England and Wales operate a common law legal system. This means that the law develops by way of both statutory legislation and case law, which are regarded as equally weighted. For example, in England and Wales the laws of tort and contract are not grounded, for the most part, in statutory legislation and instead are established and developed in case law.
It is important to note that there is no unified legal system across the UK. Distinct from England and Wales, Scotland and Northern Ireland operate separate legal systems. For the purposes of this chapter of the guide, the authors will focus on the legal system of England and Wales.
Civil proceedings with a claim value of GBP100,000 (or GBP50,000 in the case of personal injury claims) or less are generally dealt with at local County Courts. Claims with a value in excess of these thresholds can be brought before the High Court.
Historically, the High Court has been divided into three divisions.
The work undertaken under Chancery Division has commonality with the work undertaken in the civil lists of the Queen’s Bench Division, such that the work is now grouped under the heading of the Business and Property Courts.
All criminal proceedings are first heard by the Magistrates' Court. While the Magistrates' Court will progress proceedings in the large majority of criminal cases (and magistrates are empowered to deliver, among other punishments, prison sentences), more serious indictable offences are likely to be referred to the Crown Court.
Cases referred to the Crown Court are heard by a judge and the trial is conducted, and ultimately decided, by jury. If the jury find an individual guilty, sentencing will be carried out by the judge.
The Court of Appeal hears appeals made from all divisions of the County Court, High Court and the Crown Court. Permission to appeal to the Court of Appeal is required. It is unusual for lower courts to grant such permission (as this would indicate that the judge accepts the decision may not be right), hence permission is usually refused and the applicant has to apply directly to the Court of Appeal itself. If permission is granted, the appeal will typically be heard by a three-judge court, with (normally) no fresh evidence being submitted (in the case of civil cases).
The Supreme Court is the final court of appeal in the UK for civil claims and criminal proceedings. Established in 2009, the Supreme Court is legally independent from the High Court and the Court of Appeal. As such, it hears appeals made from the courts of Scotland and Northern Ireland, as well as the courts of England and Wales. Permission to appeal to the Supreme Court is first dealt with by the lower courts and is typically only granted if the claim involves an arguable point of law of general public importance.
The UK constitution (largely unwritten and based on constitutional conventions) provides for a judiciary that is independent from government and politically impartial. For example, judges are selected for appointment by the Judicial Appointments Commission, an independent body.
The National Security And Investment Act (the NSI Act) received Royal Assent on 29 April 2021. The NSI Act is expected to come into force later this year.
The NSI Act introduces a new foreign direct investment and national security screening regime under which the UK government can call-in certain investments, transactions and other so-called "trigger events" (transactions) for review. Previously, the government had only been able to intervene in certain transactions that raise "public interest considerations", limited to matters of national security, the plurality of media (in respect of media mergers), the accuracy and freedom of expression (in respect of newspaper mergers) and matters relating to the maintenance of the stability of the UK financial system which are currently within the remit of the UK Competition and Markets Authority (the CMA).
Under the NSI Act, parties to transactions involving high-risk sectors will be required on a mandatory basis to notify and obtain approval from the Department of Business, Energy & Industrial Strategy (BEIS) prior to completing the transaction. There are 17 high-risk sectors which, as well as obvious sectors such as defence and energy, also include sectors focused on technology and innovation such as advanced robotics and quantum technologies. Detailed definitions of the high-risk sectors will be finalised in a series of statutory instruments prior to commencement of the NSI Act.
Parties to a transaction involving a sector which is not considered high-risk will have the option of notifying BEIS on a voluntary basis if they believe that the transaction may raise national security concerns. Further, BEIS can also elect to call-in and review a transaction on a unilateral basis.
The NSI Act will have retrospective effect, meaning that BEIS may call-in transactions that completed on or after 12 November 2020 for review for a five-year period once the NSI Act comes into force. However, once the government becomes aware of a transaction, it has six months to decide whether or not to call it in. This reduced six-month period also applies if the parties have brought the transaction to the attention of BEIS by way of informal notification on a voluntary basis before the NSI Act comes into force.
In all cases, BEIS has the power to investigate and order remedies in relation to transactions that it considers to be giving rise to national security concerns.
In addition to the protections under the NSI Act, certain sectors of the UK economy – such as water, electricity, gas and energy, aviation, nuclear and communications – are governed by specific regulations or by independent regulators. Approval of the regulator is often required for changes of control of regulated entities (whether through domestic or foreign investment) and the nationality of the acquirer may have an impact on this process.
The NSI Act introduces a statutory review timetable under which BEIS has up to 105 working days to review a transaction (longer in certain exceptional circumstances).
BEIS carry out an initial review within 30 working days following a mandatory or voluntary filing is made after which they will either clear the transaction or call it in for a full national security assessment. A full assessment will be carried out within 30 working days, subject to an initial extension of 45 working days. The clock can be stopped, extending the timetable further, if BEIS requires further information or materials from the parties in order to complete the full assessment.
Once BEIS has assessed the transaction, it may impose conditions on clearance. For example, BEIS can impose restrictions on access to commercial information or controlling access to certain sites or works. In the extreme, BEIS has the power to block completion of the transaction and, if a transaction has been completed, require that it be divested or unwound.
If an acquirer completes a transaction which is subject to mandatory notification without clearance, it may be subject to civil penalties comprising fines of up to 5% of its worldwide turnover or GBP10 million (whichever is greater); criminal penalties may also be incurred. Transactions subject to mandatory notification that take place without clearance will also be deemed legally void.
There are no specific commitments required from foreign investors beyond those that would be requested from domestic investors.
There will be an appeal process in the High Court (or the Court of Session in Scotland) for civil penalties and requirements to pay associated costs under the NSI Act. All other decisions under the NSI Act will be subject to judicial review proceedings. The government will be entitled to apply for a closed material procedure to protect sensitive information in all such proceedings.
Corporate vehicles in England and Wales can take various forms, including general partnerships, limited partnerships, limited liability partnerships, companies limited by shares (both private and public), companies limited by guarantee and unlimited companies. The form of vehicle the incorporating parties elect to use depends on the business being undertaken, the relationship between the incorporating parties and tax structuring. This chapter will focus on the most common forms of corporate vehicle, being companies limited by shares and limited liability partnerships.
Companies Limited by Shares (a "Company")
A company must be formed with a minimum of one shareholder and there is no upper limit on the number of shareholders a company can have. A company must have an issued share capital comprising of at least one share and each share must have a fixed nominal value. All companies must have articles of association (Articles) that govern the relationship between the shareholders and the company, and set out the corporate governance structure of the company as well as the responsibilities of the directors. Companies are subject to filing requirements and disclosure obligations that are principally set out in the Companies Act 2006 (CA2006).
A company can either be private, in which case the company’s shares are not allowed to be offered to the general public (limited companies), or a public company, in which case the company must have an allotted share capital with a nominal value of at least GBP50,000 and the shares can be offered to the general public, and, ordinarily, the shares are admitted to trading on a stock market (public companies).
Most companies are incorporated as limited companies that re-register as public companies if, and when, they choose to list their shares on a stock market. Limited companies are the most popular form of vehicle due to their flexibility and are normally seen as the preferred vehicle for small businesses, English subsidiaries of international groups and joint ventures.
Limited Liability Partnerships (LLPs)
An LLP combines the benefits of a company with the flexibility of a general partnership. An LLP is regulated, primarily, by the Limited Liability Partnerships Act 2000 and the CA2006. The participants in an LLP are referred to as its members. There is no limit on the maximum number of members; however, an LLP should have two appointed members at all times. An LLP must have at least two designated members who have particular responsibilities and functions within the LLP. Unlike a company, there is no need for an LLP to adopt constitutional documents; however, it is advisable for the members to adopt an LLP agreement to regulate the management of the LLP and the members’ rights and obligations.
LLPs are often used where a general partnership might otherwise be used, except the benefits of limited liability are required by the members (eg, solicitors and accountants). Unlike a general partnership, an LLP has its own separate legal personality and its members are not personally liable for debts and obligations of the LLP. However, like a general partnership, an LLP is (broadly) tax-transparent and profits are therefore taxed on the individual members in accordance with their entitlement to share profits.
The incorporation process of a company and an LLP both require documents to be filed with, and a fee paid to, Companies House. Companies House will then proceed to issue a certificate of incorporation and the company or LLP will appear in the companies register, which is publicly maintained by Companies House. The incorporation process is swift and can be completed within 24 hours, if same-day incorporation is selected.
For a company, the requirements are as follows:
For an LLP, the requirements are as follows:
Once the company or LLP has been incorporated, the vehicle should maintain a set of books and registers that include a register of members, a register of persons with significant control, a register of charges and, for a company, a register of directors.
Both a company and an LLP are subject to ongoing filing obligations. The following are examples of the type of documents that must be filed with Companies House, either on an annual or event-driven basis. The Companies House website provides a useful resource of forms that can be used to file information relating to the vehicle.
The following documents must filed in relation to a company:
The following documents must be filed in relation to an LLP:
If the company is a public company listed on a stock market, it will also be subject to the disclosure requirements under rules appropriate to the listing, such as the Transparency Rules, the Market Abuse Regulation and the Takeover Code.
There is a separation between the management and ownership of a company. The directors are responsible for the day-to-day management of a company, while the shareholders are the owners. The roles are not exclusive and shareholders can also be appointed as directors.
The Articles commonly provide for the remit of powers of the directors and the rights of shareholders. The CA06 sets out further rules and procedure – for example, requiring that particular matters be approved by the shareholders, such as amendments to the company’s Articles, certain transactions involving directors and amendments to the company’s share capital.
No LLP legislation in England and Wales prescribes a particular management structure that must be adhered to by an LLP. Hence, one of the main advantages of an LLP structure over a company is that it has more organisational flexibility at an operational level. The default position is that there is no separation between management and ownership as the legislation prescribes for each member to have a right to take part in the management of the LLP. The negotiation of the LLP agreement between members and the allocation of designated member/member roles would enable participants in an LLP to determine the rights, roles and obligations available to each participant.
A company has a separate legal personality from its shareholders. A shareholder’s liability is generally limited to the amount that remains unpaid on that shareholder’s shares. However, the principle of shareholder limited liability can be eroded if, for example, a shareholder accepts direct contractual liability to a third party by providing a guarantee. Furthermore, in certain circumstances the courts may be prepared to disregard the company’s separate legal personality and fix liability on the shareholders, known as "piercing the corporate veil". The courts typically only pierce the veil when a shareholder has deliberately used the fact that a company has a separate legal personality as a device or facade to conceal or avoid liability following the shareholder’s wrongdoing.
The CA2006 provides that directors may be held criminally liable for a number of offences under the CA2006 (for example, failing to make certain filings) and codifies the duties of directors to limit the abuse of their power. These duties include the duty to act within powers, the duty to exercise independent judgement and the duty to avoid conflicts of interest. The CA2006 also provides that any provision that seeks to exempt or limit a director from any liability for negligence, default, breach of duty or breach of trust in relation to a company is void. A company may indemnify a director in respect of certain costs and expenses relating to proceedings brought by third parties but other indemnities from the company are customarily void. This being the case, most companies maintain directors’ and officers’ liability insurance cover.
As mentioned above, an LLP also has a separate legal personality from its members. The members act as its agents and are generally only liable up to the amount they have contributed to the LLP. However, the members may agree to contribute to the LLP's assets on its winding-up. Anyone lending money to the LLP (such as a bank) may still require personal guarantees from the members, as they frequently do with shareholders in a limited company. The principle of piercing the corporate veil also applies equally to LLPs.
Employment laws and obligations in the UK derive from a variety of legal sources, including:
Collective bargaining agreements (CBAs) entered into between trade unions/employee representative bodies and employers are less prevalent in the UK than other jurisdictions. However, collective bargaining can occur with a trade union that is recognised by the employer and, subject to satisfaction of certain requirements, a CBA may contain terms that become incorporated into individual employment contracts.
Under UK law, an individual may be an employee, a worker, or self-employed. The distinction is important, as it determines that individual's statutory employment rights (if any) and how he or she is taxed. Employees receive the full range of rights, while workers only receive certain core protections.
Importantly, assessing an individual's status is not just determined by how the parties label the relationship. It is a question of law and fact.
An employee is an individual who has entered into, or works under, a contract of employment. A contract of employment may be in writing, but can also be found to exist verbally or by virtue of how the relationship between the employer and employee operates in practice. The contract of employment will also include implied terms – most notably, a term that neither party will do anything calculated or likely to destroy the mutual trust and confidence necessary in an employment relationship.
In determining whether an individual is an employee, an employment tribunal will assess his or her integration into the organisation, considering, in particular:
Although the employment contract itself need not be in writing, under UK domestic legislation, employees are entitled to receive a written statement of certain key particulars of employment by no later than the beginning of the employment (and certain additional particulars within two months of employment commencing).
Employment contracts are typically "permanent" (indefinite) or fixed-term. Both can be entered into either on a full or a part-time basis. Fixed-term contracts can be of any length and used in succession. However, employees who have been continuously employed for four years or more on a series of successive fixed-term contracts are automatically deemed to be on a permanent contract, unless the continued use of a fixed-term contract can be objectively justified.
A “worker” is an individual who has entered into or works under either a contract of employment, or any other contract (which again may be in writing, but can also be found to exist verbally or by virtue of how the relationship operates in practice) under which the individual undertakes to do or perform personally any work or services for the other party and whose status is that of a client or customer of any profession or business undertaking carried on by the individual. Similar to employees, workers are entitled to receive written details of key particulars of their engagement.
Full-time weekly working hours usually vary between 35 and 40 hours, depending on employer preference. UK legislation contains a number of restrictions on working time, including in respect of rest breaks, daily and weekly rest periods, and a 48-hour limit on average weekly working hours. A number of exemptions apply (including the ability for individuals to opt out of the maximum 48-hour week).
There are further specific rules for employees who carry out work at night, those who are under 18 and for certain industries.
Furthermore, all UK employees have a minimum entitlement to 5.6 weeks’ paid annual leave/holiday each year (inclusive of any public and bank holidays in the UK). This amounts to 28 days in the case of full-time (five-day week) employees, which is pro-rated for part-time employees. Employment contracts can provide for annual leave in excess of this statutory minimum. Legislation and case law govern precisely how holiday pay in respect of leave taken should be calculated.
For completeness, note that working time rights also apply to the intermediate category of "workers" in the UK.
In most circumstances, employees are entitled to receive statutory minimum notice of termination. An employee who has been continuously employed for more than one month but less than two years is entitled to receive one week's notice. Thereafter, he or she is entitled to receive an additional week's notice for each complete year of service, up to a maximum of 12 weeks. The minimum notice to be given by an employee with at least one month's continuous employment is one week.
However, it is common for employment contracts to provide for notice periods that exceed the statutory minimum, in which case the longer contractual period will apply. Employment contracts also often give employers the discretionary right to make a payment in lieu of an employee's notice period.
An employee may be dismissed summarily (ie, without any notice period) if he or she commits a repudiatory breach of the employment contract that would justify this (eg, gross misconduct).
An employer should comply with any contractual obligations regarding termination of employment to avoid giving rise to a breach of contract/wrongful dismissal claim.
In addition, an employee who has been continuously employed for at least two years has a statutory right not to be unfairly dismissed.
An unfair dismissal is one where the principal reason for the employee’s dismissal is not one of the following:
A fair and reasonable process is also required in dismissing any employee for one of the valid reasons set out above. What constitutes a fair and reasonable process will depend on the circumstances and the reason for the dismissal.
There is no minimum qualifying service required to bring a claim where dismissal is based on certain grounds (eg, trade union membership, whistle-blowing, asserting a statutory right, protected characteristics). It is good practice, therefore, for UK employers to follow fair process in most cases.
Employees who are dismissed for redundancy may be entitled to a statutory redundancy payment. Employees who successfully bring a claim for unfair dismissal may be entitled to compensation, reinstatement or re-engagement.
Collective Redundancy Consultation
If an employer proposes to dismiss 20 or more employees on the grounds of redundancy in a period of 90 days or less, it must consult collectively with employee representatives (whether a recognised trade union or elected employee representatives).
Consultation must begin no later than 30 days before the first dismissal takes effect (and no later than 45 days before if 100 or more dismissals are proposed).
If an employer fails to comply with its obligations to collectively consult in a redundancy situation, the affected employees (or their representatives) can bring a claim for compensation of up to 90 days' (uncapped) pay each.
Employers must inform and consult trade unions or other elected employee representatives before business transfers (ie, in circumstances where legislation provides for the automatic transfer of employees) or in respect of collective redundancy proposals (see above).
Workers have the right to join a trade union. Where an employer with at least 21 workers does not recognise a union voluntarily, the union can follow a statutory procedure to obtain recognition. Depending on the terms of the recognition agreement, once recognised, the union may have the right to collectively bargain on issues such as pay, hours and holidays, and to be informed and consulted on a number of other matters.
Individuals are subject to income tax on their employment income, wherever earned, when received. Individuals who have moved to the UK from abroad may, however, claim "overseas workday relief" for their first three years of UK tax residence, whereby earnings in respect of duties performed outside the UK will only be taxed if and when they are remitted to the UK.
Individuals who are not resident in the UK are taxed in the UK to the extent that they perform duties of their employment (other than duties of a merely incidental nature) in the UK. Any tax charge on non-resident individuals may be limited where a tax treaty applies.
Income tax is charged at progressive rates of up to 45%. Employers are obliged to deduct income tax from payments of employment income and account for it to Her Majesty's Revenue & Customs (HMRC) through the "pay as you earn" (PAYE) system.
Employers must also account for National Insurance (ie, social security) contributions through the same mechanism. Employee contributions are charged at a rate of 12% on earnings of up to approximately GBP50,000 per year and 2% above that threshold; employer contributions are charged at a flat rate of 13.8%.
UK-resident companies are subject to corporation tax on their worldwide income (although an exemption can be claimed for profits of foreign permanent establishments). Non-resident companies are subject to corporation tax on profits attributable to any trade carried on in the UK through a permanent establishment in the UK, and to profits from developing or dealing in UK land.
Capital gains arising to non-residents on disposals of UK land and substantial interests in land-rich entities were brought within the charge to UK corporation tax from April 2019.
Corporation tax is currently charged at a rate of 19%, a rate which is expected to rise to 25% from 1 April 2023 for companies with profits in excess of GBP250,000. Most dividends are exempt, as are capital gains on the disposal of shareholdings in trading companies in which the disposing company has held a 10% shareholding for at least a year.
Persons making payments of UK-source interest, royalties and other "annual payments" to non-residents are generally required to withhold income tax at a rate of 20% from the payment. There is no withholding tax on payments of dividends, other than dividends paid by companies within the REIT regime.
Value Added Tax (VAT)
VAT is charged on goods and services supplied within the UK in line with EU rules. The standard rate of VAT is 20%. Certain goods and services are charged at a reduced rate of 5% and a zero rate applies to certain other supplies (including most foods, books and children’s clothes), as well as to exports. Supplies of medical and financial services are generally exempt.
Stamp duty or stamp duty reserve tax is charged at 0.5% on the consideration paid for shares in a UK company. Transfer taxes also apply to transfers of interests in UK land or buildings.
Business rates are payable in respect of the occupation of non-domestic property. They are calculated by applying a multiplier to the property’s "rateable value" (which is its open-market rental value and is subject to revaluation every five years). Certain reliefs are available, particularly for smaller businesses, and wide-ranging exemptions were introduced for the year commencing 1 April 2020 as a response to the COVID-19 pandemic.
Companies can elect into the "patent box" regime, which offers an effective rate of 10% on income and gains derived from patents and similar IP rights.
Additional relief is available for qualifying expenditure on R&D. SMEs can claim either a deduction equal to 230% of qualifying R&D expenditure, or, if they are in a loss-making position, a credit equal to 14.5% of qualifying expenditure. Larger companies, and SMEs that are sub-contracted R&D, can claim a credit equal to 13% of qualifying expenditure.
Group companies remain separately taxable persons for UK corporation tax purposes. Members of the same group of companies can, however, surrender losses to other group companies that are subject to UK corporation tax through the "group relief" system. Companies will be members of the same group if one is a 75% subsidiary of the other or both are 75% subsidiaries of a third company (which need not be UK or EU-resident). The 75% test looks both to ownership of ordinary share capital and to the shareholder’s interest in the profits available for distribution and assets distributable on a winding-up.
Thin capitalisation is policed primarily through application of transfer pricing rules, which will deny a deduction for interest expense in excess of an arm’s-length amount.
In addition, interest deductions are now limited to an amount equal to the lower of 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA) of the group companies within the corporation tax charge and the net interest expense of the worldwide group, subject to a de minimis of GBP2 million. Where the worldwide group’s interest expense exceeds 30% of EBITDA, the company can claim interest deductions up to the lower of an equivalent percentage of its EBITDA or the amount of the group’s worldwide interest expense (subject to certain adjustments).
Deductions are also denied for interest payable under a loan relationship that has an unallowable purpose (ie, where its main purpose, or one of its main purposes, is the obtaining of a tax advantage). Interest that exceeds as a reasonable commercial return is treated as a dividend and is not deductible; the same is true for payments on instruments with certain equity-like characteristics.
The UK’s transfer pricing rules follow the arm’s-length standard and incorporate the current Organisation for Economic Co-operation and Development (OECD) guidelines by reference. Small enterprises are largely exempted from the rules, as are medium-sized enterprises unless they are issued a transfer pricing notice by HMRC.
There are no specific documentation requirements imposed in relation to transfer pricing (eg, no formal requirement to prepare or file with HMRC a master file or local file), although HMRC is consulting, at the time of writing, on introducing specific transfer pricing documentation rules in line with OECD guidelines. Companies remain subject to the general obligation to keep and preserve such records as are necessary to enable them to deliver a correct and complete tax return, which includes records relating to transfer pricing.
The UK has controlled foreign company rules. These impose a UK tax charge on profits of foreign subsidiaries that are attributable to risks or assets managed in the UK, and on non-trading finance profits deriving from capital contributed from the UK, as well as certain other classes of profits viewed as being artificially diverted from the UK. Certain exemptions apply in respect of arrangements posing a low risk of diversion.
The UK has a general anti-abuse rule that can re-characterise "abusive" arrangements whose main purpose, or one of whose main purposes, is the obtaining of a tax advantage. Arrangements are "abusive" if they cannot reasonably be regarded as a reasonable course of action in relation to the relevant legislative provisions. The legislation also includes numerous targeted anti-avoidance provisions.
With the end of the transition period under the EU-UK Withdrawal Agreement, which ran until 31 December 2020, the UK merger control rules (primarily contained within the Enterprise Act 2002, as amended by the Enterprise and Regulatory Reform Act 2013) now operate in parallel to the EU merger control regime – ie, transactions that meet both the UK and the EU merger control thresholds will be notifiable to both the UK Competition and Markets Authority (CMA) and the Commission.
A transaction will be subject to the UK merger rules if it constitutes a "relevant merger situation" and meets a jurisdictional threshold.
A "relevant merger situation" will arise if the transaction in question results in two or more businesses "ceasing to be distinct". Businesses will "cease to be distinct" if they are brought under common ownership or control. There are three relevant levels of control.
An acquisition that causes the purchaser to move from one level of control (eg, the ability to exercise material influence over the target’s commercial policy) to a higher level of control (eg, de jure control) will be caught by the UK merger control regime and therefore may require notification to the CMA. The creation of a new joint venture, or a change of control over an existing joint venture, may give rise to a relevant merger situation, provided that the jurisdictional thresholds are met.
The jurisdictional thresholds are triggered if (i) the target had UK turnover of GBP70 million or more in the prior financial year or (ii) the transaction will result in the creation of, or an increase in, a 25% share of supply (or purchases) of a given good or service in the UK (or a substantial part of it).
Lower jurisdictional thresholds apply where the target is active in one of the following specified sectors:
Even where the jurisdictional thresholds are met, notification to, and prior clearance by, the CMA is not mandatory. It is therefore for the parties to decide whether to notify and each case turns on its particular facts. The guidance on the CMA’s jurisdiction and procedure (2020) provides in this regard that: “In cases that constitute a relevant merger situation, but where competition concerns clearly do not arise, the merger parties may decide that notification to the CMA is not necessary”.
To the extent that the CMA becomes aware of a transaction that has not been notified voluntarily – through, for example, its (active) Mergers Intelligence Committee or a third-party complaint – the CMA can elect to review the transaction to determine whether the transaction creates the realistic prospect of a substantial lessening of competition in the UK. If it makes an election to this effect, the CMA may take up and review the non-notified transaction, and impose interim orders preventing or unwinding integration pending its review.
Finally, the CMA’s jurisdiction to review a completed transaction has a temporal element. The CMA is subject to a four-month statutory deadline for completed transactions in which to make a Phase II reference, from the date on which facts about the transaction became public, or the time the CMA was informed of the transaction, whichever is earliest. A transaction is referred for a Phase II investigation where the CMA believes it could give rise to a substantial lessening of competition.
The CMA has the power to carry out an initial Phase I investigation, and has a duty to refer the merger to a detailed Phase II investigation where it believes a transaction could give rise to a substantial lessening of competition in the UK.
Absent an extension (eg, to negotiate commitments or to "stop the clock"), the CMA is required to complete its Phase I investigation within 40 working days from:
Where a Phase II investigation is opened, the CMA must publish its report within 24 weeks from the date of reference for a Phase II investigation, subject to possible extensions. If the CMA requires remedies as a condition for clearance, it will have an additional period of 12 weeks (which can be extended by six weeks) to accept any remedies.
The CMA encourages parties in all cases to engage in "pre-notification" discussions with the CMA at least two weeks before submitting the Merger Notice. Pre-notification discussions enable the case team to familiarise itself with the markets by asking for additional information before the regulatory timetable starts to run. The pre-notification period will typically last a few weeks, but for very complex cases it can last several months.
Chapter I of the UK Competition Act of 1998, which closely mirrors Article 101 of the Treaty on the Functioning of the European Union (TFEU), prohibits agreements or concerted practices between two or more undertakings that have the object or effect of preventing, restricting or distorting competition and that may affect trade within the UK. It is noted that a new Section 60A of the UK Competition Act of 1998 provides that UK courts and competition authorities will continue to be bound by an obligation to ensure no inconsistency with pre-Brexit EU competition case-law when applying the Chapter I prohibition (and indeed the Chapter II prohibition (see 6.4 Abuse of Dominant Position)), unless appropriate in light of particular circumstances.
Chapter I applies only to the extent that an agreement, decision or practice is, or is intended to be, implemented in the UK and concerns, in particular, agreements that:
Cartel activity in the UK may be sanctioned both civilly and criminally. The CMA has the power to:
Individuals who are found guilty of a cartel offence can be imprisoned for up to five years and/or face an unlimited fine.
Under Chapter II of the UK Competition Act of 1998, which closely mirrors Article 102 TFEU, any conduct on the part of one or more undertakings that amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the UK or any part of it – noting that a dominant position could be considered to exist even in a small area of the UK.
A company may generally be considered dominant if it is able to behave to an appreciable extent independently of its competitors, its customers and, ultimately, consumers. As a rule of thumb, dominance will not generally be considered to exist below a market share of 40%. Above 50%, a rebuttable presumption of dominance exists.
Conduct may, in particular, constitute an abuse if it consists in:
Generally, there are two main categories of abuse: (i) where the dominant undertaking uses its position to exploit its customers or suppliers, and (ii) exclusionary abuses designed to prevent the development of competition.
Cases in which conduct has been alleged to exploit consumers have been fewer in number and most have related to excessive pricing.
The CMA may impose a financial penalty of up to 10% of the worldwide turnover of an undertaking for an infringement of the Chapter II prohibition.
In addition, the director of a company that commits a breach of the Chapter II prohibition can be disqualified for up to 15 years if the court considers that his conduct as a director makes him unfit to be concerned in the management of a company.
A patent is a monopoly right allowing the patent owner to protect his or her invention. A patent does not confer a "right or freedom to use" the patented invention. Rather, it provides its owner a "right to exclude" others from doing so.
The laws governing the grant of patents in the UK are set out in the Patents Act 1977 (the Patents Act) and the Patents Rules 2007 (the Rules).
The Patents Act states that a patent may be granted only for an invention that:
Applications for the grant of patents are made to the UK Intellectual Property Office (IPO). The inventor need not be one of the applicants.
The procedure for applying for a patent is set out in the Rules, which also outline the procedures for (i) oppositions, (ii) challenging the validity of a granted patent and (iii) obtaining opinions on validity and infringement.
A patent can be granted for a maximum of 20 years.
Infringement occurs when an unauthorised person makes, imports or sells products, or uses a process, or sells products made to a process, falling within the claims of the patent. However, there are allowable exceptions for non-commercial and experimental use.
Patent infringement does not give rise to criminal liability. However, certain false claims, such as falsely stating that a product is the subject of a patent or patent application, is a criminal offence.
Registered Trade Marks
A trade mark is a sign that distinguishes the products or services of a business from those of another.
The laws governing registered trade marks in the UK are set out in the Trade Marks Act 1994 (the Trade Marks Act), incorporating the Trade Marks Regulations 2018 (the Regulations).
The Trade Marks Act states that a trade mark may consist of “words (including personal names), designs, letters, numerals, colours, sounds or the shape of goods or their packaging”.
To be registered, a trade mark must be capable of (i) "being represented" clearly and precisely, and (ii) distinguishing one entity's goods or services from another.
Applications for the registration of trade marks are made to the IPO.
Trade marks are registered on an indefinite basis, subject to renewal every ten years.
Any person may apply to revoke a trade mark if it is not used for the last five years, or it has become a generic term.
The proprietor of a registered trade mark has the exclusive right to use the trade mark in the UK with respect to the goods or services for which the mark is registered, and may deal with the trade mark as any other property right, including assigning or licensing to other parties.
Infringement occurs when a person (not being the proprietor of a registered trade mark) uses a mark identical to (or similar to) the registered trade mark for similar (or identical) goods or services, and where such similarity causes confusion.
Unregistered Trade Marks – Passing Off
The UK also protects unregistered trade marks (including trading names, brands or get-up) through the common law tort of passing off. To succeed in a claim of passing off, the claimant must prove:
The UK operates two industrial design regimes: (i) registered designs and (ii) unregistered design rights.
Registered Designs – Legislation
The laws governing registered designs in the UK are set out in the Registered Designs Act 1949 (the Registered Design Act).
The Registered Design Act states that a "design" comprises of “the appearance of the whole or a part of a product resulting from the features of, in particular, the lines, contours, colours, shape, texture or materials of the product or its ornamentation”. Essentially, the design (which can be two or three-dimensional) of a product relates to its appearance, rather than to the technical principles of its construction or operation.
To be registered, a design (i) must be novel (differing from prior designs by more than immaterial detail) and (ii) must possess "individual character". A design cannot be registered if its features are dictated by the product’s technical function or connectability to another product.
Applications for the registration of designs are made to the Designs Registry of the UK Intellectual Property Office.
A registered design can be granted for a maximum of 25 years.
A registered design gives its proprietor the exclusive right in the UK to make, use, sell, import and export any product embodying or bearing the design. This means that a proprietor is protected even if a third party is using a design created independently and without intentionally copying the registered design. A person intentionally copying and making products exactly or very similar to that design, knowing it is registered, is liable for up to ten years’ imprisonment and/or to a fine.
Unregistered Designs – Legislation
Unregistered designs are protected in the UK under the Copyright Designs and Patents Act 1988 (CDPA).
An unregistered design right comes into being automatically, and without application or registration, when a new design is created and graphically recorded. Unregistered design rights do not vest in two-dimensional designs or decoration, but only to the shape of a three-dimensional design.
Design rights will not subsist in a design that is not original – that is, one being commonplace in the field when designed.
An unregistered design right is protected for ten years from the first sale of products made to the design, or 15 years from design creation.
The proprietor of a design right has the exclusive right to reproduce the design for commercial purposes by making articles/products to that design. A design right is only infringed if a third party intentionally copies the design. Independently created articles or designs are not infringements if they do not involve the intentional copying of the protected design.
The CDPA allows an "author" to protect certain qualifying "works" from unauthorised copying.
"Works" can comprise:
Copyright automatically comes into being without application or registration when a work is created, regardless of any artistic or other merit attaching to the work.
The duration of the protection afforded by copyright depends on the classification of the work. For example, copyright protection for literary, dramatic, musical and artistic works expires 70 years from the end of the calendar year in which the author dies.
Where a work is the product of an author’s independent creation, the author (or subsequent copyright holder) has the exclusive right to, among other things, copy, sell, rent or lend the work, and perform, show or play the work in public. Copyright is therefore infringed if any third party carries out any of these activities.
Remedies for copyright infringement include criminal liability of up to ten years’ imprisonment and/or unlimited fines.
An author, even if not the proprietor of copyright in a work, has certain "moral rights", namely to be identified as the author of the work, object to derogatory treatment of the work and not have a work falsely attributed to him or her.
All IP infringement proceedings may be brought in the High Court or in the Intellectual Property Enterprise Court (IPEC). The IPEC generally offers more streamlined proceedings than the High Court and has caps on the level of costs (GBP50,000) and damages (GBP500,000) that can be recovered.
The remedies available in either court include:
Databases can be protected by both copyright as a literary work and by way of database right (introduced by the Copyright and Rights in Databases Regulations 1997) when the database producer can demonstrate “substantial investment in obtaining, verifying or presenting the contents of the database”. The database right offers protection against copying, extraction and re-utilisation of the database and/or its contents.
A specific protection is granted when a sign is used on products that have a specific geographical origin and qualities, notoriety or characteristics related to that place of origin (eg, the Scotch Whisky Regulations 2009).
Trade secrets are potentially protectable without any procedural formalities and for an unlimited period, where the information is not generally known or readily accessible to the public, and contractual measures and reasonable steps are taken to keep it secret.
The Trade Secrets (Enforcement, etc) Regulations 2018 formalised a regime for the protection of know-how by, in particular, providing for the possibility of obtaining orders, provisional or not, to prohibit, destroy or recall products resulting from an infringement of a trade secret, as well as awarding compensation for the damage caused by the unlawful use or disclosure of the misappropriated trade secret.
The main regulations applicable to data protection in the UK are:
Following the UK’s withdrawal from the European Union, the GDPR no longer has direct application in the UK. The provisions of the EU GDPR were incorporated directly into UK law at the end of the transition period by virtue of Section 3 of the European Union (Withdrawal) Act 2018 and as amended by Schedule 1 to the Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019 (SI 2019/419) (as amended). The DPA 2018 sits alongside the UK GDPR and provides supplementary rules to tailor how the EU GDPR applies in the UK (for example, by providing national exemptions). The DPA 2018 also sets out separate and specific rules for law enforcement authorities and intelligence services, and for certain processing activities that fall outside the scope of the UK GDPR.
The EU GDPR will continue to apply to the extent a UK business is caught by the extra-territorial test under the EU GDPR (see 8.2 Geographical Scope). This means that businesses operating in the UK could now be simultaneously subject to the UK GDPR, the EU GDPR and the Data Protection Act 2018.
As both the DPA 2018 and UK GDPR EU GDPR can apply in the UK, the territorial application of data protection regulation should be considered as follows.
UK GDPR: Territorial Scope
Companies are directly subject to the UK GDPR if they satisfy any of the following three tests.
The UK GDPR applies where an organisation has an UK "establishment" and the processing of personal data is “in the context of the activities” carried out by such establishment (whether the processing takes place in the UK or not). Whether an organisation has an UK "establishment" is a broad concept and means that an organisation has an “effective and real exercise of activity [in the UK] through stable arrangements”. The presence of a branch office or even a single representative in the EU could be sufficient to bring an organisation’s activities within the scope of the UK GDPR, whereas the mere accessibility of an organisation’s website in the UK would not.
Offering goods or services
This test is satisfied where a non-UK organisation’s processing of personal data relates to the offering of goods or services to data subjects (consumers) located in the EU. Regulatory guidance confirms that (i) this test is not limited by the citizenship or residence of individuals and (ii) there must be an element of "targeting" individuals in the UK. Certain factors should be taken into account when considering this test – for example, whether a company has launched a marketing campaign directed at an UK audience, if a specific EU language or currency is used, or any mention of dedicated addresses or phone numbers to be reached from the UK.
This test is satisfied where a non-UK organisation’s processing of personal data relates to the monitoring of data subjects’ behaviour located in the UK. The "monitoring" of behaviour relates to any recording or tracking of the behaviour of data subjects, particularly via the internet, to predict or analyse an individual’s attitudes, behaviours or personal preferences. For example, this can include behavioural advertisement, geo-localisation activities, or personalised diet/health analytic services online. Again, the data subject must be located in the UK.
In practice, an EU located company can be caught by the UK GDPR if they have operations that are “established” in the UK, or otherwise offer goods/services or monitor individuals located in the UK.
Where a company is located outside of the UK and is caught by the UK GDPR, it is required to appoint a UK representative by way of written mandate for that representative to act on its behalf.
EU GDPR: Territorial Scope
As the UK GDPR is very similar to the EU GDPR, the territorial tests set out above apply in exactly the same way but with the geographical location being the EU – ie, if the company is “established” in the EU, or is non-EU based and targets or monitors individuals located in the EU, it will be caught. Therefore, in practice, UK companies can still fall within scope of the EU GDPR as well as the UK GDPR if they meet the territorial scope of these two regimes.
DPA 2018: Territorial Scope
In addition to the test under the UK GDPR, organisations doing business in the UK must consider the application of the DPA 2018. Currently, the DPA 2018 applies to:
The Information Commissioner’s Office (ICO) is the supervisory authority for data protection in the UK. The ICO offers advice and guidance, conducts audits and advisory visits, considers complaints, monitors compliance and takes enforcement action, where appropriate.
The ICO has the power to:
Recent trends indicate that the ICO is increasingly issuing monetary penalty notices. At the time of writing, the ICO’s highest fine has been issued to British Airways for a sum of GBP183.39 million in connection with a cyber-incident. The ICO has indicated that more fines are in the pipeline.
Following Brexit, the ICO is no longer able to take part in the existing co-operation mechanism between EU supervisory authorities and has lost its seat on the European Data Protection Board.
The NSI Act
The UK government will introduce a series of statutory instruments required for the commencement of the NSI Act and will provide accompanying guidance. These regulations will define in detail those high-risk sectors that will be subject to the mandatory notification regime, the form and content of mandatory and voluntary notifications and various procedural elements.
New domestic subsidy control regime
With the end of the transition period under the EU-UK Withdrawal Agreement on 31 December 2020, a corollary of which is that the UK is no longer bound by the EU state-aid rules, the UK will soon have in place a new domestic subsidy control regime that reflects its strategic interests and particular national circumstances. In particular, the UK will have a regime that, inter alia:
In this regard, the UK Subsidy Control Bill was introduced to Parliament on 30 June 2021. The Subsidy Control Bill lays down the principal elements of the new UK subsidy control regime in primary legislation. As such, a new domestic subsidy control regime for the UK is anticipated to come into effect in 2022 – subject to parliamentary approval.
Key developments in merger control
There have been several important developments in the field of merger control. A significant development pertains to the fact that, since 1 January 2021, the UK merger control rules operate in parallel to the EU merger control regime. In other words, transactions that meet both the UK and the EU merger control thresholds are now notifiable to both the UK Competition and Markets Authority (CMA) and the European Commission – a corollary of which is that the CMA will play a greater role in the review of global transactions.
In anticipation of and in tandem with the UK’s departure from the EU, we have witnessed the CMA take an increasingly strict and interventionist approach to enforcement. Testimony of this development is borne by, inter alia, the CMA’s investigations into mergers that have only a (very) tenuous connection with the UK, with its decisions in Sabre/Farelogix and Roche/Spark being two cases in point – the target had no sales in the UK but (very) flexible use of the “share of supply” test was made. The increasingly expansionist approach that is being taken by the CMA signals an increased risk of non-notified mergers being “called in” for review going forward. This is despite the UK continuing to operate a voluntary merger control regime.
Furthermore, a striking reflection of the CMA’s increasingly interventionist approach is the number of transactions that are being prohibited or referred to Phase II. Indeed, of the 13 Phase II merger investigations concluded in 2020, four mergers were prohibited (Sabre/Farelogix, JD Sports/Footasylum, Hunter Douglas/247 Home Furnishings and FNZ/GBST). These cases are a strong reminder of the risks of completing transactions without UK merger control approval.
Finally, arguments surrounding the impact of COVID-19 (such as the failing-firm defence) have carried negligible sway with the CMA when assessing mergers, and there is little, if any, evidence showing that the standards applied have been or will be loosened as a result thereof. This position stands in contrast to the CMA’s approach to business co-operation in response to COVID-19 under the UK antitrust rules.
A new UK subsidy control regime
Since 1 January 2021, the UK is no longer bound by the EU state-aid rules. As such, the UK will soon have in place its own domestic subsidy control regime that reflects its strategic interests and particular national circumstances. In particular, the UK will have a a regime in place that, inter alia:
In this regard, on 3 February 2021 the UK Department for Business, Energy & Industry Strategy (BEIS) published a consultation paper setting forth proposals for a new subsidy control regime in the UK. The deadline for responding to the consultation paper ended on 31 March 2021. The consultation addressed key issues including:
In follow-up to the consultation, the UK Subsidy Control Bill was introduced to Parliament on 30 June 2021. The Subsidy Control Bill lays down the principal elements of the new UK subsidy control regime in primary legislation. As such, a new domestic subsidy control regime for the UK is anticipated to come into effect in 2022 – subject to parliamentary approval.
In its 2021 Budget, the UK government announced that the main rate of corporation tax will rise from 19% to 25% with effect from 1 April 2023. This will apply to companies making annual taxable profits in excess of GBP250,000. The existing 19% rate will be retained for companies with profits of less than GBP50,000, and “marginal relief” will apply to taper the rate up to 25% for companies with profits between GBP50,000 and GBP250,000.
The prospective increase in the corporation tax rate could provide an incentive for companies to delay capital expenditure until after the rate increase is implemented, thus providing a greater benefit. In order to discourage companies from delaying capital investment, the government has also introduced a “super-deduction” for acquisitions of new plant and machinery, which will apply with respect to capital expenditure incurred by companies over the period to 31 March 2023. During this period, companies will be able to claim a deduction equivalent to 130% of the expenditure on the asset in the year of acquisition (in contrast to the 18% that would be available in the first year under normal rules). For long-life assets, the first-year deduction will be 50% of the expenditure (in contrast to 6% under normal rules).
The UK is also fully engaged with negotiations at the OECD over potential changes to the international tax system, and can be expected to implement any changes that are agreed at OECD level. The proposed reforms involve two “pillars”. Pillar 1, which would reallocate a proportion of the residual profits of the largest digital and consumer-facing companies to the market jurisdictions, and establish a new concept of taxable nexus which would permit those jurisdictions to tax those profits even if the company in question does not have a permanent establishment under traditional principles. Pillar 2 would introduce a minimum global corporate tax rate for larger companies. If these reforms are introduced, the UK’s digital sales tax – which was introduced as an interim measure with effect from April 2020 – will be repealed.
While not limited to the area of intellectual property, the possibility and consequences of divergence from EU law will be a growing trend. Under the UK’s European Union (Withdrawal) Act 2018 (EUWA), existing EU law was effectively “cut and pasted” into domestic UK law, and is known as “retained EU law”. Following the UK’s exit from the EU and the subsequent expiry of the transition period on 31 December 2020, UK courts will exclusively interpret and apply retained EU law. Pre-2021 EU case law with respect to retained EU law is intended to remain binding on the UK courts, except that, when they consider it “right to do so”, the Court of Appeal in England and Wales or the UK Supreme Court may reverse pre-2021 EU case law. When it is “right to do so” remains a matter for interpretation. Post-2021 EU case law on retained EU law is not binding on the UK courts. It would appear inevitable that, over time, case law will diverge, even if the relevant legislation does not.
Regarding diverging legislation, one should note the UK Medicines and Medical Devices Act 2021 (MMDA), which is intended to “confer power to amend or supplement the law relating to human medicines, veterinary medicines and medical devices”. A large part of that power resides with the Secretary of State for Health. The UK government’s stated aims for the legislation include the easy amendment of EU retained laws (as well as any other domestic legislation related to medicines and devices), thereby allowing divergence from the EU regulatory framework. That ease of amendment would be equally applicable should the UK wish to converge with the EU regulatory framework as it changes. The UK government may decide that legislation such as the MMDA is equally applicable in other fields.
Impact of COVID-19 on working arrangements
The key theme impacting UK employers for the past year or so has been contending with the workplace ramifications of the COVID-19 pandemic. Many employees were furloughed, with their employers taking advantage of payments under the Coronavirus Job Retention Scheme. Significant numbers of employees who can work from home have been required to do so for an extended period of time, in line with applicable UK government guidance on COVID-19-secure workplaces.
As the vaccination rollout progresses and restrictions are progressively eased (fully, permanently or otherwise), it will be necessary for UK employers to keep abreast of that guidance and ensure that workplace health and safety risk assessments are kept under review in line with it. More broadly, it is generally anticipated that in future greater numbers of UK employers may be prepared to adopt more flexible working models (for instance, in relation to expectations regarding hours and location of work) than had been the case prior to the pandemic.
Taxation of independent contractors in the UK private sector
New “off-payroll working” tax rules (commonly known as IR35) were introduced to the UK private sector as of 6 April 2021. Equivalent rules have applied in the UK public sector since 2017. The new rules had originally been due to take effect as of 6 April 2020, but their implementation was delayed in March 2020 because of the COVID-19 pandemic.
The move essentially shifts responsibility for determining the employment status for tax withholding purposes of individuals who personally provide services through an intermediary “loan out”/personal service company (PSC) from that PSC to the end-user client. Each PSC relationship in the UK in future will therefore need to be assessed using “reasonable care”, and a “status determination statement” will need to be issued. Where employment is found, the “fee-payer” (ie, the end-user client or, where there is an intermediary agency, the agency) will be responsible for tax and social security withholdings, together with employer social security contributions at a rate of up to 13.8%. Further information is available at www.gov.uk (April 2021 changes to off-payroll working for clients).
Protection of “workers” from health and safety-related detriment
In addition to employees and independent contractors, UK law recognises an intermediate category of employment status: workers. A “worker” is an individual who has entered into or works under either a contract of employment, or any other contract (which may be in writing, but can also be found to exist verbally or by virtue of how the relationship operates in practice) under which the individual undertakes to do or perform personally any work or services for the other party, and whose status is that of a client or customer of any profession or business undertaking carried on by the individual. Workers benefit from more employment rights than independent contractors, but less than employees do.
The UK High Court declared in a judgment last year that, by limiting certain health and safety rights to “employees”, the UK had failed to properly implement aspects of EU law by which it was bound on the minimum health and safety requirements in relation to workers.
Following the decision, the UK has revised the relevant legislation to provide that workers (and not just employees) now have the right not to be subject to any detriment for, in essence, taking steps to protect themselves by refusing to work when faced with a situation reasonably perceived to be a serious and imminent danger to safety (eg, exposure to COVID-19). The change came into effect from 31 May 2021 and will apply to any detriments arising on or after that date.