Blogs by our partner, John Clarke, who specialises in corporate/commercial law

Black holes and other strange phenomena – will Entrepreneur’s Relief survive?

Don’t worry: a legal blog hasn’t morphed into something that Professor Brian Cox might write (although, if they re-run it, I do recommend the Astrophysics of Light evening class run by St Andrews University). No: it is financial black holes that interest me here.

There was a good article in the April 27th edition of the Economist (A Form 10-K for America’s government) which in turn talked about Steve Ballmer’s USAFacts website. One of the themes is to treat the US government as a company and see what the results looked like. And if it works in the US….

In Britain, there are increasing and vociferous calls and claims on the income that Britain Inc has. The cash out includes both revenue items (such as pension payments, NHS costs and so on) and capital items (such as infrastructure spending and debt repayments). The cash in comes from taxation in all of its forms. But one major (and really rather worrying) difference between UK Inc and your business is the lack of any real accruals. The major example relates to pensions: a 35 year old pays taxes now with the promise of a pension some time after they are 65 (whatever the rules then are). But, today’s income is being used to pay today’s pensioners – not put to one side for the 35 year olds. Their pensions will depend on the people who are now babies paying enough tax to fund those pensions. Put another way, those pensions are completely unfunded: black hole # 1.

Less worrying but more imminent is black hole # 2. Assuming that the Conservatives are re-elected next month (and even I might put some money on that) then they will attempt to balance the current books of UK Inc (including some debt repayment).That’s going to be tough, and at its simplest they will have to (a) cut more (and that will be hard); (b) tax more (and that will be unpopular – but do watch the manifestos); and/or (c) not repay debt (and what does that do to credit ratings?). It’s (b) that I am most interested in here: the potential tax black hole.

We saw in the budget and subsequent about-turn that the Chancellor was trying to raise some of the less obvious taxes in order to plug gaps. The National Insurance paid by the self-employed and tax free dividend income were two targets before “her next door” called the election. But after the election, the new manifesto will be in place; the government will have five years (I assume) to get over any problems caused by changes now; and the black hole still needs filled. And, from the point of view of our clients, the tax – more properly a relief – that worries me most is Entrepreneur’s Relief.

Many of you will know that, subject to meeting qualification requirements, you can sell your business and pay CGT of 10% on the next proceeds. Short of dying, that’s the lowest tax rate in the UK. It encourages people to build up value in their business, keep it in the business and then realise the benefit on sale. But – is that 10% rate tempting? What if it were raised to, say, 15%? The business community would complain, but at 15% it would still be a low rate; it would help the “just about managing” families (who seem to have dropped off the radar); and if a “rich” business person sold their business for £1M and ended up with £850K and not £900K – who are they to complain?

So – where am I going with all of this? Entrepreneur’s Relief results in a low CGT rate and that has been the case for some time. It may be just too tempting a target for the Chancellor. Therefore, there must be a real risk of an increase in the effective rate in the next budget, whenever that is. We would never recommend disposing of a business for purely taxation reasons, but it is part of the mix: what will be your net proceeds of sale now compared with next year? If you are thinking about selling in the near future, have a good think – now.

Back to the real black holes. As I understand it (and my understanding is sketchy despite trying really hard) at time zero, everything in the universe – matter, energy, the whole damn lot – was in a super-concentrated small ball. At least, that’s how I imagined it. The big bang happened and, after an infinitesimally small gap, the universe started expanding broadly in terms of the rules about gravity and so on that we now know about. Today’s question is this: if the universe only started with the big bang, where was the black hole before the big bang? Answers, on a postcard……

Office and meeting rooms

We are re-arranging our space within our Dunfermline office at Crescent House from 15 May 2017. What does this mean for you?

  • our address, phone numbers, etc will remain unchanged, but
  • all future meetings will take place on the ground floor rather than the first floor, so
  • you’ll be directed to turn right at reception next time you visit us!

We look forward to welcoming you in our new meetings rooms soon.

Don’t vote: it just encourages the……….

If you don’t know the missing word, google P. J. O’Rourke, and you’ll learn. But after yesterday’s announcement of a General Election in Britain on 8 June, there is a real risk of voting apathy/exhaustion in the UK. So, here’s today’s quiz question: just in the same way that “claustrophobia” means “fear of confined spaces”, “fear of elections” is – what? A bottle of something (quality depending on the quality of the winning answer) to the winner!
Since most of the rest of the world seems to get by OK with fixed term parliaments or presidencies, I had thought that the UK having a fixed term parliament was a step in the right direction. But now I know: our parliamentarians had their fingers crossed when the Fixed Term Parliaments Act was passed, so it doesn’t mean what it says on the tin.
What all of this means for UK businesses – Brexit uncertainty; the Westminster election; the threat of Indyref2 in Scotland; the current lack of a devolved assembly in Northern Ireland; local elections; and all the others that I have forgotten to mention – is continuing uncertainty. That means that it is harder to make long term decisions and when to make those decisions – and of course, it is all too easy to delay making that difficult decision.
It’s maybe some small comfort that we are not alone. Imagine that you were running a business in France just now, needing to make the same sort of decision, but with even greater political uncertainty there. As Donald Trump is finding out, running a business and running a country are two very different things. The CEO of a company is quite clearly in charge, and reports to only a few groups of stakeholders (such as shareholders). When running a country, annoying and unpredictable things like democracy get in the way (unless, of course, you follow the Turkish model…)
Enough of this rant (but do check out P.J O’Rourke). On a brighter note, we are hosting our Avrio colleagues in Edinburgh on 19/20 May. We already have a few clients lined up to meet colleagues from other countries (Cyprus, Switzerland and the USA so far) so if you have or might have any need to chat to one of our overseas colleagues, get in touch and I’ll see what I can do.

Meanwhile, keep practising your “x”: you don’t want to spoil your ballot paper!
John Clarke

Sex, lies and videotapes

Just when you thought things couldn’t get any stranger…..!

Politicians: who voted for them? Well we did actually, so whether or not we like them and what they are (or aren’t) doing, we are stuck with them. Therefore, from a business perspective, I think we should view all the stuff in both the US and Europe (including the UK) as a spectator sport – unless of course it will or may impact on business. In other words, ignore and (largely) get on with life.

So, what’s new on a cold January day at the start of 2017? UK unemployment is at or close to the rate that economists call “full employment” (albeit that many of the jobs are at or about the living wage); the results of Sainsbury’s, Tesco, M & S and others have lifted some of the High Street gloom; and while the recent fall in Sterling doesn’t help importers, it does help exporters; and so on. But, are we confident enough to make business decisions: employee more people, make capital investments, open new locations, decide to sell – whatever?

There’s a real risk attached to waiting and seeing because we never know what tomorrow, next year or the next election will bring. Yes, we are trying to forecast/guess in a time of unusual uncertainty, but most (or at least many) of us were in business during the financial crisis in 2008 – and survived that chaos. So, I think that – to the extent we can – we should ignore all the political chaos around us and get back to focussing on our businesses and what we really can influence.

Therefore, what are your business resolutions for 2017?

  • Get the changes made to your employment contracts that you had always meant to do?
  • Stop relying on the terms of business that you copied from somewhere years ago, and get ones that work?
  • Start planning your exit from your business and do the housekeeping needed to make it ready for sale?

They all seem worthwhile that spending ages reading who said or did what with whom (entertaining though that is!).

And of course, my colleagues and I would be happy to help with your shopping list of to-do’s – but a starting point has to be to make that list. What’s holding you back?

international law

Judges: who elected them anyway?

I was conscious that I was (over)due another Brexit Blog, but didn’t really know where to begin. Nothing much seemed to be happening, so what was there to say. Wrong, and wrong again.

Apart from MPs resigning, the High Court’s decision – that the triggering of Article 50 required the approval of the UK Parliament, rather than being exercised under the “Royal Prerogative” – has thrown the timing of the trigger-pulling into question. The decision is likely to be appealed to the Supreme Court, but if the Supreme Court uphold the decision then both houses of Parliament may have some fun. The “both” is important because the House of Lords may well cause more issues than the House of Commons.

Understandably, Brexiteers are in uproar. How dare the judges defy the wish of the British people? But, there is one problem with that argument: the judges’ decision is that the UK Government must uphold the law and do things “properly”. So, Government, do it properly and then pull the trigger: don’t do it properly and you can’t pull the trigger.

At the heart of this is the fact that, because the UK does not have a written constitution, we think we know what the law is on things like this – but don’t know for sure until the point is tested in court. If you add to that the fact that much UK law remains based on precedent (in other words, the law is what the courts say it is, whatever anyone else thought) that’s why this case deals with important principles of constitutional law. Where does power lie between the Government (the executive) and the people’s representatives (MPs and, yes, members of the House of Lords). We thought we knew, until the court told us for sure

And then there is the Royal Prerogative. That stems from the time when the monarch had absolute power, but has now morphed into something where the Prime and other Ministers (appointed by the Crown) can exercise powers on behalf of the Crown. But, we have a sovereign Parliament – so who wins? As this case shows, not much is clear, but it looks as though Parliament trumps the Crown (on this at least).

So, what are the lessons? We really are not much further forward on Brexit: I don’t know what will happen after the trigger is pulled or what the outcome will be. Perhaps the UK now needs a written constitution (particularly with devolved governments in three of the constituent nations – and all the recent furore over bulk appointees to the House of Lords). And, in my view at least, the courts are there to uphold the law (which must surely be at the heart of our constitution).

I’ll finish on a potential delicious irony. If the Supreme Court upholds the High Court’s decision, will the Brexiteers appeal to the European Court?!

John Clarke

A week, no a day is a long time in politics

To misquote Sir Alex Ferguson, “Politics – bloody hell!” As a spectator sport, this is great fun: just a shame that it’s serious.

We have now had the spectacle of political journalists running from one sensation to the next – to the extent that I’m worried about pressing “send” on this blog in case something happens between me pressing that key, and you reading it.

Let’s recap. The referendum took place because David Cameron felt he had to promise it in order to try to keep the two factions of the Conservative Party together. That worked, didn’t it? Since then. (and I wish these were my original words, but they aren’t) the Leavers have left and the Remainers have left. Nigel Farage has wandered off. We may be facing another General Election (and that prospect must be causing panic in the Labour Party, seems to be on the point of self-destructing). And who said politics wasn’t interesting?

So where are we? In terms of Brexit, this somehow feels like the end of something: perhaps we have just had our amuse bouche and are about to start on the real meal. But what does this all mean for business?

Business really wants boring politics, so we are not there yet. And we haven’t  even started discussions with our EU colleagues, let alone know how they are going to turn out. So, there are bound to be many more twists and turns ahead – but it does feel slightly better to have someone leading the negotiations who doesn’t start by laying down their list of wants without considering what the other party wants. It might even be a good idea to bring to this party people who have successfully negotiated something in the past – but that’s probably me being silly again.

Therefore, from a business perspective, no change yet after 23 June. The possible outcomes remain as before and in effect, and despite all the political noise, nothing has really changed yet. So, I am afraid, the business uncertainty goes on – and on, and…..

But, let’s not be too isolationist about this. Some Italian banks are in such a state that there is nervousness about the Euro; there is deadlock in Spain following the latest election there; the Australian Prime Minister may be about to be kicked out following their latest election; and we also have elections to look forward to in Germany, France and elsewhere.

Could this be the new export that will revive the UK economy? Exporting political chaos?

But please do remember to read this quickly before checking your news feed, as everything may have changed (again).

John Clarke

12 July 2016

Brexit

Those of you who have read Kafka’s “The Trial” may understand my feelings and concerns following last Friday’s vote. The words “lunatics” and “asylum” come to mind.

This blog is focussed on the impact on business, but before I start I’d better nail my colours to the mast. I was a firm believer that the UK should remain as a member of the EU. Yes, it is a (deeply) flawed body, but I think the decision reached in the Brexit referendum has best been summed up by the cover of the New Yorker magazine. I’ll stop the personal rant now, but if you do want to hear much, much more, then call me.

As I said, the focus of this blog is the impact the decision has on business – our clients, friends and colleagues. It is trite to say that, on 28th June 2016, when asked “what now?” the answer is “nobody knows”. None of us would, I hope, go into critical negotiations without knowing what we want, considering what the other side wants and working out how to get there. And critically, we would counsel against laying down ultimatums without being prepared to carry them out. But, I am getting into rant mode again.

We are already starting to advise clients on the likely impact of the decision:

  • Should holding companies be set up elsewhere in the EU
  • For businesses based elsewhere in the UK, might a holding company in Scotland make sense if there is a possibility that Scotland will remain in the EU
  • What do we do about key employees who come from other EU countries?

We will be preparing and updating a briefing note for clients as the implications of the referendum decision become clearer – if they ever will – in the coming weeks and months (and, heaven help us, years). If you’d like to be on the circulation list, please email brexit@ccwlegal.co.uk.

Let me finish with a practical example. Friday’s result came on the last full day of a holiday in Torridon. For those of you who don’t know the area, Torridon is a remote and beautiful part of Wester Ross, in the north-west Scottish highlands. To get there – one of the EU’s “less favoured areas” – you pass along roads and projects partly or mainly funded by EU money. And, as a result the local tourism business is doing very well: you see lots of non-UK number plates. The owner of the hotel to which our cottage was attached has 25 full time employees – 3 of whom are UK nationals (largely because he couldn’t get other UK nationals to fill vacant posts). And by Saturday morning he was worried whether he would be able to employ non-UK nationals in the future; whether he would have to apply for visas; and so on.

The Chinese curse was “may you live in interesting times”. Or, more relevantly, be careful what you wish for.

John Clarke

28 June 2016

Money for nothin’ ….

Money for nothin’ ….

or what you should be wary of when giving free advice

OK: I admit it. Even for me, there’s only a tenuous link between the Dire Straits song title and what I’m about to talk about – but you can’t blame me for trying, can you? (And there will be a prize for whoever comes up with the best song title that I should have used)

Helping friends out is a good thing, isn’t it? Well – maybe not, following the recent case of Burgess –v- Leojonvarn. Simplifying the 51 pages of the judgement:

  • Mrs Leojonvarn had a background in architecture and design
  • The Burgesses and the Leojonvarns knew each other and lived close to each other
  • And when a third party quotation from a landscape gardener came in too expensive, the Burgesses sought help from their (then) friend Mrs Leojonvarn.

Unfortunately, things didn’t work out; the relationship broke down; the Burgesses claimed that the work was defective; and the dispute ended up in court. The court came to various conclusions before telling the parties to go away and try to resolve things – but critically:

  • There wasn’t a formal contract here. To form a contract you need an offer which is accepted, and whatever they thought they were doing they hadn’t contracted
  • But (and it’s a big “but”) even though there was no contract, Mrs Leojonvarn owed a duty of care to the Burgesses. The court confirmed that a professional designer can owe a duty of care in such a project – and that any liability is not restricted to advice but can also extend to cover other services that a professional can supply.

Assuming (a) the judgement stands and (b) this can be taken as a precedent, this may well mean that you or your business will be “on the hook” for advice given or work done for free in pretty much the same way as if it were charged for – whether that advice or work is done for a friend, charity, business incentive or whatever.

So, what does this mean for us all?

  • Firstly, don’t stop being generous: that’s the last thing that is needed.
  • Secondly, be careful: the case implies that the barrier between advice you give or work you do as part of your business and private life is breaking down, if it hasn’t already.
  • Thirdly, though, ask yourself – does my insurance policy cover this? If the answer is no, then should you be doing what is being asked of you?

It all feels a little depressing to be saying “be careful about being generous with your time” – but that’s what we probably now have to bear in mind.

Having depressed you, let’s lighten the tone and go back to the music. Would a better title be:

Paint It Black;

The Sun Ain’t Gonna Shine Anymore

Or your suggestion, which is……

John Clarke

50 Shades of Grief

Sorry for the pun, but as a New Year resolution, can I urge you to avoid giving lawyers lots of cash by not putting in place that paperwork that you always promised to get around to. Put another way, lawyers like us make more money from sorting out a mess than from preventing a mess happening – and while we’re always happy to accept your generosity, bear in mind the other consequences of things being “not quite right”:

  • The business may go down the tubes as you spend all your time arguing with former colleagues, seeing your accountants and lawyers and so on
  • The bank may not like what is happening and call in their loan (and that guarantee you signed years ago…)
  • Your competitors may take their eyes off the ball, and start out-manoeuvring you.

So – what is to be done? Some things are predictable (death, for example) and some can be anticipated (serious injury, shareholder disputes or divorce). I think it best to prepare for the worst in the hope that it won’t happen. So:

  1. Do you have a Shareholders Agreement in place? If not, shouldn’t you? Disputes, death or divorce can (often) mean that otherwise successful businesses fall apart
  2. What happens on death or serious injury? If you don’t have wills and Powers of Attorney in place, sort that out – now. As a personal example, a friend in Australia had a stroke and couldn’t deal with family finances – but the bank wouldn’t/couldn’t take instructions from his wife. That’s bad enough at a personal level – but what if that happened to your business and suppliers couldn’t be paid?
  3. Plan ahead. We are all guilty of cracking on with the day job and getting our heads down, without pausing and working out what we want to do. In other words, the business does what we want, and we don’t react to the latest crisis. I got some good advice some years ago – which, of course, I haven’t followed – to find some time to look out of the window and think.

This is, inevitably, a counsel or perfection. It would be nice to find the time to get things done properly but today’s crisis is….. But, if you don’t start, you certainly won’t get there. So, why not come into our office for a coffee and at least get what should be done onto a piece of paper. The tasks can then be prioritised and, if they can’t all be done this year, let’s make sure that this time next year there is at least one less on the list.

Good idea? Unless, of course, you want all that hard earned money to go to lawyers or accountants…!

franchising

Franchising: the franchisee’s guide

Removing the mysteries

Franchising is a great way to carry on business – and there are many more businesses “out there” that are franchises than are generally known to be. So, what’s it all about?

At its simplest, franchising is a way of you getting into business quickly, by using the ideas, etc of another business. Let’s say that a company sells goods (widgets) in Towns A and B. They want to open in Towns C, D & E, and can either do that themselves or create franchises so that someone else can open there.

As a franchisee, you get:

  • Exclusivity for a defined geographical area (by map or post code) – and that’s why franchising is harder to get right for virtual (rather than physical) sales.
  • A contract (or the like) setting out your rights and theirs – such as:
    • Purchases of widgets only through the franchisor
    • Other things you have to pay: lease costs, marketing or whatever
    • What the franchisor has to do – doing the marketing for example
    • How long things last for
    • What happens if things go wrong, and
    • Most importantly, what you pay to get the franchise.
  •  And all the paperwork will be standard form because the franchisor won’t want to have to remember doing differing deals for different people. It follows that negotiating of “special” rights is usually somewhere between difficult and impossible. That’s one of the reasons why we tend not to suggest that prospective franchisees waste scarce cash on arguments that they are not going to win – but instead make sure that they are fully informed before they “sign up”.

But, bear in mind that the franchise fee (or whatever) is payable throughout the life of the franchise. So, there is no point grumbling about paying it 10 years after you start because by then you know it all. Your options are:

  • Sign up and pay, and by doing so get into business quickly, or
  • Don’t sign up and don’t pay, but get into business slowly.

In some ways, the franchise fee can be looked at as the alternative to doing your own marketing and watching sales build up over time.

We’ve done a lot of franchising work in the last 20+ years, so have a good feel for what works – and what doesn’t. So, if you are interested in having a chat about this whole area, get in touch.

 

International law from CCW

Avrio in Amsterdam

So, why did 75 odd (yes – some very odd) lawyers and spouses/partners meet at the start of October in Amsterdam?

Well, obviously, for the beer, jenever (Dutch gin) and haaring (raw herring, Dutch style – better with every jenever taken…). But, from what I can remember (after all that jenever) it was a very successful meeting of Avrio Advocati, the international legal group where we are the only Scottish members. We talked quite a bit about how all markets, but the legal market in particular, are changing quickly – and how things might look completely different in 5 years’ time.

That seems to be particularly the case in terms of employment/engagement (and expect to hear more on this from Donna in the future). According to the Dutch academic addressing us, people now can expect to have multiple jobs, both consecutively and concurrently – but also that people may be hired by project. I’m still trying to come to terms with what that means for career development, employment related benefits (just think of health cover in the US) and so on. If anyone thinks, they know – let me know.

As important as the formal part of the meeting was, the informal part was excellent. That’s where we really get to know our colleagues – and that’s important for you, because if I have to refer your problem to one of my colleagues I think it important that you know the person responsible for your work. My experience is that, bad as it is having to deal with lawyers (the kind, cuddly people that we are…) it is much more stressful to have to do that in a strange place and another language. So, if we can help by introducing you to the people and practice, that should help.

So, please look on our friends in Avrio as a resource for you to use: only a few of them really bite!