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Commercial Newsletter Winter 2005

Gypsy Case Highlights Need For Compliance Care

A recent case involving a planning application by a gypsy family illustrates the potential implications of failing to comply with planning notices as they are set out.

A residents' association took issue with their local council's decision to grant retrospective planning permission to a family who moved onto an area of land in 2001 and asserted they had gypsy status. In 2003 the council's licensing officer expressed reservations over whether the homes on the site at that time fell within the statutory definitions of caravans.

This was largely due to the fact that by that time the occupiers had installed a cesspit and associated soil pipes, gas cylinders with plinths, delivery pipes, a brick meter box, mains electricity cables and water pipes and had constructed various timber structures as well as boundary fences in excess of 1 metre in height and a driveway plus vehicular hard standing. After much argument, retrospective planning permission was granted by the council's inspector, in 2004, for 'the use for the stationing of three units of mobile living accommodation'.

The residents sought to quash the granting of the planning permission on the basis that the defendants had lost the habit of travelling, which was necessary for them to be considered as gypsies, and also on the technical point that the structures on the site were not consistent with the description of mobile living accommodation because they were effectively fixed to the ground and had immoveable structures attached to them. They could not, therefore, be considered to be caravans.

The appeal by the residents to quash the planning permission was successful, not because they had proved the loss of gypsy status, but on the point that the structures on the site did not comply with the description in the planning notice.

Don't Miss V.A.T. Relief

According to a recent survey, many property developers and individuals are missing out on a valuable VAT relief. Where a property conversion involves altering a commercial property to a residential one, changing a mixed-occupancy property into domestic dwellings or changing the number of dwellings in a single property, VAT is chargeable at five per cent rather than the standard rate of 17.5 per cent.

Since this VAT is irrecoverable for a person who bears the cost and is not VAT registered, this represents an additional cost to them of 12.5 per cent on all the works done.

If you are considering undertaking conversion works which may qualify for the exemption, you should take advice to make sure you do not pay more VAT than is necessary. For property developers who make onward zero-rated supplies, the main effect is on cash flow, but this can be considerable. There are substantial planning opportunities in this area. Contact Clare Magill for advice.

Hotline

To Help Traders Understand New Licensing Laws

Under the Licensing Act 2003 pubs, clubs, off licences and a range of other premises will need to be licensed by their local council, not by the Magistrates' Court as before.

In addition, a personal, 'portable' licence will also be needed by anyone wanting to sell alcohol. Any application which does not comply with the regulations will be rejected. Licences under the new regime will take effect on 24th November 2005. Businesses without a correct licence as of that date may not be able to carry on trading.

A telephone information line has now been set up by the Local Government Association and the Local Authorities Co-ordinators of Regulatory Services, funded by the Department for Culture, Media and Sport, to help traders understand the new licensing laws. The information line number is 0207 072 7447. Licensees can also e-mail licensing@lga.gov.uk.

Contact Nick Roper if you would like assistance with any licensing matter.

Covenants Not Exclusive

A recent case shows the folly of making assumptions about lease terms and, more particularly, of the pitfalls that can occur if the drafting of a lease is done without sufficient care.

A lease contained two covenants relating to the condition of a let property after the tenant had ceased to occupy it. The first specified that the tenant would remove various fixtures and make the premises good. The second specified that the tenant would fit out the premises in accordance with a specification contained as a schedule to the lease.

The tenant believed the two covenants to be inconsistent and mutually exclusive and sought to have the first covenant deemed to be void for uncertainty. The Court of Appeal decided that the clauses were not inconsistent and where any apparent inconsistency applied, the clause specifying the fitting out of the premises would take precedence.

Wolferstans Commercial

Clare Magill, Partner and Head of Department . . . . . . . . . . . . . . . . . .cmagill@wolferstans.com

Nick Roper, Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .nroper@wolferstans.com

Bill Duncan, Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .bduncan@wolferstans.com

Julia Allsop, Solicitor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .jallsop@wolferstans.com

Matt Bryant, Solicitor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .mbryant@wolferstans.com

James Twine, Employment and Corporate Support . . . . . . . . . . . . . .jtwine@wolferstans.com

Deptford Chambers, 60/66 North Hill, Plymouth PL4 8EP Tel: (01752) 663295 Fax: (01752) 250589 DX 8206 Plymouth 1

Guard Your Business Property Relief!

One of the most valuable reliefs available to company owners for Inheritance Tax (IHT) is Business Property Relief (BPR). This allows the owners of business assets to transfer them to family members without incurring an IHT charge. The relief is given by reducing the value, for IHT purposes, of the assets transferred.

In a family company context, BPR is given at 100 per cent for shares in unquoted companies and at 50 per cent for assets which are used in the business controlled by the transferor. There are various requirements that must be satisfied in order to qualify for BPR but the main one is that the assets must have been owned by the transferor for the two years prior to the transfer.

If the transferor (or transferee) dies within seven years of the transfer, the business property or 'replacement property' must still be owned by the transferee at that date. Replacement property is property which would qualify as business property, but where the original property has been sold and its proceeds reinvested within three years. There are other ways replacement property can arise, such as on share-for-share exchanges.

There is a common pitfall which can affect BPR where replacement property is bought out of the sale proceeds of the original property which qualified for BPR. When the property which is transferred is replaced, but the whole of the proceeds of the original property (net of expenses) are not reinvested in the replacement property, the relief is completely lost. So, if property is sold for 400,000, with 30,000 of expenses, the replacement property bought must cost at least 370,000, otherwise the BPR available on the whole of the 400,000 will be lost. This could increase an IHT bill by 160,000.

Another common problem results when borrowing is undertaken using the company assets as security. In this case, the BPR is limited to the value of the asset or assets net of the borrowing. If, on the other hand, the borrowing is secured on an asset that is outside the company (say a house), then the BPR will be available on the gross amount.

For example, if a business asset, such as a property, is valued at 500,000 and a loan of 200,000 has been advanced to the business, the BPR available if the property is subsequently transferred is alternatively:

1. 300,000 (500,000 - 200,000) if the loan is secured on the property transferred; or
2. 500,000 if the loan is secured on an asset outside the business (such as the house of the director). Care must be taken when structuring transfers and it is advisable to seek professional advice well in advance. The laws governing IHT on business assets are complex and there are interactions with other taxes, particularly Capital Gains Tax, to consider. We shall be pleased to advise you on all corporate planning and IHT planning.

Seven Year Ban

for Director in Serious Breach of Duty

A businessman who took over a company in order to (in the words of the Registrar) 'hive off the assets to other companies under his control, so as to leave the Crown facing an empty shell', has been banned from being a director of a UK company for seven years, under s.6 of the Company Directors Disqualification Act 1986 (CDDA).

The ban was the result of his deliberate intention to structure the company in 'a way designed to make it difficult to unravel and so as to present the Crown (and any insolvency practitioner appointed) with a fait accompli'. This left the Crown with a substantial bad debt while over 2m was paid from the company to third parties.

The CDDA allows for bans of varying periods depending on the severity of the offence. In this case, the offence was at the lower end of the 'middle tier', which can carry a ban of six to ten years. Due to the 'serious and flagrant breach' of his fiduciary duty to the company and its creditors, the ban was confirmed on appeal to the High Court.

Corporate insolvency can lead to significant penalties for directors who do not exercise appropriate care. If you face insolvency issues, Julia Allsop can advise you.

Draft Legislation

for Public Procurement

The Office of Government Commerce has published new draft procurement regulations following a consultative exercise which commenced in June 2005 and ends on 10 October 2005. The regulations are intended to come into force on 31 January 2006 and will affect governmental and quasi-governmental bodies that award contracts as well as businesses seeking to be awarded such contracts.

Changes were necessary following a judgment in the European Court of Justice concerning electronics giant Alcatel. This requires the

introduction of a 10-day 'standstill' period between the award of a contract and its conclusion in order to permit complaints challenging the award of the contract.

The new regulations bring together in one document the previously distinguished areas of 'public works contracts', 'public supply contracts' and 'public services contracts'. Separate regulations have been promulgated for the award of utilities contracts.

The draft public contract regulations can be seen at http://www.ogc.gov.uk./embedded_object.asp?docid=1003747 and the draft public utilities regulations at http://www.ogc.gov.uk./embedded_object.asp?docid=1003750.

Are You A 'Sophisticated Investor'?

Michael Durant, who failed in the Court of Appeal to obtain information held on him by Barclays Bank and the Financial Services Authority, is petitioning the House of Lords to hear his appeal.

The Lords may well grant his request, especially as the UK's interpretation of the law in this area seems to be at variance with European law.

The outcome of the case could have very significant implications for businesses and, to a lesser extent, public bodies, whose duties as regards allowing access to data were significantly increased when the Freedom of Information Act came into force on 1 January 2005.

A new data protection guide is now available on the website of the Information Commissioner (http://www.informationcommissioner.gov.uk).

The Employment Practices Code of Practice deals with the impact of data protection laws on the employment relationship and updates and consolidates information previously contained in four separate guides on recruitment and selection, employment records, monitoring at work and information on workers' health.

Technology And Construction Cases

New Management Arrangements

The IT and construction industries have three things in common - both are important to the UK economy, both typically involve large-scale projects and both carry a high litigation risk.

Because of this, the Government has proposed a shake-up of the way disputes are handled in the Technology and Construction Court (TCC), which will see the judges exercising a great deal more control over the management of cases. A High Court judge in charge of cases in the TCC will only hear other types of case if there is no TCC work requiring his or her immediate involvement.

The more complex cases will be allocated directly to a High Court judge for management and TCC cases which commence outside London may be referred directly to the judge in charge of the TCC to decide on how they are to be managed and tried.

A new edition of the TCC Guide is currently being prepared and should be published on the website of the Department for Constitutional Affairs (http://www.dca.gov.uk) in due course.

Tenants Cannot

Invoke Rent Review

The courts have confirmed that where a lease stipulates that the landlord (only) can undertake periodic rent reviews, the tenants have no right to require a rent review.

In the case in question, the tenants had held a lease, since 1982, which had a clause allowing the landlord to undertake a rent review at seven-year intervals. Reviews had been undertaken in 1989 and 1996, bringing the rent to 375,000 per annum. Unusually, the review provisions allowed for a decrease as well as an increase in rent. Believing that the rent payable would fall if a review were undertaken in 2003, the tenants went to court to obtain an order for a rent review to be instigated when the landlord refused to permit one.

The tenants argued that if they were unable to require a rent review, the practical effect would be that the rent reviews would be 'upward-only', as the landlord had only to decline to carry out the periodic rent review for it to remain at the same level.

However, the judge was not persuaded that there should be a presumption that the clause should be exercisable by both parties when the lease specifically reserved the right to the landlord.

"This case demonstrates the old adage that you get what you negotiate, not what you deserve," says Clare Magill. "There is no substitute when negotiating any agreement for making sure that the wording reflects your intentions precisely. Failure to do so can be very expensive."

Auditor Liability to be Limited

The argument over whether auditors can limit their liability by agreement with their audit clients is to be resolved in favour of the auditors. In a written statement to Parliament in late July, minister of state Alun Michael revealed that despite opposition from groups representing investors, the liability regime for auditors would be reformed to allow them to limit their liability.

Legislation will also confirm the 1990 House of Lords ruling in the 'Caparo' case, which stated that auditors do not owe a duty of care to the individual shareholders of the companies they audit.

"Relying on an auditor's report to provide assurance that all is well with a company is insufficient," says Bill Duncan. "There are other, more effective ways of limiting financial risk. Contact us for further advice."