Module Overview
This modules aims to provide a solid foundation towards forming a new business venture and creating the right structure from the outset. The module will clarify the roles and responsibilities for business owners when starting a new firm, what regulatory standards they must meet and how to deal with intellectual property.
Company Formation
Types of Business
There are 3 main types of business that are generally formed in the UK:
- Limited Company
- Partnerships
- Sole Trader
Think carefully about the trading and legal considerations before deciding on the best structure for your business. Once the choice has been taken, it is sometimes hard to change.
Limited Company
Business structure where the company has a legal identity of its own, separate from its owners (shareholders) and its managers (directors). Directors and shareholders are not personally liable, except in a few particular circumstances.
Partnerships
There are different types of partnerships. Partners can be personally liable, or not, depending on the type of partnership.
Sole Trader
You run your own business as an individual and are self- employed. You can keep all your business’s profits after you’ve paid tax on them. As a sole trader you are personally liable.
Types of Business: Limited Company
What is a limited company? This is a business structure where the company has a legal identity of its own, separate from its owners (shareholders) and its managers (directors). Liability is limited to the value of the issued shares.
Having ‘limited liability’ status means the company is an entity in its own right. As long as the company name you want to use is available, you’ll have exclusive rights to that name. Assuming no fraud or insolvent trading has taken place, ‘limited liability’ means directors and shareholders are not personally liable for any financial losses of the business.
Limited company is the most common vehicle to use if you want to attract investment. Limited companies pay corporation tax on profits (corporation tax is 19% in the 2019/20 tax year)
If the directors are the main shareholders, business decisions can be made quickly, allowing for a successful business strategy.
Don’t forget to check the UK trade mark registry to see if your proposed trading name is already registered. (www.gov.uk/search-for-trademark)
Foreign companies can have UK branch/establishment
Foreign companies can establish a presence in the UK without the need to form a separate company / subsidiary.
A permanent branch/establishment must be registered in the UK but it is not a separate legal entity in its own right. It remains part of the foreign company.
By registering a permanent branch/establishment in the UK, a foreign company can establish a presence in the UK without the needing to form a separate UK company or subsidiary.
A non-resident company that carries on a trade in the UK through a UK permanent establishment will pay UK corporation tax on its profits, wherever in the world they arise. However, the company is only liable to the extent that the profits are attributable to that permanent establishment.
Tax advice is essential as there are significant exceptions to these rules.
Types of Business: Partnerships
Partnerships (also called “GPs” or “General Partnerships”) and Limited Liability Partnerships (LLP)
(General) Partnerships
A partnership is an arrangement by two or more parties to manage and operate a business and share its profits. A partnership is not a separate legal entity, therefore, each partner has unlimited liability and is personally responsible for all debts and liabilities that the business incurs.
Limited Liability Partnerships combine features of a partnership and a limited company. Like a company, LLPs have separate legal personality and you have no personal liability.
Like a limited company, an LLP can enter into contracts, own property, sue and be sued in its own name, however LLPs are taxed differently, more like partners in a partnership.
Limited companies and shareholders both pay tax – this is sometimes seen as a ”double tax” hit. Whereas LLPs are “tax transparent” so only the partners pay tax on their LLP income. You must take tax advice in this area.
Types of Business: Sole Trader
- Simple and low cost
- Unlimited personal liability
- No ability to raise equity investment
This is the simplest form of business structure. The business is owned and operated by a single individual. There is no legal distinction between the owner and the business.
A sole trader is personally liable, without limit, for all the debts and other liabilities of the business.
Small businesses often operate as sole traders because of the lack of legal formality and the low administration costs.
Not required to file accounts. For 2019/2020, income tax is paid at 20% on net profits between £12,501 and £50,000; 40% between £50,001 and £150,000; 45% above £150,000).
You will still need to register with the tax authorities and do self-assessment tax returns. The inability to raise equity investment makes it suitable for very small businesses only.
Registering a Business
There are no registration, filing or regulatory requirements for a general partnership or a sole trader (except to register with HMRC to pay self-assessment tax)
Companies and LLPs can be created quickly and cheaply by completing Companies House forms yourself and paying a small fee (around £40). You can check if the name you want to use is available on https://find-and-update.company-information.service.gov.uk/. A company/LLP must have a registered office in the UK.
You must provide names/addresses, date of birth, nationality and country of residence of the director(s) and shareholders with >25% of the shares, plus issued share details.
Issuing Shares: Co-Founders
- Subscriber shares
- Co-founders appointed as directors
- Co-founders issued shares and investing at a premium
On formation at least one shareholder (the “subscriber”) must be issued with at least one share and there must be at least one director who is a natural person. Often co-founders are the initial subscribers and directors but directors can be appointed and shares can be issued anytime after formation.
Assuming the company has just one class of shares, the directors can allot shares freely without authorisation from shareholders (subject to “pre-emption rights” & the “articles”). Co-founders must pay the nominal value of shares (e.g. 2 x £1 shares @ nominal value = £2) but they may choose to invest in the company by paying a premium (2 x £1 shares @ £1,000 per share = £2,000).
Check the Company’s Articles of Association for restrictions on the right to issue shares. “Pre-emption rights” mean new share issues must be offered to existing shareholders.You should take legal advice.
Issuing Shares: Members of Staff
Many companies offer employee share incentive plans to recruit, retain and motivate employees.
The Government supports these schemes by offering valuable tax reliefs.
There are 4 main tax-advantaged (or “approved”) share schemes:
- Enterprise management incentives (EMI) options
- Company share option plans (CSOPs)
- SAYE, Save as you earn, sharesave, or savings-related option schemes (SAYE)
- Share incentive plans (SIP)
Companies can also offer non tax-advantaged share schemes.
EMI is the most common “approved” scheme. To qualify, companies must be independent, trading, have < £30m gross assets and <250 employees. The EMI plan must be registered with HMRC. The shares must be ordinary, paid up shares and must not be redeemable. Employees must work more than 25 hours per week or devote 75% of their working time to the EMI company. Tax benefits for employees are significant, but the company also benefits.
It is strongly advisable to agree the market value of the shares up front with HMRC in order to (i) determine the tax treatment and (ii) keep within the EMI scheme limits – £3m total EMI share value and £250K per employee.
Additional Resources
Director & Shareholder
Directors
A company must have at least one director and a public company must have at least two directors. At least one director must be a person but you can have corporate directors as well.
There is no maximum number of directors. A director must at least 16 years of age.
Every company has Articles which outline the rules for running, governing and owning the company – including the responsibilities and powers of the directors.
Subject to what the Articles say, a director can usually be appointed by the board of directors or by shareholders at a general meeting of the shareholders.
Note: you can ask lawyers to prepare bespoke Articles, but if you choose not to, a simple set of Articles set out by law automatically apply to the company.
Directors are elected by shareholders to manage a company and make the decisions. Shareholder Agreements (and often new Articles) are needed if shareholders want day-to-day decision-making power and more control over what the company does.
Register of Directors and Companies House Filing
“Companies House” is the registrar of companies in the UK. It holds the register of Directors and their details. It is a public document.
Companies must maintain a register of directors:
The Register of Directors is a public document. It must be kept at the Company’s registered office and kept open for public inspection, or it can be registered on the public register (Companies House) except for (i) the director’s usual residential address and (ii) the day (but not month or year) of director’s date of birth – which are both protected from public disclosure.
Notice of the first directors must be delivered to Companies House on formation. Notice of any director appointment, removal or change in particulars of a director must be notified to Companies House within 14 days.
Directors Duties
Director’s duties are owed to the company and only the company can enforce them (but in certain circumstances shareholders can bring an action against a director).
The seven general duties under the Companies Act 2006 are:
Other duties (not set out in the Act but) owed by directors are:
Directors can be personally liable – to a criminal or civil action – for wrongdoing whilst in office. “Directors’ and Officers” (D&O) liability insurance can cover some but not all such risks. It is good practice to consider D&O cover.
Board of Directors
Directors’ decisions are usually taken during formal meetings of the board of directors. The procedure for convening and holding board meetings are usually set out in the Articles.
Strictly speaking, companies must take minutes of all board meetings however the management and administration of small, private companies is often informal.
These transactions between a company and its directors (and sometimes persons connected with its directors) must first be approved by shareholders:
Directors can be removed by ordinary resolution (i.e. 51% of shareholders) which is just one reason why you should have a Shareholder Agreement (and maybe new Articles) to ensure your Board has the right people on it and runs correctly.
Share capital
A company’s share capital is made up of the shares that it has issued to its shareholders (also called “members”). You will be given a 6-digit Authentication Code which makes it easy for directors to file many routine documents at Companies House e.g. an AP01 to appoint a new directors or an SH01 Form to issue new shares.
Shares must have a fixed nominal value (for example, £1.00 or £0.01 etc).Members are liable for to pay up the nominal value. Nominal value is different to the amount paid for a share (the excess above the nominal value is the ”premium”).
Shares may be denominated in any currency (£, US$, EURO etc) and a Company may have different classes of shares (A shares, B shares, preference shares etc).
A company must file a Statement of Capital at Companies House when it forms and every time it alters its share capital. As well it must annually filing a Confirmation Statement noting any changes to its share capital.
But remember! Filing at Companies House is not a substitute for doing things required by law, e.g. passing a shareholder resolution if it is needed to authorise new shares issues.
Register of Members
A company must keep a Register of Members and a PSC Register (People of Significant Control) that details people with significant influence or control over the company. Usually defined as shareholders with more than 25% or that exercise control.
The Register must be kept updated and it must contain:
The Register of Members is a public document and must be kept available for inspection at the Company’s registered office. You can now choose to keep your Register of Members and Directors online on the public register at Companies House.
The Register of Members is important because it shows that a shareholder owns a share. It is more important than the share certificate for proving ownership of a share.
Shareholder Agreements
A shareholder agreement (SHA) controls the relationship between shareholders themselves and between them and the Company.
The SHA is a private contract so it can contain private, commercial terms so it has advantages over the Articles which are a public document that must be kept on the register.
SHA’s often protect minority shareholders’ rights otherwise majority shareholders can make decisions against minority shareholders’ interests. SHA’s set out agreement on a wide range of sensitive issues e.g. business plans, director remuneration, borrowing limits, , non-compete restrictions, dividend policy etc.
Many of these issues can be dealt with in either the Articles or SHA. The two are closely linked and care must be taken when deciding what goes into each.
Articles create the company structure and things like share classes, share rights, board and shareholder procedures whereas the SHA deals with business strategy, personal and commercial matters.
Additional Resources
Management of the Company
Company Name and Registered Office
Rule are strict as to what you have to do when managing a company
- Company name
- Registered office
Before choosing a company name you should:
- search the index of company names to see if it is free
- search Trade Marks Register at Intellectual Property Office
- search domain name registries and relevant trade journals
- note many words are prohibited e.g. “Fund”
- to change the name you may need shareholders to pass a special resolution (i.e. holders of 75% of shares)
A company must, at all times, have a registered office to which all communications and notices may be addressed.
You must include your registered office address on your business letters and order forms.
Many incorporation service providers also provide relatively inexpensive packages where they agree to act as your registered office and deal with filing at Companies House and help you deal with regular administration.
Directors
A director’s duty is to promote the success of the company and have regard to the employees, community, acting fairly between shareholders, the environment and other things.
Directors are often employees (in order to benefit from the £12,000 per year tax allowance for employee salaries). Employees must have an employment contract. For directors, a contact suitable for executives/senior employees is often used.
Non-executive directors: not employees, usually part-time independent advisers, but with same legal responsibilities
Directors duties still apply if:
- you’re not active in your role as director
- someone else tells you what to do
- you act as a director but have not been formally appointed
- you control a board of directors without being on it
Articles
You must follow the company’s Articles setting out what powers you’re granted as a director, and the purpose of those powers.
Director Responsibilities
As a director, you’re legally responsible for running the company and making sure information is sent to Companies House on time
Specific duties include:
- confirmation statement
- annual accounts
- any change in your company’s officers or their personal details
- a change to your company’s registered office
- allotment of shares
- registration of charges (mortgage)
- any change in your company’s people with significant control (PSC) details
You can hire other people to manage some of these things day-to-day (for example, an accountant) but you’re still legally responsible for your company’s records, accounts and performance.
Companies House have a good video you can watch here:
https://www.youtube.com/watch?v=C6otYEz9218
Key Director Duties
What are Directors duties in insolvency? How must you apply and independent view and the standard expected of you as a Director?
Independent judgement
You must not allow other people to control your powers as a director. You can accept advice, but you must use your own independent judgement to make final decisions.
Exercise reasonable care, skill and diligence
You must perform to the best of your ability. The more qualified or experienced you are, the greater the standard expected of you. You must use any relevant knowledge, skill or experience you have (for example, if you’re a qualified accountant).
Insolvency: If the company becomes insolvent, your responsibilities as director will apply towards the creditors (owed money by the company), instead of the company.
Avoid conflicts of interest
You must avoid situations where your loyalties might be divided. You should tell other directors and members about possible conflicts of interest and follow any process set out in the Articles. This duty continues to apply if you’re no longer a director. You must not take advantage of any property, information or opportunity you became aware of as a director.
The Board
The day to day management of companies is the responsibility of the board of directors.
Companies should:
The manner in which directors may make decisions are set out in the Shareholders Agreement and Articles. All the usual rules as regards quorum of meeting and recording of decisions will continue to apply.
ICSA has produced a useful guide for virtual board and committee meetings. This is available here:
Record Keeping
At a minimum, you need to:
- Keep records
- Have a SAIL – Single Alternative Inspection Location
- Hard copy or electronic form
What records of board and shareholder meetings need to be kept?
Companies are required to keep at their registered office (or nominated place – SAIL) records of meetings of their shareholders and directors (including all resolutions passed at such meetings) and of written resolutions passed in the absence of such meetings.
These records must be kept for 10 years from the date of the resolution, decision or meeting and may be kept in hard copy or electronic form. Records kept in electronic form must be capable of being reproduced in hard copy form if required.
Any shareholders’ resolution, other than an ordinary resolution dealing with routine business is likely to require filing at Companies House. Board resolutions do not need to be filed at Companies House. Most resolutions must be filed within 15 days.
A company may have a sole director.
Details of decisions by sole directors must also be kept. Obviously a sole director cannot have a “meeting”, they record decisions in a written resolution.
Additional Resources
Key Agreements
Shareholder Agreement (SHA)
If the company has no SHA and standard Articles issued upon incorporation will apply. Without amendment, the rights of minority shareholders are very limited.
Shareholding of 5% or more
Able to require the circulation of a written resolution.
Able to require the company to call a general meeting.
Able to prevent the deemed re-appointment of an auditor.
Shareholding of 10%
Able to call a poll vote at a general meeting.
Able to require an audit.
Shareholding greater than 10%
Able to block consent to short notice of a general meeting.
Shareholding greater than 25%
Able to block a special resolution.
Able to block compromise arrangement with members or a class of members.
Shareholding greater than 50% pass an ordinary resolution.
Minority shareholders have few rights. This is the case regardless of how much they have invested. SHA is essential to give minority shareholders- and cash investors in particular – enhanced rights to protect their position and their investment.
Typical Shareholder Agreement
Give careful consideration to any shareholder agreement clauses you may want to add when constructing the right agreement.
Business. Define/limit the business of the company
Reserved matters. List of items requiring consent of some / all shareholders
Directors. Right of shareholder to be a director
Shareholder Loans. Set out terms of any loans to the company
Duty to promote the business
Right to financial information
Share (Issues and Voluntary Transfers): first right of refusal to existing shareholders (called “pre-emption” rights)
Share (Compulsory Transfers) if a shareholder dies, is bankrupt or is a “Bad Leaver” and set the value they receive in each case
Drag/Tag.If 51% want to sell the company, they can force the 49% to sell at same price and the 49% cannot be left behind
Restrictive Covenants. Non-compete after shareholder leaves
Intellectual Property. Shareholders assigning IP to Company
Key advantage to an SHA is that it can remain a private contract between the shareholders – not on a public register like the Articles. Disadvantage is that a party must enforce if a party is in breach, whereas a breach under the Articles is automatically invalid.
Articles of Association
The Articles govern the day-to-day management of the company and set up the structure or rules for the company to operate within.
Common provisions in the Articles include:
- Creating separate classes of shares and their respective rights and provisions relating to the variation of share rights
- Procedures for the issue and transfer of shares (including “pre-emption rights” and restrictions on transfer)
- Notice and proceedings at shareholder and director meetings (including quorum and voting)
- Appointment, powers and duties of directors and company secretary
- Borrowing powers and certain other restricted matters
Many things e.g. Drag/Tag or Pre-emption Rights – can be in either the Articles or the Shareholder Agreement.
Amendment to any set of Articles requires at least 75% of shareholders to vote in favour of the amendment.
It is difficult to change Articles if there is a dispute between shareholders.
Differences between Articles and SHA
Investment agreement
An investment agreement is just a shareholder agreement with enhanced rights for a cash investor over founders / other shareholders.
Reflects different interests: founders contribute their skills, time (and sometimes money) whereas investors contribute their money (and advice or specific help e.g. client, intro, IP)
Typical SHA clauses will be enhanced to give the investor (or a majority of investors):
- A place on the board and rights to appoint observers
- Rights to a say (or even veto) over decisions regarding director appointments, spending, borrowing and director remuneration
- The benefit of warranties from the founders who will be asked to personally warrant certain aspects of the Company’s assets, activities or targets
- Special shareholder status e.g. preference shares, enhanced dividends, anti-dilution protection – usually in the Articles
It is vital to ensure that the company’s new Articles and the Investment Agreement are consistent in their approach and mesh together.
Joint Ventures
The first choice to be made is whether (1) a separate legal entity will be established as a vehicle for the joint venture (i.e. a Company, LLP or Partnership (SPV) or (2) the joint venture will be set out in a contract.
Whether a Joint Venture agreement or Shareholder Agreement if a SPV is being used. Or, if just a joint venture contract, what usually what needs to be covered in an agreement is:
- The division of power between the parties and the extent of their influence over the management of the joint venture
- The terms on which any party can transfer their shares to a third party
- How to deal with disputes and deadlock between the parties
- The circumstances in which the joint venture will terminate, including the mechanics and implications of termination
It is critical to set out the parties’ respective contributions and benefits, their rights and responsibilities etc.
Taking legal advice at an early stage is important. It same to assume that your counterpart will be advised.
Clients and Suppliers
The first choice is whether to use standard terms and conditions (T&Cs) or a sign a bespoke agreement with your client/supplier.
One of the main reasons for using T&Cs is that unlike bespoke agreements, they enable you to do business on terms that are favourable to you in a format that does not encourage heavy negotiations. T&Cs are usually shorter than bespoke agreements.
The four things that largely determine the style and content of both T&Cs and bespoke agreements are:
- Do they need to cover services, or goods, or both?
- Cover single orders or provide a framework for multiple orders?
- Business-to-consumer or Business-to-business?
- All in the UK or is it cross-border?
Often, T&Cs are considered of little importance and last of all – this is dangerous. All T&Cs are not the same and you cannot assume that using someone else’s T&Cs (or competitor’s) will protect your business.
Other Agreements
Other key agreements include:
- Intellectual Property (IP)
- Employees
- Online
IP Assignments and Licenses. Founders often wrongly assume that IP created by founders, employees or consultants is automatically owned by the company they work for – it is not. IP needs to be transferred to the company – in either a specific deed of assignment or licence or alternatively as part of an SHA or employment contract.
Employee incentives, contracts and shares. Employees and consultants can be motivated in many ways. Tax-advantaged share schemes e.g. EMI schemes, bonuses, sweat equity and share options provide a wide range of possibilities that are very useful for start-ups that may not have cash to pay salaries or consultancy fees.
Online. Whether you are a tech business or not, liability and compliance in relation to your online activity, e-commerce, websites, communications and data usage must always be a top consideration.
The internet is littered with legal contracts and templates however it is important to check with a lawyer that knows what they are talking about before relying on web documents.
Protecting Intellectual Property
Overview
- OIP Overview – what does it cover?
- The main types of IP rights that are sought by business and individuals
- The difference between Registered and unregistered IP
“Intellectual Property” is a term to describe the legal rights that attach to certain kinds of information, for example a database or a formula, to ideas such as an invention or a new process and to forms of expression, such as books and movies.
Businesses need to be aware of different IP rights to ensure that they protect what they create, maximise their competitive position and avoid infringing the IP rights of others.
IP rights fall into two general categories:
Registered rights. These are granted on application to an official body such as the UK Intellectual Property Office. Unregistered rights. These arise automatically, give protection against copying or using the right, and include copyright, unregistered design rights, rights in unregistered trademarks and confidential information.
Registered rights are monopoly rights. This means that, once registered, the owner can stop others from using the right without permission. They include patents, trade marks and registered designs. Be aware, even “Registered Rights” can be challenged.
Copyright
Copyright protects original artistic, musical, dramatic and literary works, including computer programs, sound recordings, films, broadcasts and typographical arrangements of published works.
Copyright protects original artistic, musical, dramatic and literary works, including computer programs, sound recordings, films, broadcasts and typographical arrangements of published works.
Copyright arises automatically on the creation of the work and lasts for 70 years after the death of the author for artistic, musical, dramatic and literary works. Sound recordings and broadcasts are protected for 70 and 50 years from the date of publication and making respectively.
Copyright protects the expression of an idea, not the idea itself. It does not protect against independent development of the same idea(s), only against the actual copying of another’s work.
Ownership of copyright in a work will allow the owner to prevent unauthorised use of the work, such as the making of copies or placing the work on the internet.
Computer programs (software) can receive copyright protection, but it is a complicated area, take advice on this.
Design Rights
Design rights protect the appearance of the whole or part of a product.
They can be registered or unregistered rights.
Registered designs.
A registered design provides a legal monopoly. A registered design must be novel; of individual character; and not excluded by statute.
Protection lasts 25 years if renewed every five years, however this may change post-Brexit. Relatively low-cost and particularly appropriate for industries such as fashion where design is key.
Unregistered designs.
An unregistered design gives a right against copying. Duration of protection is three years.
EU design rights have ceased from 1 January 2021 and are to be replaced by rights under UK law.
Sometimes design right can be used to protect elements of a software programme such as displays and graphics.
Patents
Patents provide inventors with a legally protectable monopoly over their inventions, protecting new and inventive technical features of products and processes. They last for a limited period (20 years in most countries).
To qualify for patent protection, an invention must be new, involve an inventive step, be capable of industrial application and not specifically excluded from protection.
To obtain a patent, it is necessary to file an application for a patent, normally with the Patent Office of the country where the inventor works.
Patents are not automatic, are complicated and expensive to obtain/maintain and you will need a specialist patent attorney
Patents can provide a high level of protection and are essential for some industries such as pharmaceuticals, where years of research and development are necessary to commercialise a new product.
Exclusions include computer programs, methods of doing business and methods of medical treatment. The public disclosure of technology is a downside, it could enable a competitor to develop a competing product without infringing the patent.
Trademarks
A trade mark can be a brand name (such as NIKON for cameras), a house mark (APPLE for electronic goods), a company logo, a trading style or packaging.
A trade mark can also consist of the shapes of products or their packaging (for example the Coca Cola bottle), and colours associated with a trading style (such as the BP green petrol stations), as well as sounds, smells and slogans. However, it is more difficult to register these marks.
A UK-registered trade mark is only enforceable in the UK.
The goodwill in an unregistered trade mark can be protected in an action for passing off if you can prove a reputation in the mark, misrepresentation and loss, but is difficult to prove and expensive.
To be registrable, a trade mark must be:
- capable of being represented graphically;
- distinctive;
- capable of distinguishing goods or services; and
- not excluded by statute.
Software
Software is not patentable on its own. However, an exception is if the software possesses a “technical character” or in other words involves a “computer-implemented invention”, it may be protected
Software and Patents
There is considerable inconsistency and uncertainty surrounding the approach taken by authorities in relation to software-patenting in Europe and USA. Engaging a qualified patent attorney is paramount.
Software and Copyright
Software can be protected as a copyright work. However, because software is unlike traditional forms e.g. books and because software often comprises more than just the object or source code e.g. graphics, copyright protection is not entirely straightforward either. Elements of software such as screen-displays and graphics may protectable as a design right.
Databases (compilations of data) can be protected by copyright and the structure of a database (but not its content) could previously be protected by the EU Database Directive (this is to be replaced by a UK database right post-Brexit)
Licensing Software
Software is mostly licensed (a right to use, not to own) on non-exclusive terms. It is subject to a wide range of restrictions on usage in order for suppliers to sell the software to multiple customers, retain ownership and freely exploit the software.
The most common arrangements for the licensing of software are:
- Standard off-the-shelf software licensed by means of a “shrinkwrap” agreement i.e. opening of the packaging is taken to be consent by the user to be bound by the licence terms.
- Sublicences of software issued by the software distributor
- Software licence combined with a value added reseller agreement in conjunction with hardware or services.
- For more complex programs, a licence of software designed to meet the user’s specific requirements may be individually negotiated between the software developer and the user.
Software licensing is being rapidly replaced by Software as a Service (SaaS) delivered securely to the customer on a pay-per-use basis over the internet from processors hosted remotely by the SaaS provider
Additional Resources
Regulatory & Compliance
Latest developments: Brexit
From 31 December 2020, a new body of UK law, known as “retained EU law” was rolled over meaning that much EU law continues to apply in the UK (as UK law) until UK lawmakers decide to change or replace it.
Going forward the UK-EU Trade and Co-operation Agreement (TCA) covers economic and security co-operation with the EU:
trade in goods and in services
- digital trade
- intellectual property
- public procurement
- aviation and road transport
- energy
- fisheries
- legal, criminal and dispute resolution matters
So the UK has left the EU, is no longer subject to its laws or courts and is maintaining legal continuity by keeping “retained EU law” – however this will change as the UK diverges in future.
The UK is no longer subject to EU laws apart from “retained EU law”.Northern Ireland is an exception, it will remain subject to many EU laws permanently e.g. single market and customs union rules, state aid rules and VAT law.
Consequences of Brexit
Brexit impact has been in the news for sometime and will continue to be.
Two areas to be conversant on are:
- Impact on start-ups
- Dealing with financial services
Effect on business start-ups in the UK
The biggest and most immediate impact of Brexit upon business start-ups, will be in these areas:
- VAT, customs and import duties/tariffs
- Intellectual property and information technology
Financial Services.
- Despite some general, high level provisions in the TCA there will not be anything like the levels of market access available while the UK was part of the single market and only a little more market access than being on WTO rules.
- No more “passporting” therefore financial services firms based in the UK have lost access to EU markets and firms based in the EU have lost access to UK markets.
- The EU and UK are planning to negotiate to try to establish structured regulatory co-operation on financial services.
Copyright: EU/UK law will likely diverge;
EU database right: Ceased in the UK, to be replaced a UK database right;
Patents: A new EU-wide patent (Unitary Patent) will not be available in the UK unless agreement is reached;
Employees: Recent Developments
New developments are covering:
- Wages
- Pensions
- IR35 and Consultants
Wage increases. The National Living Wage and National Minimum Wage were increased in 2018 and in April 2019. While this is good news for workers, many small companies will need to make plans to meet these new minimum wages
Pension contributions. The minimum requirements for employee and employer contributions toward auto-enrolment pension schemes will increase to 3% for the employer and 5% for employees, thereby increasing business costs
Consultants: for bigger companies, changes are coming (called IR35) which will make fees to consultants subject to income tax and national insurance contributions (NIC) just like employees.
Employees/Directors & Tax
It is important to determine in what circumstances is an employee or director taxed.
An employee or director who is resident in the UK is taxed on the full amount of his/her worldwide income for the tax year, unless his/her permanent home (domicile) is abroad. Non-UK residents are chargeable to income tax on general earnings in respect of their duties performed in the UK.
If the employee is resident in a non-UK country but employed in the UK and the other country has a double taxation treaty with the UK, employees may be able to claim relief in the UK to avoid double taxation.
Where the employee’s duties are performed partly in the UK and partly overseas, a time apportionment is generally used to determine the employee’s UK tax liability.
If an employee is not resident in the UK and he/she do not perform duties in the UK, there is no liability to pay UK tax.
You are automatically deemed to be a UK tax resident if during the tax year (6 April to 5 April) you either:
- Spend 183 or more days in the UK during the tax year.
- Your only home is in the UK (owned, rented or lived in for at least 91 days in total and spend at least 30 days there in the tax year).
Corporation Tax. UK resident companies are subject to corporation tax in the UK on their worldwide profits, regardless of the source, unless such profits arise from a permanent establishment outside UK
Rate.The main corporation tax rate for the 2019/20 tax year is 19%.
VAT.You must register for VAT if your VAT taxable turnover goes over £85,000, or you know that it will. Your VAT taxable turnover is the total of everything sold that is not VAT exempt. You can register voluntarily. You must charge and account for VAT on the whole value of the goods or services you provide. Most goods and services are taxed at the standard rate of 20%
Dividends (above £2,000) are taxed at between 7.5% – 38.1%.
Foreign subsidiary/UK parent. Anti-avoidance rules exist to prevent diversion of UK profits to low tax territories.
Business Rates are a tax on occupied non-residential property charged on the property’s value
Stamp Duty Tax is paid on land transactions above £125K for residential properties and £150K for non-residential properties.
Data Protection
From 1st January 2021 a new set of rules will apply in the UK called UK GDPR (and GDPR will be known as the EU GDPR).
The EU and UK have committed to maintaining high data protection standards.
A temporary “bridging mechanism” allows the free flow of personal data from the EU to the UK to continue uninterrupted in the first half 2021 (unless an “adequacy decision” is made)
An adequacy decision by the EU (recognising a third country’s DP laws as adequate) will enable the transfer of personal data from EU states to the UK without requiring any further safeguards. A decision is possible late 2021
The EU is revising its E-Privacy Directive which will impact electronic direct marketing, online tracking and cookies, so for now the old E-Privacy Directive still applies in the UK.
The ICO’s guidance recommends that companies review and update their privacy notices and other documentation in order to update references to EU law and UK-EU transfers etc.
Trading in the UK
Core to trading in the UK is dealing with:
- Agents and Distributors
- E-commerce in the UK
- UK consumer rights law
Agents and Distributors
- UK Agents Regulations impose mandatory provisions and restrictions on commercial agency agreements, designed to protect the commercial agents (NB you can be liable to agents after termination)
- There are no laws in the UK specifically regulating distribution agreements however UK competition law prohibits anti-competitive provisions (e.g. price fixing) in distribution agreements
E-commerce in the UK
- E-Commerce Regulations impose a range of obligations including: providing certain information about you and your services;
- confirming the customer’s order electronically without undue delay.
UK consumer rights laws:
- Imply a wide range of terms into consumer contracts by law
- Give consumers remedies for breach of contract by suppliers
- Give consumers rights regarding the delivery of goods
- Prohibit unfair practices by traders e.g. misleading actions or omissions and aggressive sales tactics.
Additional Resources
Disclaimer:
Information given is of a general nature. The views expressed are not necessarily those of the module manager or of LawBite or any of its affiliates. No reproduction of this presentation may be made in whole or in part for professional or recreational purposes. No action should be taken based on this presentation and we accept no liability if we change your views on any of the subjects mentioned.
Any legislation, sourced from HMRC, is that prevailing at the time, is subject to change without notice and depend on individual circumstances. Clients should always seek appropriate legal advice from a lawyer.
