be used in construction agreements. In the court's view, letters of intent are most suitable for use when the following are agreed or there is little chance of dispute regarding them:

• the scope of the works;
• the price of the works;
• the date of completion of the works and any ‘milestones’ prior to final completion; and
• the main contract terms.

The use of letters of intent is also most appropriate when there are good reasons to commence the works prior to the formal contract documents being in place.

Employee Fraud - Fraud Act 2006

Employee fraud continues to rise as the recession continues to bite - however,  the Fraud Act 2006 provisions make it easier to obtain convictions for fraud a than was possible under the predecessor legislation.

Under the Act, fraud offences are:

• fraud by false representation. This is committed when a false representation is made which the person making it knew was or might be false and which was made with the intent to make a gain or cause loss;

• fraud by failing to disclose information. This is committed when the perpetrator fails to disclose information which he is under a legal duty to disclose and which is withheld with the intent of making a gain or causing a loss; and

• fraud by abuse of position. This is committed when the perpetrator is in a position of trust and acts dishonestly with the intention of making a gain or causing a loss.

There is also an offence of obtaining services dishonestly. This involves obtaining services for which payment is due and failing to pay, in whole or in part, where this is done with the intent that payment will be avoided.

Click here for advice on reducing the risk of employee fraud.

Buying from an Administrator - Take Care

With businesses becoming insolvent in large numbers, opportunities abound to acquire assets from their administrators. However, the low prices sought for the assets are due, at least in part, to the additional risk to the purchaser.

Here are some of the main issues to be aware of when buying property from an administrator:

• Vacant possession of a property will not normally be guaranteed and the cost of clearance of items left in the building should be borne in mind;

• No guarantees or warranties regarding the property will be given – undertaking proper due diligence to reduce risks is advisable;

• There may be items that appear to be a part of the property being sold which do not in fact belong to the insolvent business; and

• The administrator acts only as agent for the insolvent company and will accept no liability for errors or omissions.

Buying a property from an administrator is a risky business. We can help you to control the legal risks.

Outsourcing - Nine Steps to Success

These days more and more processes are being outsourced (run by external contractors under a service agreement) by more and more businesses. It is particularly common to outsource IT functions and telephone call management.

Outsourcing can offer many advantages - for example, cost reductions, access to better technology and the ability to prevent management attention being diverted by 'non-core' activities within the business.

However, unless the contractual side of an outsourcing arrangement is right, the results can be a disappointment, or worse.

The steps to take in order to make sure your outsourcing is successful are:

1. Make sure your objectives are clear. You should know precisely what benefits you are expecting the outsourcing to bring to your business;
2. Before you start the outsourcing process, look at your own working methods and make them efficient. Having done this, you may even find you no longer want to outsource! Never outsource a mess;
3. Carry out a thorough costs analysis. Know exactly what your system costs to operate;
4. Create an invitation to tender. Specify precisely what needs to be done and what your necessary performance criteria are. This will form the basis of your contract with the supplier, so take care. Generally, it is better to express the requirements in terms of outputs (things that must be done) rather than in technical terms. Let the supplier deal with the technical side, but make sure the contract is clear on what you will get out of the process;
5. Shortlist suppliers. It is important that the proposed supplier understands your business and its needs - both now and in the future. Contact existing customers of the supplier to find out what they think of the service they receive. Look at the supplier's finances to ensure they have sufficient financial strength to see the contract through;
6. Negotiate your contract very carefully. Make sure every critical part of the process is properly documented and dealt with in the contract;
7. Develop a transition plan to ensure your service standards continue to be met while the new system is being implemented. This is an important part of the 'who does what and when';
8. Develop a service level agreement, which makes the outsourced service provider specifically responsible for delivering the agreed goals;
9. Make sure you have a disaster plan and an exit strategy. Plan for the worst. If it happens, you will be glad you did. Set up a system which allows a clear mechanism for dealing with any disputes or service failures.

The Information Commissioner's office has published useful guidance on outsourcing and data protection issues which should be read by any business considering using outsourcing.

Money Laundering Regulations

Money laundering is the process by which criminals turn their 'dirty' income – which is usually earned in cash – into 'clean' money, by undertaking transactions which hide the original source of the cash and/or turn the cash into 'legitimate assets'.

The Government's battle against money laundering has caused a massive increase in the compliance burden for firms of all kinds engaged in financial transactions, following the passing of the Proceeds of Crime Act 2002. The main thrust of the regulatory regime is based on the need to 'know your client' (KYC), which is backed by the requirement to report any suspicious transactions. It is estimated that over 100,000 suspicious transactions will be reported to the authorities in the current year.

Money laundering now comes under the remit of the Serious Organised Crime Agency (SOCA).

Compliance with money laundering regulations can cause delays in the completion of quite innocent transactions when there is a need to get 'clearance' for the transaction in question. It is worth remembering that time may be necessary for this - especially when dealing with larger transactions with a foreign element. Do not be surprised, even as a client of long standing, if a bank or other financial institution asks to have sight of your passport before you are permitted to open a new account or undertake a transaction.

Recently, the Money Laundering Regulations 2007 have been revamped somewhat to place more emphasis on management control and the need to carry out a proper form of risk assessment.

The changes are contained in the Money Laundering (Amendment) Regulations 2012.

More information on money laundering regulations can be found on the Office of Fair Trading website and guidance is available from HM Revenue and Customs' website.

Limited Liability Partnerships: Procedures and Guide

Limited liability partnerships (LLPs) were first introduced in April 2001 and are becoming an increasingly popular way of structuring a business, especially with professional practices.

The big advantage of the LLP is that it allows the liability of partners to be limited. In ‘normal’ (unlimited) partnerships, the liabilities of the partners are unlimited, so the risks can, effectively, be ‘open-ended’. All business involves a degree of risk so using a business vehicle that limits the liability of the partners may be a good idea.

However, if you do decide to form an LLP, do not expect your bank to do nothing. It is likely to insist that any loans or overdrafts are individually guaranteed by the partners. Some of your trade suppliers may also seek to reduce their credit limits or ask for guarantees.

The first thing to be clear about regarding an LLP is that it is a partnership and is taxed as such while trading. It is not taxed like a limited company. The taxation of LLPs has been arranged to make transferring from an ordinary partnership to a limited one quite straightforward. On the winding up of an LLP, however, it is taxed like a company.

An LLP is set up by applying to the Registrar of Companies in much the same way as one would to set up a limited company. The regulations attaching to LLPs as regards disclosure requirements, filing requirements and so on are similar to those for companies. For example, the business stationery must carry the registered office address, name and number. Annual returns must be submitted to Companies House.

Information on the procedures necessary to set up an LLP can be found here.

The equivalent of the director of a company is the ‘designated member’ of the partnership, of whom there must be at least two. The partnership’s ‘rules’ are contained in an agreement, which will also specify how much each member would have to contribute in a winding up.

Like companies, LLPs must file accounts at Companies House and disclose similar information to companies.

The advantages of the limitation of liability of an LLP in protecting partners’ personal assets must be balanced against the greater level of disclosure of information required and the possible reduction in availability of trade credit.

Company Formation Checklist

You may have come across advertisements which make forming a company sound very easy, but before you go ahead there are some serious issues to think through. If you have decided that a company is the best vehicle for your new venture then here is a checklist:

Decide what to include in the Articles of Association and Memorandum of Incorporation. These documents lay down how the company is to be structured and what its operating procedures will be. Include the names of the director(s) and company secretary (if necessary). Include any positions that have special names or rights (e.g. managing director) and any specific limitations on directors;

Determine who will own the shares and in what proportions. Changing this later on is fraught with potential tax traps;

Check that any proposed name for the company is allowable;

If you own trademarks you need to decide whether to keep them or sell or lease them to the company;

If the company will use a property owned by a director you need to decide whether or not you should have a lease. There are many tax considerations attaching to this, so take advice before you act;

Cars can be a major source of friction is small businesses. Take advice on whether cars should be owned by the company or kept out, how they are financed, insured and how you are going to meet travelling expenses;

Give thought to what the ‘corporate look’ is going to be. If you plan to use a trade name, do a search to make sure the company name AND trade name can be used without legal ramifications. Companies House produce a free guidance on many company issues including basic guidance on the Companies Act 2006;

Your stationery, website and emails must show your registered number and other details. Adding your VAT number is usually a good idea (particularly if stationery will be used for invoices) so you will need to sort out these details before you can get your stationery printed. There is helpful information in the guidance issued by Companies House on company formation;

If your turnover is omore than the VAT limit you must register for VAT. You must also tell HM Revenue and Customs (HMRC) that the company is trading. Failure to do so within the time limit may lead to a fine. Even if you do not need an audit, you will probably have to appoint accountants to make sure your accounts comply with the Companies Act ;

By law employers must have employers’ liability insurance. However, very small companies which employ only their majority shareholder are exempt from the requirement to carry employers’ liability compulsory insurance. This has brought them into line with sole traders who do not employ anyone else;

Also, contact your local HMRC office for the employer's PAYE pack. The HMRC website has helpful leaflets;

Normally, you will not be able to open a corporate bank account until your bank has seen the company’s certificate of incorporation. If you need borrowing, consider what security can be offered and who will give guarantees if necessary;

Employees have numerous rights and it is important to know which laws apply to you and to be ready for forthcoming legislation. For example, all employees are entitled to a written statement of their terms of employment.

Business Relief - 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 have been collectively known as Business Property Relief (BPR), although HM Revenue and Customs (HMRC) have changed the name to 'Business Relief'.

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 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 one case, the shareholders of 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.

HMRC provides guidance on BPR on its website. In 2013, an important case was decided in which BPR was denied for a furnished holiday letting business on the basis that the range of services provided was not sufficient to justify the claim that the enterprise was a 'business'. It remains to be seen to what extent this case will be used to justify denials of relief in similar curcumstances.

Company Name Rules

You cannot incorporate a company using any name you like. Some names are prohibited (for example, those which suggest a connection with the Government or the Crown) and names will not be allowed if they are too similar to the names of existing companies.

In 2013, facing more than 4,000 applications for names per month which required review, the Government acted to reduce the number of restricted names. A new list of  restricted names was released, with names such as National, United Kingdom, Register and Authority being removed form the list of 'sensitive' names. The revised list can be seen here.

Companies House provides guidance on the rules for choosing names for new companies. Don't forget to check that the associated Internet domain name is available as well. Different rules entirely apply to the registration of domains on the Internet and the regulations also vary from country to country. For example, some countries will not allow the country's domain suffix to be registered to a domain unless there is an active trade mark and/or trading presence in the country.

Bank Deposit Protection Rules for Businesses : Guide

In December 2010, new limits were announced for the levels of protection available for different investments underwritten by the Financial Services Compensation Scheme (FSCS).

The FSCS protects the deposits of small companies, which are those which meet two of three criteria:

• they have fewer than 50 employees;
• their turnover is not more than £6.5 million per year; and
• the balance sheet total is less than £3.26 million.

The £85,000 limit is also available for unincorporated organisations, partnerships and sole traders, but in the latter case the limit would apply in total to all (i.e. business and personal) accounts held by the customer with the same lender.

One possible area for concern is whether deposits held in different members of the same banking group are covered separately. In this case, if each of the banks is separately authorised by the Financial Conduct Authority, the FSCS would pay compensation up to the limit of £85,000 per person (from 31 December 2010, the limit is being raised to the sterling equivalent of €100,000), per authorised institution. If each of the banks is not separately authorised but is covered by the parent company's authorisation, the FSCS would pay compensation up to the limit of £85,000 once, irrespective of how many different group members a person held accounts with.

In July 2009, it was announced that the scheme was being improved for those with deposits at and loans from the same bank. These are now  'netted off' for the purposes of compensation, which will improve the position for some customers.

In 2013, measures were announced to add protection for larger unincorporated organisations.

Deposit takers in the Channel Islands and Isle of Man are not covered by the scheme.

Company Disclosure Rules - The Basics

The Companies (Trading Disclosures) Regulations 2008 set out the the requirements as to where and when company trading names, names of directors etc. need to be shown. The Statutory Instrument implementing the changes is both short and straightforward.

In particular, Section 6 is important. It specifies that every company shall disclose its registered name on:

• business letters, notices and other official publications;
• bills of exchange, promissory notes, endorsements and order forms;
• cheques purporting to be signed by or on behalf of the company;
• orders for money, goods or services purporting to be signed by or on behalf of the company;
• invoices and other demands for payment, receipts and letters of credit;
• applications for licences to carry on a trade or activity; and
• all other forms of its business correspondence and documentation.

In addition, it requires that every company shall disclose its registered name on its website.

Step by Step Plan for Health and Safety Compliance

The Health and Safety Executive (HSE) has published a ‘step by step plan’ for businesses for protecting the health and safety of workers and others. The key recommended actions are:

1. Register a new business with the appropriate authority (HSE or your local authority);
2. Take out employers’ liability insurance and display the certificate as required by law;
3. Make sure you have someone competent to help you comply with health and safety regulations;
4. Decide on your health and safety policy (how you will manage health and safety issues);
5. Carry out an assessment of risks (potential dangers and appropriate precautions to take) and act on the findings;
6. Provide basic welfare facilities, such as washing and toilet facilities;
7. Provide appropriate health and safety training for employees;
8. Consult with workers on health and safety matters;
9. Display the required health and safety law poster or give workers a leaflet containing the information; and
10. Report as required any work-related accidents, diseases or dangerous incidents.

It is also essential to keep up to date with current health and safety law.

Employee Fraud: Warning Signs

Employee fraud was a boom area even before the recession started.  ‘Targeted’ frauds, often backed by organised criminals, are also becoming more common. In these cases, an employee (often using a stolen identity) is ‘planted’ in an organisation with the express intention of carrying out a fraud.

A lack of resources means that police response to fraud is patchy, particularly outside London. When it comes to gathering evidence, the onus is likely to be on the employer.

According to CIFAS, the Credit Industry’s counter-fraud watchdog, warning signs of potential employee fraud include:

• staff under stress without a high workload;
• marked personality changes;
• always working late;
• reluctance to take holidays or to delegate work, especially when on holiday;
• unexplained wealth or living beyond apparent means;
• sudden change of lifestyle;
• customer complaints of missing statements, unrecognised transactions;
• new staff resigning quickly;
• cosy relationships with suppliers/contractors;
• suppliers/contractors who insist on dealing with just one individual;
• rising costs with no explanation;
• key employees having too much control or authority without audit checks;
• employees with external business interests.

If you do suspect fraud, we recommend that you take legal advice immediately. Whilst your main aim will be to obtain evidence that will stand up in court, you should proceed with caution. There is a risk of being taken to an employment tribunal should your suspicions prove incorrect or you act in a way that breaches an employee’s employment law rights. In addition, the way you gather evidence or record personal data on employees must comply with the Human Rights Act and the Data Protection Act. Always carry out a full identity check on any new employee.

 Click here for advice on reducing the risk of employee fraud.

Contractors Are Your Responsibility

A handbook produced by the Health and Safety Executive (HSE) outlines the responsibilities of both the contractor and the client in situations in which work is carried out by contractors rather then employees. It does not apply to circumstances in which the Construction (Design and Management) Regulations apply or to work done by agency workers.

The leaflet begins from the premise that 'all parties must co-operate to ensure that health and safety is properly managed'.

Under health and safety law, both the contractor and the client have responsibilities. The client must identify all aspects of the job that they want the contractor to do and then carry out a risk assessment. They must satisfy themselves that the contractor they have chosen is competent to carry out the job without unacceptable health and safety risks and must explain their procedures and systems to the contractor sufficiently well for them to understand them and act in accordance with them.

The risk assessment should be carried out with the contractor, who will normally be responsible in the same way as the client for any sub-contractors, who should also be part of any relevant risk assessment.

Clients, contractors and sub-contractors must keep their employees properly briefed on any matters that may affect their health and safety.

The guide is another illustration of the Government's intention to improve compliance with health and safety regulations. What is most problematic here is the need for the client to assess the competence of the contractor, which is a potential source of problems for many firms. We can advise you on any legal issues arising out of health and safety matters.

Recent case law has made firms responsible for a number of actions taken by subcontractors, especially where they are under the direct control of the ultimate employer. Just because a person is employed directly by another business they will not necessarily be their responsibility alone.

In April 2008, the Corporate Manslaughter and Corporate Homicide Act 2007 came into effect, which has profound implications for businesses. The Ministry of Justice has issued a comprehensive guide.

Prosecutions for corporate manslaughter are currently exceeding 60 per year.

Outsourcing the Processing of Personal Information - Guidance

The Information Commissioner’s Office offers guidance for small businesses on how to comply with the Data Protection Act 1998 (DPA) when you outsource the processing of personal information, such as your payroll function or customer mailing information.

If you use an outside organisation to process personal information on your behalf, you remain responsible for the processing and will be liable for any breaches of the DPA. The Act requires that you take the appropriate technical and organisational measures to protect the information being processed whether this takes place in-house or whether someone else does it for you. In order to decide what measures are needed, the following should be taken into account:

• what sort of information is being processed?
• what harm might result from its misuse?
• what technology is available to ensure the appropriate level of security?
• what would be the cost of providing this level of security?

The guidance stresses that if you employ another organisation to process personal information for you, you must select one that you believe will carry out the work in a secure manner. Ongoing checks should be made to ensure that this is the case. Wherever the organisation is based, you must have a written contract with them. This should state that the personal data can only be used and disclosed in line with your instructions and that appropriate security measures must be taken.

If you are using an organisation based outside the European Economic Area, make sure the contract is enforceable in that country.

In summary, the good practice recommendations if you want to outsource the processing of personal data to an outside organisation are:

• select a reputable organisation offering suitable guarantees as to their ability to ensure the security of the data;
• make sure the contract is enforceable;
• make sure the appropriate security measures are in place;
• make sure that the organisation makes appropriate checks on its staff;
• audit the organisation regularly to make sure it is up to standard;
• require the organisation to report any breaches of security or other problems; and
• put in place procedures that allow you to act appropriately if a problem is reported.

The guidance can be found on the Information Commissioner's website.