Commercial Client Reference Articles

Tips for Business Borrowers

With the economy improving, businesses will be thinking about financing the expected expansion of trade. Borrowing cost often dominates the thinking, but it isn’t all about the cost of the loan. In order to negotiate the right deal, here are some tips on other things to think about:

Borrowing Generally

•Make sure your lending proposition stands up on a cash flow as well as a profitability basis, and be able to defend your sales forecasts;
•Overdraft or loan? With an overdraft, you pay interest only on the amount you borrow plus an annual renewal fee – if the bank agrees to renew your overdraft. With a loan, you pay interest on the whole sum from day one, but normally at a lower rate, and the loan cannot normally be recalled. Many loans have, in effect, penalties built in for early repayment. It is common advice for ‘hard core’ borrowing and borrowing to finance assets to be by way of a loan and for overdrafts to be used for short-term borrowing;
•Don’t forget to read the small print. It may one day be important to understand fully the legalities. Don’t just sign the loan agreement and hope for the best – take advice first;
•If you are borrowing to finance increased sales, factoring or invoice discounting may be for you. These agreements are complicated and often impose significant extra accounting costs, but can be a good way of reducing risk;
•If you are self-employed, the lender’s ‘long stop’ is you and your assets. Take advice on how to minimise your risk before you borrow;
•If you are worried about being able to stay within your overdraft limits, it is often worth borrowing on loan to make sure you do: penalty charges and interest rates on unagreed overdrafts can make them a very expensive way to borrow;
•You may be tempted to use your credit cards for finance. This can be very risky as if you incur interest charges on a credit card, these will be much higher than for normal commercial lending – and you won’t get tax relief on the borrowing;
•Never borrow from an individual (particularly friends or family) unless you have a proper legal agreement in place (or want to risk a falling-out); and
•Remember that the greater your exposure in respect of any loan, the less ‘spare credit’ you will be regarded as having for other borrowing.

Company Borrowing

If you are borrowing for a company, the following should also be considered:

•Whether you are prepared to give a debenture for the loan. A debenture will give the bank security over all the company’s assets. This improves the bank’s security but makes missing loan repayments dangerous, as the bank will have the right to appoint an administrator. Giving a debenture may reduce the cost of the borrowing, however;
•You may be asked to give a personal guarantee. Take advice before agreeing. Again, your assets are on the line; and
•If you borrow money personally and put it in your company, tax relief on the interest might not be available. This can make a cheap loan quite expensive after tax.

Borrowing sensibly isn’t just a matter of signing an agreement, taking the cash and making repayments. Negotiating loan finance successfully is easier if you are advised by experienced professionals who fully understand the legal implications of the documents you will be asked to sign.

Nore interest rates are expeected to rise in 2018, so borrowing that is marginal now may be too expensive later on.

GDPR General Principles

The General Data Protection Regulation (GDPR) applies detailed provisions to ensure that personal data – i.e. any data relating to an identifiable person – is properly processed and kept secure, and imposes a significant compliance regime on those who hold such data.

Key to the GDPR is the concept of 'data protection by design', so that data protection risks are considered at all steps of data handling and storage.

The GDPR builds on the existing data protection principles, as set out in the Data Protection Act 1998, but also makes significant changes, imposing stricter rules concerning the holding and management of data and also the use of personal data for commercial purposes. There are substantial rights given to individuals as to how information about them is collected and held.

The key principles are that the processing of personal data must be lawful, fair and transparent. This means that only the minimum necessary amount of personal data must be collected and only for specified, explicit and legitimate purposes. The data must be accurate and kept up to date, with access to it and use of it restricted to only those personnel who are necessary for the purpose, and it must be retained for no longer than is necessary and kept secure.

The most significant addition is the 'accountability principle', whereby data controllers must keep records to demonstrate how they comply with the data protection principles – for example by documenting the decisions taken about a processing activity.

The ICO's office has published a guide and checklist for complying with the GDPR. The requirements are substantial for organisations of all sizes and the potential fines for failure to adhere to data protection law are extremely severe.

Company Formation Checklist

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

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

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

Check that any proposed name for the company is allowable;

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

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

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

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

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

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

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

HMRC can provide the employer's PAYE pack. The introduction to PAYE is here.

Employers are required to provide a (contributory) pension scheme for all employerrs who earn more than £10,000 per year who do not opt out.

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

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

Insolvency and Pre-Packs

Legislation on insolvency enacted in the Small Business, Enterprise and Employment Act 2015  affect directors of companies that become insolvent.

The Act added two new grounds for disqualifying a person from being a director of a UK company and broaden the range of review of the past conduct of a director and the 'harm done' as a result of an insolvency. In 2016 Parliament issued a research briefing on the operation of pre-packs and setting out the need to comply with best practice when undertaking pre-pack sales out of administration.

What will be particularly worrisome for directors, and which should be of particular concern to those – including non-executive directors – who do not take an active and inquiring role in the management of the company, is that the Secretary of State has enhanced powers to make directors personally responsible for losses suffered by creditors in appropriate circumstances.

The Government has also made it known that it will consider implementing further changes that will affect 'pre-pack' sales of insolvent companies if voluntary measures currently in place do not prove to be successful in curbing abuses.

What follows below is a snapshot of some of the more important ones.

  • A new regime for the conduct of creditors' meetings is to be introduced, the practical effect of which will be that the proposals of the insolvency practitioner as regards the insolvent entity will be deemed to be accepted unless ten per cent of the creditors (by value) object. A formal meeting will not be held unless requested by at least ten per cent (by value or number) of the creditors.

  • Administrators will be given the same powers as liquidators of companies to bring claims for wrongful or fraudulent trading.

  • Directors of insolvent companies are at increased risk of having compensation orders made against them and face an extension to the period – from two years to three – within which an application to disqualify them from acting as directors can be brought. Compensation orders can also be brought against non-directors who advise a director who becomes disqualified.


Insolvency practitioners who overstep the mark when arranging pre-packs (typically transferring assets for less than a value the creditors think is fair) can face sanctions from the courts, which seem to be taking an increasingly dim view of perceived sharp practcie.

Bank Deposit Protection Rules for Businesses : Guide

The levels of protection available for different investments underwritten by the Financial Services Compensation Scheme (FSCS) are detailed on their website.

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

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

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

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

There is temporary cover of up to £1million for temporary high balances (e.g proceeds of a house sale) with a bank, building society or credit union that fails.

If the customer has deposits at and loans from the same bank. These are now  'netted off' for the purposes of compensation, which will improve the position for some customers. However, since companies and their directors are separate people in law, netting off would not occur in these circumstances.

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

GDPR Documenting Processing Activities

Article 30 of the EU General Data Protection Regulation (GDPR) contains explicit provisions that require organisations to maintain internal records of their data processing activities.

This obligation reflects the increased importance of accountability and the need to ensure (and demonstrate) that your organisation processes personal data in line with the GDPR. 

Most organisations must document their processing activities to some extent. Both data controllers and data processors have their own documentation obligations, but controllers are required to keep more extensive records than processors.

The scope of the exemption from documentation is still under consideration. Under the current guidance, organisations with 250 or more employees will be required to document all their processing activities. Smaller organisations must do so where the processing is not occasional, where it is likely to result in a risk to the rights and freedoms of data subjects or where it includes special categories of data. The latter largely refers to what is currently termed 'sensitive personal data' under the Data Protection Act 1998, but also includes genetic and biometric data when this is processed in order to uniquely identify an individual. Similar extra safeguards apply to the processing of personal data relating to criminal convictions.

The Information Commissioner's Office (ICO) has published detailed guidance on documentation. This explains how maintaining up-to-date records of data processing activities can assist in complying with other elements of the GDPR, such as drafting privacy notices, responding to access requests and ensuring the personal data you hold is relevant, accurate and secure. Knowing precisely what data you hold will also support good practice in data governance and increase business efficiency.

The ICO's guidance on documentation can be found on the ICO website.

The GDPR comes into effect on 25 May 2018.

Contractors Are Your Responsibility

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

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

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

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

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

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

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

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

As of then end of 2017, fewer then 30 prosecutions had been commenced under the Act - all against smaller companies - and successful prosecutions obtained in all cases so far decided. Fines of up to £700,000 have also been imposed.



Age Discrimination and Retirement

Since the abolition of the Default Retirement Age (DRA) in 2011, it is not permissible for an employer to dismiss an older worker on the ground of retirement unless this can be objectively justified under the Equality Act 2010.

This does not mean that employees will never be able to retire, but that an employer cannot lawfully force an employee to retire at a set age unless the age can be objectively justified under the Equality Act. If this is not possible, the employer faces the double threat of a claim for age discrimination and for unfair dismissal.

Employers therefore have two options. These are:

  • not to have a set retirement age and use other dismissal options where necessary; or
  • to use an Employer Justified Retirement Age (EJRA).

For a set retirement age to be objectively justified, its use must be a proportionate means of achieving a legitimate aim. This is not an easy test to pass, and businesses who do wish to have in place an EJRA are advised to seek legal advice before choosing this option. An EJRA will normally be appropriate for occupations where retirement at a particular age can be justified on health and safety grounds – for example for airline pilots or fire fighters. Employers must provide evidence that the chosen EJRA is necessary – not based merely on assumptions – and be able to demonstrate that no alternative or less discriminatory action could achieve the same result. Employers who choose to use an EJRA must follow a fair procedure, giving the employee adequate notice of their impending retirement and, if circumstances permit, consider any request to work beyond the EJRA as an exception to the normal policy. However, it is important to have procedures in place to ensure consistency of treatment of employees who request to stay on.

Older employees can retire voluntarily at a time of their choosing and draw any occupational pension to which they are entitled under the rules of the scheme. If an employee has given formal notice that they wish to retire, the employer is under no obligation to permit them to withdraw their notice should they change their mind. If, however, an employee has only told their employer that they plan to retire, they can change their mind before formal notice is given.

Great care must be taken if an older employee is performing badly. Procedures for dealing with performance issues must be fair and applied consistently across all age groups. To avoid a claim of unfair dismissal, any dismissal must be for one of the potentially fair reasons for dismissal under the Employment Rights Act 1996. Care must also be taken that any decisions taken by the employer do not discriminate against an employee who has a condition that constitutes a disability under the Equality Act. In such cases, the employer has a duty to make reasonable adjustments to remove any barriers to the employee’s performance.

Group risk insured benefits are exempt from the principle of equal treatment on the grounds of age, so employers who provide such benefits can cease to provide or offer them to employees who reach the State Pension Age, even if they continue to work beyond that age. The age at which group risk insured benefits can be withdrawn will increase in line with increases in the State Pension Age.

In addition, under the pensions auto-enrolment rules, employers are not obliged to enrol workers who have reached the State Pension Age.

Whilst the abolition of the DRA has given employees greater choice and flexibility over when to retire, the move has been criticised as having a negative impact on an employer’s ability to plan workforce requirements to meet future business needs.

The Advisory, Conciliation and Arbitration Service has published guidance for employers, entitled ‘Working Without the Default Retirement Age’, which contains useful advice on a possible framework for workplace discussions that will help identify an employee’s future aims, and gives examples of ways of raising the issue of retirement without asking questions that could be seen as discriminatory.

Drug Policy - Recognising the Signs and What to Do

Substance abuse amongst staff can affect all areas of employment, whether it be a decrease in productivity, increased absenteeism or the increased likelihood of accidents and injuries. The failure to identify and deal with a problem is an unnecessary risk for businesses and can prove costly.

The Law

The Misuse of Drugs Act 1971 makes it an offence for any person to permit the production, supply or use of controlled drugs or substances on their premises, unless they have been prescribed by a doctor.

Employers also have a general duty under health and safety legislation to ensure, as far as is reasonably practicable, the health and safety and welfare at work of their employees and to make sure that no one else is put at risk as a result of the work activities of an employee.

Under the Management of Health and Safety at Work Regulations 1999 employers have a duty to assess the risks to the health and safety of their employees. If you knowingly allow an employee to carry on working whilst under the influence of drugs and this puts others at risk, you could be prosecuted.

Health and safety law applies to driving activities as it does to other work activities and the risks must be managed accordingly. Drivers must not be under the influence of drugs while driving, attempting to drive or when they are in charge of a vehicle. In addition, the Crime and Courts Act 2013 (Commencement No 1) (England and Wales) Order 2014, which came into force on 2 March 2015, makes it a criminal offence for a person to drive with a concentration of any specified controlled drug above the maximum specified limit for that particular drug.

What to Look Out For

Possible signs of drug misuse include:

  • impaired performance such as lack of concentration, a tendency to become confused and poor judgement;
  • sudden mood changes and unpredictable behaviour;
  • poor time-keeping;
  • unusual irritability and deteriorating relationships with others;
  • lower personal standards – self-neglect;
  • increased time off work;
  • dishonesty and theft.

There may, of course, be other reasons for such behaviour patterns but it is sensible to consider the possibility that misuse of drugs could be the cause.

What to Do

Even if you are confident that your business does not currently have a problem, drug misuse that affects the workplace is a growing threat. It is advisable to have an agreed, written policy setting out the company’s position.

Employees should be well informed as to the policy and know that it applies to everyone in the company. It should form part of your overall health and safety policy. Make sure you consult with employees and with safety representatives.

The policy should include a definition of drug misuse, have clearly stated aims, name the persons responsible for carrying out the policy and give clear guidelines as to what employees must do to comply with the rules.

If an employee suffers from drug addiction, you should support them, not punish them. Offer them counselling and encourage them to seek voluntary help. Addiction could be viewed as an illness in an unfair dismissal case so disciplinary procedures may not be appropriate. The policy should contain a statement assuring employees that problems will be dealt with in confidence, subject to the provisions of the law. It should, however, be made clear that a breach of the law (for example the possession of or dealing in substances that are controlled under the Misuse of Drugs Act in the workplace) will be reported to the police immediately. Make clear the circumstances in which disciplinary action will be taken.

It is important to train key staff to be aware of the signs of drug misuse and how to handle the situation sensitively.

Review your policy regularly and check that it is widely understood. If you have a staff handbook, it should contain details of the policy. Make awareness of the policy a part of the induction programme for new employees.

Where it is justified, some employers screen employees for illegal substances as part of their drug policy, particularly in safety critical industries. With the widespread advance in non-intrusive methods of testing, this is likely to become more common. However, this is a very sensitive area because of the legal issues involved and we would recommend you take advice to ensure there is no breach of your employees’ rights. Also, the results of any drug tests must be handled in accordance with the Data Protection Act 1998.

Psychoactive Substances and Your Workplace Drug Policy

The Psychoactive Substances Act 2016 makes it an offence to produce, supply, offer to supply, import or export any psychoactive substance if it is likely to be consumed for its mind-altering properties. There is a list of exemptions, which includes legal substances that are in everyday use, such as nicotine, caffeine and alcohol, and medicines, which are regulated elsewhere.

The substances targeted by the Act usually contain one or more chemical substances which, when consumed, imitate the effects of illegal drugs controlled by the Misuse of Drugs Act. Prior to the ban, these substances were frequently referred to as 'legal highs'. They often contain ingredients that have not been tested on humans and so their effects are hard to predict. As such substances are not generally intended for human consumption, they have frequently been marketed as bath salts, incense or plant food. The drugs have three main effects – as stimulants, sedatives or hallucinogens.

Possession of a psychoactive substance is not in itself an offence, except where it occurs within a 'custodial institution' – i.e. a prison, young offender institution, remand or removal centre etc.

The Advisory, Conciliation and Arbitration Service (Acas) advises employers who do not already do so to include the use of psychoactive substances in their workplace drug and alcohol policies. As screening for their use can be difficult, Acas suggests focusing on the effects of such mind-altering substances on employees' behaviour and ability to work, rather than on the drugs themselves.

Dealing with Employee Absence

Employee absences can be both costly and disruptive for businesses.

According to the Chartered Institute of Personnel and Development's 2016 annual survey report on Absence Management, on average people were absent from work for 6.3 days in the year, compared with 6.9 days per employee in 2015. However, absence rates vary considerably within and between different sectors.

Stress was the most common cause of long-term absence, and the second most common cause of short-term absence – after minor illness. Workload, non-work factors and management style were again reported as the top three causes of stress at work. In addition, a quarter of the organisations surveyed reported that non-genuine absence was one of their top five causes of short-term absence.

More organisations are recognising the important part line managers play by giving them primary responsibility for managing employee absence. However, this awareness was not matched by support by way of initial training or tailored ongoing support for the role.

Overall, the survey findings suggest that addressing long hours' cultures and an increased focus on workers' well-being are among the steps employers need to take if they are to reduce employee absence.

Clearly, it is advisable to have systems in place to measure and analyse these costs so that you can identify problem areas and tackle the possible causes. Are there patterns of absence? Does a particular department have a below average record?

Unhappy, demoralised employees are more likely to take time off work. Workplace stress is a common cause of long-term sickness among non-manual workers. Creating a friendly working environment, where staff feel valued as part of a team and where flexible, ‘family friendly’ policies are in force is likely to pay dividends, keeping absenteeism to a minimum.

To manage absence effectively, make sure staff are well informed as to your sickness policy and procedures. Make sure these are seen to be followed and keep accurate records. These must be kept for at least three years after the appropriate financial year-end.

Where line managers are primarily responsible for overseeing employee absence, make sure they are trained in all aspects of absence-handling and have ongoing support, such as online support or a care conference with the Human Resources department, so that they are able to handle what can be difficult conversations with staff in a sensitive manner.

When hiring new staff, make sure you check their attendance record with the previous employer. If new staff are absent it is good practice to make sure you know if there are problems preventing them from settling in. How staff are treated in the first weeks of a new job is vital. Inadequate training can leave them feeling disillusioned.

It is sensible for employers to ensure that contracts of employment allow them the right to get an independent medical assessment in the event of an employee taking more than a few days off work. You may consider requiring all potential employees to undergo a medical examination with an occupational health adviser.

As a matter of company policy always carry out a ‘return to work’ interview. This may range from ‘hope you’re better, we missed your contribution’, to an identification of underlying problems that will affect your management strategy. It may also deter malingerers.

Long-term sickness must be handled sensitively. You must have an employee’s permission to apply for a medical report. It is vital to keep in touch so that the employee doesn’t feel isolated. Consider referring them to an occupational health specialist. This can identify ways of helping them return to work and give you information as to how long the absence is likely to last.

Disciplinary action for unacceptable absence must be distinguished from dismissal on health grounds. Employers need to be aware of the full range of conditions that count as a disability for the purposes of the Equality Act 2010. Where an employee is suffering from a condition covered by the Act, reasonable adjustments must be made to help them return to work. Care must also be taken to avoid a claim for unfavourable treatment 'because of something arising in consequence' of an employee's disability.

As regards the accrual of holiday pay when a worker is on long-term sick leave, workers have the right to carry forward four weeks of their statutory holiday entitlement to the next leave year if they are unable to take it or choose not to do so in the current year owing to long-term illness. However, the leave, or the right to payment in lieu of that leave, will be lost if it is not taken within 18 months of the end of the relevant year in which the entitlement to that leave accrued.

Dealing with long-term absences, in particular, is a difficult area of the law. Each case must be decided on its own merits and proper procedures must be followed. Employers who have not done so for a while are advised to review stress management and long-term absence policies and procedures so that potential problems are identified early on and remedial action is taken as soon as possible.

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