Talking Business podcast: key changes to corporate law in 2021

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In this episode host, Sophie Brookes provides an update on the latest developments in corporate law focusing on what changes will be coming up in 2021. Topics that will be covered in this months update include the impending changes to Companies House processes, the potential ban on corporate directors, the new rules for off-payroll workers and much more!

In this episode:

  • We look at the changes to Companies House processes that are coming into force in 2021;
  • The ban on corporate directors which might come into force later this year;
  • We look at the new rules for off-payroll workers;
  • We explore the changes to non-compete clauses in service contracts in the future; 
  • We flag the National Security and Investment Bill, which is currently working its way through the parliamentary process.

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This episode is part of our Talking Business podcast series. Learn more about the series and what we cover. This podcast is available on SpotifyApple Podcasts and Google Podcasts.

Read the transcript:

Sophie Brookes:  Welcome to Talking Business, your straight talking guide to dealing with corporate matters, whether you are a private or public company, an owner-managed business, or an entrepreneur, a director, company secretary, or in-house counsel, this is the podcast for you. My name is Sophie Brookes and I'm a partner in our corporate team. I was a transactional lawyer for a number of years before becoming a professional support lawyer, which means I'm now responsible for know-how across our corporate team. Each month I'll provide an update on the latest developments that matter to you, and we'll be joined by an expert to take a deep dive into a key corporate law topic.

So in this episode, we thought we'd do a bit of forward thinking and have a look at things that could be coming up in 2021. So first up, following a consultation last year, it's likely that we're going to see some changes to Companies House processes. The various proposals are aimed at enhancing the role of Companies House and increasing transparency of UK corporate entities. So one of the key proposals relates to identity verification, with the government saying that it's going to build this into the incorporation and filing processes run by Companies House.

So identity verification is going to be required for company directors, for PSCs, that's persons with significant control over the company, and also for those filing information or presenters. We don't actually yet know exactly what form the identity checks are going to take. But the government has said that it's going to develop a digital verification service using leading technology. Although it has actually said, as well, that there's going to be an alternative non-digital method for those unable to provide that identity electronically.

The government expects the majority of verifications to be conducted through digital processes, and that for most individuals, that process is only going to take a matter of minutes. The good news is that the information provided by individuals to Companies House to verify their identity is not going to be publicly available, but access to it could be provided to law enforcement officials on a case by case basis. If a person fails to verify their identity, then the usual outcome will be that the intended action can't proceed. So for example, a director's appointment won't proceed or a presenter won't be able to file the relevant information. The new regime has a particular focus on directors, with all company directors having to verify their identity with Companies House before a company can be incorporated or a director appointed. So identity verification is going to have a fundamental change on the appointment process for directors, with the appointment effectively being conditional on identity verification.

So the process will be that a director will be chosen by the company, Companies House will then be informed. Companies House will verify the director's identity, and then Companies House will register the director. And at that point, the director is actually appointed at Companies House, which affects the appointment of a director and not the passing of a board resolution, which is generally the current position. So companies are going to need to take that into account in their processes, making sure, for example, that new directors don't sign documents for the company until their appointment has actually been confirmed by Companies House. On acquisitions, the proposed new directors of the target should open a Companies House account and get their identity verified in advance so that their appointments can be immediately confirmed at completion and the company isn't kind of left stranded without any directors when the sellers resign.

Companies House has also said that the new identity verification requirements are going to be applied to all live registered companies. So the good news there is that there's going to be a transitional period during which current company directors and PSEs will be allowed to carry on their current role and open a verified account with Companies House. But once that transitional period has expired, unverified individuals are going to face compliance action and even possibly prosecution. So the government published its response to this consultation on the reforms late last year, and although no a timetable is yet being set, it does seem likely that these measures will be finalized and come into force at some point during 2021.

Okay, so moving on. More than six years after it was first proposed, it looks like the ban on corporate directors might finally come into force later this year. So a corporate director refers to one company, rather than an individual, being appointed as a director of another company. So the ban is another part of the government's drive to increase corporate transparency and crack down on corporate crime. There's evidence that using corporate directors in this way can muddy the waters around company ownership and kind of provide a screen behind which individuals can carry on illicit or illegal activities.

So although the ban was included in the Small Business, Enterprise and Employment Act in 2015, the relevant provisions haven't actually been implemented yet, but it seems that this is now back on the government's agenda with a recent consultation setting out a suggested exception to the general ban. Under this exception, a company could be appointed as a director if all of its directors are individual natural persons, and before that corporate director is appointed, its individual natural person directors are subject to the new Companies House identity verification process that I've just discussed.

These new requirements would apply equally to both UK and overseas corporate directors. So if a UK company wants to appoint an overseas company as a corporate director, it would have to provide evidence to Companies House that the overseas entity has only individual natural persons as its own directors, and that those directors would then also need to have their identities verified. If a company does appoint a corporate director under this proposed exception, then it's going to be under an ongoing obligation to take reasonable steps to confirm that the corporate director continues to have all individual directors itself, so it continues to fall within that agreed exception. And the company is going to be required to confirm that it believes that to be the position in the annual confirmation statement that it has to file at Companies House.

So the consultation on this exception closed in February, and we're waiting to see what the outcome is and when the ban is likely to be brought into force. If your company already has a corporate director, then the good news is that the government has previously said that there would be a 12-month implementation period, during which existing companies with corporate directors would be required to comply with the ban, either by removing the corporate director or by ensuring that the corporate director falls within the agreed exception by itself having only individual directors whose identity has been verified.

So that's it for some of the proposals on improving corporate transparency. Let's move on and have a look at some new rules for off-payroll workers. So basically from the 6th of April this year, the changes to the off-payroll working rules for private sector organizations, which were originally planned for April 2020, are going to come into force. They were delayed effectively because of the effects of the coronavirus pandemic. So the revised rules impact how contractors who are engaged through intermediary personal service companies are taxed, and they're going to impose a greater administrative burden and potential liabilities on the companies that engage them. The new rules are known as IR35, and they're designed to ensure that contractors who would have been employees if they were providing their services directly to the fee-paying organization, pay broadly the same tax and National Insurance contributions as employees.

So the key kind of simple test for IR35 is, would a contractor be an employee if they were engaged directly rather than via a personal service company? If so, then the contractor is going to be within IR35. So when you're determining a contractor's IR35 status, you have to look both at the terms of the actual written contract in place with the personal service company, but also at the sort of hypothetical contract between the contractor, individual, and the fee payer, i.e. what actually happens in practice.

There are various different factors that are relevant to determining the tax status of a contractor, such as the requirement for personal service by the individual contractor, the degree of supervision, direction and control that the fee payer has, the extent to which the contractor is integrated into the fee payer's organization, the level of financial risk taken on by the contractor, and also things like whether the contractor supplies their own equipment.

Also, IR35, it works on an engagement by engagement basis. So you've got to make that status determination for each engagement, even if it's actually where the personal service company that has been engaged previously by the fee-paying organization. So the key change that's going to apply from the 6th of April 2021, is that the hiring organization, so basically the fee payer, is going to be responsible for determining the tax status of any contractors engaged through an intermediary personal service company, and whether they fall within IR35. And where they do, and so they're basically deemed to be employed for tax purposes, well, then HMRC will seek recovery of tax and National Insurance contributions from the fee payer in the first instance. So the primary tax burden basically shifts from the contractor and their personal service company to the fee-paying entity.

So the new rules are going to apply to public and private companies that are large or medium-sized companies for accounting purposes. So they're not going to apply to small companies or micro-entities. If you are a large medium-sized company and you haven't already done so, then you should be reviewing all arrangements under which contractor's services are provided to your organization to see if they will be caught by the new rules. Often, contracts with personal service companies contain an indemnity from the contractor in that company to the fee payer for any tax which might become due in connection with their appointment. But remember, an indemnity is only ever as good as the person or entity sitting behind it. And under the new rules, the primary responsibility for those considered employees will now fall on the fee payer. So the fee payer would have to pay HMRC and then try and recover that payment, that amount, from the contractor, if it can. There's a dedicated page on preparing for IR35 on our website. So if you have a look under the how we help tab on gateleyplc.com, you can find out more there now.

Now, while we're on the subject of workers and employees, we might see some changes to non-compete clauses in service contracts in the future. So recognizing that the COVID-19 pandemic has had a significant impact on the labour market and that there's probably a need to boost innovation, increased competition and create new jobs, the government's consulting on possible reforms to non-compete clauses in employment contracts. And there are basically two key proposals here. So the first would see the enforceability of non-compete clauses being made conditional on compensation being paid to the employee for the period in which they are unable to compete. According to the consultation, that apparently is the approach already taken in various countries, including Germany, France, and Italy. The government thinks that this could help discourage employers from a blanket insertion of non-compete clauses into all employment contracts, making sure that employers limit their use to where they are really necessary.

It could also potentially help reduce litigation if former employees are less inclined to breach the restrictions placed on them when they're being compensated for the restricted period. So the consultation asks what the appropriate level of compensation might be, suggesting this could be a percentage, perhaps somewhere between 60% and 100% of the employee's pre-termination average weekly earnings. So the alternative and far more controversial proposal is to make all non-compete clauses in employment contracts void and unenforceable. So the government suggests that maybe this would provide certainty for the parties, and also make it easier for individuals to start new businesses, which would itself enable a spread of skills and ideas between companies and regions and increase labour mobility. But the government does recognize that restrictions do help employers to protect their legitimate business interests and prevent an employer being harmed through, for example, the misuse of their confidential information.

Non-compete clauses are routinely used to prevent employers suffering from competitive activities by former workers, so I think the radical change of an outright ban is probably unlikely. And if either of the proposals are to be adopted, then I think the more likely outcome is to require some form of compensation payment. So I think this is one to keep an eye on, but it's probably going to be a while before any change is actually introduced if at all. Also, it's worth noting that the current consultation is limited just to non-compete clauses, but it does ask whether it should be extended to other forms of post-termination restrictions, such as non-poaching, non-solicitation and non-dealing provisions. It's also limited purely to restrictions in employment contracts. So similar provisions, which we often see in commercial contracts, such as acquisition or investment agreements, shouldn't be affected by this consultation.

Finally, I thought it was worth flagging the National Security and Investment Bill, which is currently working its way through the parliamentary process, because it is going to introduce broad new powers for the government to intervene in transactions that give rise to national security concerns. So there are three key features of this proposed new regime. The first is a mandatory notification regime for some transactions in certain specified sectors. So a transaction in one of those sectors which meets the relevant criteria cannot complete until clearance has been given by a new investment screening unit. If a relevant transaction completes without that clearance, then it will be void. So the second feature is a voluntary notification regime, and this is going to apply for certain transactions which might give rise to a risk to national security. So this is in relation to transactions which are outside the 17 specified in the mandatory notification regime where those transactions meet certain criteria.

The key thing is whether there is a risk to national security in relation to that transaction, but rather unhelpfully that hasn't actually been defined. So at the moment, the government has pretty wide powers to interpret that as it wants. The third feature of this new regime is call-in powers, under which the government can review transactions which should or could have been notified under either of those other regimes, so under either the mandatory notification regime for the 17 specified sectors or the voluntary notification regime. A transaction, which is notified or called in for review will be considered by this new investment screening unit, which is currently being set up. So there's going to be an initial 30 working day period within which either clearance will be given or the transaction will be referred for a phase two investigation. That investigation will take another 30 days, and it could even be extended by a further 45 working days.

Then when you get to the end of the review process, either the transaction will be given unconditional clearance to continue, or it will be approved but subject to certain conditions, with those conditions being designed to minimize the risk to national security, or the transaction will be prohibited. So I think this new regime is going to mark the end of the UK's sort of light touch approach to foreign investment screening. That's what it's aimed at. It's aimed at catching overseas investments. But it's actually going to apply equally to both UK and foreign buyers. I think it's likely that we're going to see a significant increase in the number of notified transactions, and it's probably going to have a material impact, certainly at least on transactions within those 17 specified sectors and possibly other transactions as well. So we're going to take a more, in-depth look at that new regime and the practical effect it's likely to have on corporate transactions in a future episode.

Thank you for listening to Talking Business. To find out more about the series, please visit gateleyplc.com/talkingbusiness. When there, you can subscribe for all updates, meet our speakers, and get more information on all of the topics being discussed.

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