Employed or Self-Employed? New Guidance

Whether you are employed or self-employed makes a critical difference to how you are taxed and the income tax liabilities of an employed person can be very different from those of a self-employed person with similar levels of gross income. The National Insurance liabilities of the employed and self-employed are also calculated differently and entitlement to benefits, such as Jobseekers Allowance, also varies depending on one’s employment status.

It is therefore important for any working person to know whether they are employed or self-employed. Sometimes, however, deciding whether someone is genuinely self-employed or an employee can be difficult and HM Revenue and Customs are unforgiving of those who ‘get it wrong’. However, they do produce fact sheets to help people make the correct decision and have recently updated part of the IR56 booklet (‘Employed or Self-Employed’). This can be viewed in its entirety at http://www.hmrc.gov.uk/pdfs/ir56.pdf.

The new guidance, in the form of leaflet ES/FS1, is a short guide to the question and is helpful in that it deals with specific types of occupation (e.g. entertainers) where the normal income tax law may not apply. It can be downloaded from

http://www.hmrc.gov.uk/leaflets/es-fs1.pdf. It also provides links to advice on special circumstances (e.g. the working rights of non-residents and what to do if you have more than one job).

General

Expert Determination – Case Shows Dangers

Sometimes, in order to make disputes arising under a contract easier to resolve, the parties to the contract insert an ‘expert determination’ clause. This type of clause provides that the dispute will be referred to an independent expert and normally stipulates that the expert’s decision with regard to the matter under dispute will be final and binding.

Such clauses are often the ideal way to deal with technical disputes, though problems can arise if they are used in circumstances in which the dispute is more general or where the competence of the chosen expert may not encompass all areas relevant to the dispute.

Another problem is that if the expert’s determination is not to your liking then getting it overturned can be difficult or impossible, as illustrated by a recent construction dispute involving an extension built onto a property. The expert who was appointed to resolve the dispute was a member of the Royal Institute of Chartered Surveyors and determined that the builders should pay the property owner a sum in excess of £50,000 plus VAT.

The builders refused to pay and the matter then ended up in court. They produced their own expert evidence and alleged that the expert appointed was biased and had failed to conduct himself in accordance with the principles of natural justice. They also claimed that the failure of the expert to provide reasons for his decision (which was not required under the terms of the appointment) meant that the award was only enforceable if free of gross or obvious error or perversity.

The court would have none of it, stating that in such circumstances there was no requirement for an expert to behave in accordance with the principles of natural justice, that only actual bias could affect the court’s decision (and none was shown to exist), that the powers of the expert, scope of the expert’s determination and effects of the determination were expressly agreed by the parties to the contract and, in particular, that if the expert was given the right question to answer and answered it, his decision is binding even if incorrect. The argument that the decision could be challenged on the basis of the expert not having given reasons for his decision was also rejected.

Says Paul Mitchell, “The use of experts in such disputes may well speed up their resolution, but there is a risk that the person appointed may make an unexpected or even incorrect determination. The scope for challenging such determinations, as this case shows, can be very limited. Accordingly, the risk of using such a method to resolve disputes, as opposed to (say) mediation, must be borne in mind. We can advise you on all aspects of dispute resolution and framing contracts in the most appropriate way.”

Tips – Government to Review Law

Currently, restaurants operate a wide variety of practices when it comes to dealing with tips and the Government does not regulate as to how they should be managed.

Minister Baroness Vadera recently announced in the House of Lords that the Department for Business, Enterprise and Regulatory Reform (DBERR) has agreed to examine the laws relating to the payment of tips in restaurants. It will look at several issues of concern and take all representations into account, including those of the British Hospitality Association and the trade unions.

The trade union Unite is campaigning to prevent service charges being used to top up wages. Currently, tips paid to a member of staff by a customer do not count as wages for the purposes of the National Minimum Wage (NMW). For example, this would be the situation in a restaurant when the customer gives a tip directly to the waiter. However, tips paid through the employer’s payroll can count for the purposes of calculating the NMW. This would be the case where a restaurant adds a service or cover charge to the bill and remunerates employees through the payroll.

In a recent case, the Central London Tribunal confirmed that customers’ tips added to a bill paid by cash or credit card then distributed to employees via a ‘tronc’ system (a special arrangement used to pool and distribute tips) do count as being paid by the employer and thus count towards the NMW. HM Revenue and Customs’ guidance note E24 had not been clear on this point. However, the Employment Appeal Tribunal (EAT) has ruled that tips paid to employees at the Mayfair nightclub, Annabel’s, between 1999 and 2003, did not count as wages for the purposes of the NMW. The tips were paid each week to one of the employees (the ‘troncmaster’) who distributed them amongst the waiting staff through a separate payroll. The EAT held that the tips did not belong to the employer but were held in trust by the troncmaster for the members of the tronc.

Lady Vadera also said that the DBERR would investigate whether restaurants should be required to disclose their tips policy to customers.

Property

Revival of Secure Tenancy Revives Rights

The Court of Appeal has issued a ruling which will be unwelcome to social landlords that allow tenants in arrears to become ‘tolerated trespassers’, when a possession order is suspended because the tenant is paying off the arrears of rent which led to the order in the first place. However, the ruling will be welcomed by tenants in these circumstances as it means they will not have to recommence the ‘right to buy’ procedure from scratch once they have regularised their position and once again become a ‘normal’ tenant.

The case involved a secure tenant who had a possession order made against her for arrears of rent. She had previously had her application to purchase the property granted by her council landlord. Because of the possession order, she became a tolerated trespasser.

Some time later, she cleared her arrears of rent and claimed that this revived her secure tenancy and with it the right to purchase the property. The council claimed that the secure tenancy had not revived and was successful in the court. However, on appeal, the Court of Appeal decided differently.

The Court concluded that once the woman’s tenancy had revived, she had the right to sue for breaches of the landlord’s covenants and that right would include breaches of covenants which occurred during the ‘limbo’ period when the tenant was a tolerated trespasser. Furthermore, the right extended to breaches of covenants which were implied as well as those which were expressly agreed. The right to buy was revived as were the tenant’s other rights in such circumstances.

Rent Payable During Notice Period

The courts often have to deal with disputes over the payment of rent and charges for the period after a tenant has given notice to vacate a let property. A recent case concerned just such an issue.

The circumstances were that premises were occupied under licence, with the licensee paying £450 plus VAT per month. The licence could be determined by either party by giving a month’s notice. After a short period, the licensee and the landlord agreed that the licensee could make a one off payment of £6,000, to cover the VAT inclusive charge for occupancy for the next 12 months. This represented a discount of approximately £25 plus VAT per month.

The licensee emailed the property owner to confirm that during the 12 month period for which the charge was prepaid the property owner’s right to give a month’s notice, as provided for in the licence, would be suspended.

About eight months later, the licensee gave notice to terminate the agreement and claimed the balance of his prepayment back from the landlord.

In court, it was considered that the licensee’s email had only suspended the landlord’s right to terminate the arrangement on a month’s notice, not the occupier’s. Therefore, the balance of the payment was refundable. The landlord appealed to the Court of Appeal.

The Court of Appeal took account of the email, but considered that it must be regarded as preventing either party from exercising the right to terminate the arrangement on a month’s notice. The occupier had secured the right to occupy the property for the full 12 months by making the payment, but could not then demand a refund for leaving the premises earlier, nor could the owner of the property compel him to vacate it before the 12 month period was up.

This ruling is on all fours with the normal position that where notice is given by a tenant, rent is due for the whole rental period during which notice is given, no matter when the property is vacated and in spite of the fact that the lease itself may end before the end of the period for which rent must be paid.

Contact Louise Madeley (lm@mitchellwilde.com) for advice on any commercial property matter.

Tax

HMRC – New Guidance on Expenses

HM Revenue and Customs (HMRC) are not known for their approval of a casual approach to record keeping, so claiming expenses without documentation has always been a problem area. However, the reality, as every businessperson knows, is that maintaining complete and accurate documentation for all transactions is a practical impossibility.

HMRC do recognise this and have recently revised their guidance on claiming reimbursement of employees’ expenses, where there is no documentation, by the use of ‘scale rates’ of reimbursement.

One of the core principles behind the use of a scale rate is that the expenditure must have occurred. So, for example, the payment of a flat rate daily subsistence allowance would create a tax liability in the hands of the employee, with a deduction for the actual expenditure incurred.

HMRC had proposed that expenses could be reimbursed, without the need for the retention of detailed receipts by all employees, if a sampling procedure were carried out whereby ten per cent of all employees (chosen at random) were selected and required to keep detailed records of expenses for a month and those expenses were then used to calculate the scale rate for employees in general. By creating the new guidance, HMRC are tacitly recognising that this approach was too complex to be workable. The need for a comprehensive internal benchmarking exercise has therefore been removed. However, such an approach needs to be adopted if an employer wishes to agree with HMRC a ‘bespoke’ flat rate allowance, which it is possible to do.

It is worth mentioning that payments of incidental expenses (within tight limits) connected with business travel (such as the purchase of newspapers when away) are normally allowable for tax purposes despite not being business expenditure. However, the maximum sums which can be reimbursed for incidentals are only:

• £5 per night for overnight stays in the UK; and
• £10 per night for overnight stays outside the UK.

Any expenditure in excess of these amounts makes the whole of the payment taxable as income in the hands of the employee.

HMRC have also increased, from April 2008, the amount that can be claimed by home workers, by way of reimbursement of their additional expenses for working at home, to £3 per week.

For further details, see

http://www.hmce.eu/employers/er-tx-ni-free.htm.

New Rules for Option to Tax

HM Revenue and Customs have issued new rules relating to the option to tax to VAT commercial properties, the most important of which is that it is no longer possible to have separate VAT treatment for a building and the land on which it stands.

There are numerous other changes which apply – including one which makes the term ‘option to tax’ the official one to use: it has always been common usage, but was previously properly called the ‘election to waive exemption from tax’.

For more information on VAT and property, see notice VAT 742A (June 2008).

Contact David Wilde (dw@mitchellwilde.com) if you would like individual tax advice.

Company Law

Accounts Watchdog Gets Tough

The Financial Reporting Review Panel (FRRP) might not strike you as an organisation that is likely ever to cause a company much grief, but its powers do include being able to go to court to seek an order requiring a company to submit accounts that meet the currently required financial reporting standards.

The reason this has become important is that the FRRP has retained a firm to check for ‘qualified’ accounts (ones where the auditors express reservations or disagreement with the way accounting information is presented) and is writing to the directors of the companies concerned to warn them that they have the power to require them to resubmit their accounts to the Registrar of Companies in a form that meets the appropriate accounting standards.

If the transgressions continue, the FRRP has indicated that it will not hesitate to use its teeth to require companies to file amended accounts.

 “This could prove to be expensive – and not just because of the additional accounting and auditing fees,” says David Wilde.  “Given that many companies file accounts near to the filing deadline, this could lead to the amended accounts being filed late with the Registrar of Companies and HM Revenue and Customs, which could lead to financial penalties being levied. Furthermore, the auditors will seek audit comfort up to the new date of their report, which may mean in particular that extensive reappraisal of balance sheet values based on actual realised values may be necessary. The days in which a relaxed attitude could be taken to non-compliance with the rules relating to accounting disclosure are over.”

Directors of companies that have to file amended accounts in these circumstances can be personally liable for any court costs and the costs of revising the accounts.

For advice on all company law matters, contact David Wilde (dw@mitchellwilde.com)

Intellectual Property

Copyright – Get it Right First Time

Yet another case highlights the need to make the ownership of intellectual property (IP) clear when negotiating contracts where the IP is in point. In the case concerned, a company was retained to develop financial forecasting software. It had financial problems and the employees working on the project left. They formed their own company, which subsequently agreed to work as a contractor to their erstwhile employers in order to finish the work. When the project was completed, the question arose as to who owned the copyright to the software, the original company or the new company formed by the ex-employees.

The situation was not made easier by the lack of formal documentation of the contractual terms. Such documentation as there was made no mention of copyright. The original company claimed that it had been made clear in precise terms and was expressly agreed, albeit verbally, that it would own the copyright to the software and that in any event, it was commercially necessary for it to retain copyright for confidentiality reasons. It claimed, therefore, that the validity of its claim should be ‘read into’ the contract. Both its claims were denied.

The case went to the Court of Appeal, which refused to read into the agreement something which was not there. There was no necessity for the original company to own the IP in order to give the contract effect and therefore it did not.

Says David Wilde, “When development work of any kind is commissioned, IP of significant value often results. It is important to consider at an early stage the potential value of such IP and to agree, in writing, the ownership of the IP created and any necessary terms under which it can be exploited after the original contract is concluded.”

Copy Without Breaking the Law

It is not at all widely recognised that copying or reusing material from the Internet, even material which is freely exhibited, is normally a breach of the author’s copyright.

In order to allow cost-effective compliance with copyright law, the Copyright Licensing Agency has created a series of digital licences. These will allow, in addition to the photocopying and scanning rights included in existing licences, the copying and reuse of electronic and online publications. They will also allow limited central storage of extracts and articles, which means that a business with the appropriate licence can now copy an article, whether it originated in print or digital format, and make it available on its company intranet for up to 30 days. 

For more information on the licensing of copyright, see http://www.cla.co.uk/.

Contact us for advice on protecting your intellectual property.

Contract

Contract Ceases When Small Breaches Repeated

Customers who don’t pay their bills are bad enough, but customers who don’t pay their bills and then attempt to sue when the supplier stops work could be considered to be very bad news indeed.

This situation can occur if a customer suffers a loss because their supplier has not done the work contracted and the contract is still ‘live’.

In a recent case, a consultant engineer was retained to advise another consulting firm which had successfully tendered to manage a project to remove radioactive waste. The payment for his work was based on an agreed hourly rate with monthly billing. For more than 18 months the consulting firm failed to pay his invoices when they fell due and the delays were substantial. After making repeated complaints, the engineer refused to continue to work for the firm, which then instructed another firm. The consulting firm brought a claim against the consulting engineer for the losses his cessation of work caused them and, not unexpectedly, he counterclaimed for the amount of his outstanding bills.

The engineer argued that the consulting firm’s repeated failure to pay him with reasonable promptness meant that it had repudiated its contract with him. The consulting firm argued that it had not breached the contract, because the payments were made eventually and the breaches of the agreed terms were not sufficient to justify bringing the contract to an end.

The case reached the Court of Appeal, which upheld the engineer’s argument. It was of particular importance to the decision that the consulting firm had repeatedly and cynically breached the agreement regarding payment terms despite numerous complaints. He was therefore entitled to consider that there was every likelihood this would continue to be the case.

“One of the reasons why this affair resulted in a prolonged court battle was that the contract terms were agreed verbally, without the benefit of a proper contract being put in place,” says Louise Madeley.  “A written contract in the right form would have allowed each side to understand where they stood and would have provided a mechanism for the termination of the contract which was unequivocal. If you are entering into contractual negotiations, we can advise you.”

Insolvency

Bank Can’t Change its Mind

Although it involved an individual borrower, the outcome of a recent case will be regarded with relief by anyone who is having trouble with their bank – an increasing problem with the advent of the credit crunch.

The case involved a man who had negotiated with his bank to have a secured overdraft, which was repayable over 20 years. The overdraft agreement provided that should the agreed borrowing limit be exceeded, the bank had the right to demand repayment of the whole of the overdraft. Failure to meet the demand would trigger the bank’s right to take possession of the property against which the advance was secured. The man failed to keep within the agreed overdraft limit and was contacted by the bank. His bank manager held discussions with him and the man claimed he obtained the bank’s agreement to a three-month moratorium, during which it would not seek a possession order if he brought the account back within the overdraft limit. There was to be a further review at the end of the period. The bank denied that this had been agreed.

The bank sought a possession order, which was granted. The man appealed. The Court of Appeal found that the bank had given an undertaking to the man not to issue proceedings for possession for three months if the terms agreed were adhered to. It had not agreed that it would never apply for a possession order, just to postpone the application. The bank could not change its mind. Accordingly, the original possession order was set aside.

This case illustrates that a bank cannot agree to take one course of action and then take another. If you find yourself in a similar position, it is very important to obtain the strongest evidence you can of what has been agreed by the bank. Taking professional advice so that variations to agreements are properly recorded is a good safeguard. We can advise you if you are having difficulty with your bank or with collecting your debts.

Business Failures to Reach New Peak

According to accountants BDO, the number of business failures in 2009 is expected to be the highest since the dotcom bubble burst, with the restricted availability of capital being the main culprit. In stark contrast with the dotcom era, only the technology, media and telecommunications sector is expected not to show an increased failure rate. Nearly 18,000 businesses are expected to go bust in 2008 and business profits are expected to be at their lowest level for nearly 20 years.

“It is a good time to make sure your credit control, purchasing policy, overheads and gross profit margins are carefully monitored. All will affect your cash-flow,” says Paul Mitchell. “If you are experiencing difficulties with your cash-flow, we may be able to help.”

Competition

Cartel Offenders Jailed

The first criminal prosecution by the Office of Fair Trading (OFT) for price-fixing has led to three businessmen being jailed for periods of between two and three and a half years. The three men have also been disqualified from acting as directors for between five and seven years. One was ordered to pay £25,000 in costs. A costs and confiscation orders hearing against the other two is scheduled to be heard in July.

Search warrants were executed in 2007 and the three businessmen were charged after a subsequent investigation.

The three pleaded guilty to participating in a cartel that undertook widespread price-fixing, customer allocation and other anti-competitive practices in connection with the marine hose industry. The three acted to coordinate the anti-competitive activities of the major marine hose manufacturers throughout the world.

This case shows that the OFT is not afraid to use the powers given to it following the passing of the Enterprise Act 2002, which makes cartel activity a criminal offence. The OFT is also prepared to pay up to £100,000 to informants who report anti-competitive behaviour and has a leniency policy with regard to companies and individuals who come forward to confess to cartel activity.

Employment Law

New Rights for Agency Workers

In recent years there have been several failed attempts by the EU Council of Ministers to agree on proposals to improve the employment rights of agency workers. In December 2007, the Agency Workers Directive (AWD), giving temporary workers equal pay and conditions, was blocked by a minority of countries including the UK. However, the issue is now firmly back on the European agenda.

The Government had also come under pressure at home, with a Private Member’s Bill proposing new rights for agency workers receiving a second reading and trade unions stepping up their campaign to hold the Government to its manifesto promise to provide better protection for temporary workers. Add to that the criticisms from the courts on the law governing the employment status of agency workers and it became clear that the Government needed to act. This has now happened, with the announcement of a compromise deal between unions and employers that will give agency workers in the UK many of the same rights as employees after 12 weeks’ employment. It is hoped that this will improve the lot of agency workers whilst still providing employers with flexibility.

Agreement has been reached on the following points:

• after 12 weeks in a given job an agency worker will be entitled to equal treatment; and
• equal treatment will be defined to mean at least the basic working and employment conditions (e.g. pay and holidays) that would apply if the worker had been recruited directly by the employer to occupy the same job. It will not cover occupational social security schemes (e.g. sickness benefit and pension schemes).

The Government believes that this will lead to agreement in Europe on an AWD that secures the flexibility the UK seeks and will now engage with its European partners to seek consensus on the terms of the AWD that will enable this agreement to be brought into legal effect in the UK. It is hoped that EU agreement will be obtained in time for the legislative changes to be introduced in the next parliamentary session.

Although the Government states that there are estimated to be 1.4 million agency workers in the UK, according to a report from Leeds University Business School the most reliable statistics come from the Labour Force Survey (conducted by the Office for National Statistics), which shows that in 2007 there were on average 250,000 agency workers making up 1 per cent of the workforce. The analysis shows that agency workers earned £7.80 per hour on average in that year compared with £11.47 for permanent workers.

Says Paul Mitchell, “There will now be consultation on mechanisms for resolving disputes concerning the definition of equal treatment and compliance with the new rules. The Government will also consider anti-avoidance measures, in particular how to treat repeat contracts for the same worker, so there is likely to be much debate before the final details of the legislation are known. We can advise you on the legal aspects of your temporary or permanent staff agreements.”

Health and Safety

Ten Point Plan for Health and Safety Compliance

The Health and Safety Executive (HSE) has published a ‘ten point plan’ for businesses on 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;
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.

For full details of the ten point plan, see http://www.hse.gov.uk/business/must-do.htm.