UK Legal Update - July 2023

The UK's departure from the European Union did not lead to all EU-derived law being jettisoned. On the contrary, a significant proportion of it was kept and the UK had a new category of "retained EU law". However, controversial legislation enabling the UK Government to revoke or reform retained EU law, the Retained EU Law (Revocation and Reform) Act (REUL Act), has now become law in the UK, although not all its provisions come into force immediately.

Here are the key points:

• A more moderate approach to sunsetting: Originally, the REUL Act provided for a wide range of EU-derived measures to be revoked automatically at the end of 2023. In a welcome move, these "sunsetting" provisions have been replaced with a more modest list of measures to be revoked at the end of 2023. Our view is that for most businesses operating in the UK, the final list is unlikely to give rise to serious concern.
  
  
• But there will still be uncertainty: The legislation creates uncertainty over whether the meaning and effect of EU-derived law will remain the same. It may also make it somewhat easier to depart from retained EU caselaw. Lastly, it gives the UK Government additional powers to change retained EU legislation on a fast-track basis.
  
  
• Removal of directly effective rights: The REUL Act also provides for all "retained EU law rights" to be repealed at the end of 2023, removing rights derived from certain EU Treaty articles. It is likely to have an impact in areas such as employment and pensions.
  
  
• New terminology: The REUL Act states that after the end of 2023, retained EU law is to be known as "assimilated law" (even if it is unchanged by the legislation). Whilst "retained EU law" may well remain in use, formal documents such as pleadings will need to use the new term.
  
  
• Other reforms to EU-derived law: Although much attention has focussed on the REUL Act, the UK Government has already embarked on a reasonably significant programme of reform of EU-derived legislation through other Bills, notably in the following areas: consumer protection, data protection, employment law and financial services.

Although some of the most heavily criticised aspects of the legislation have been removed, it will still create a climate of uncertainty around the status of retained EU law in the UK. This briefing explains why and what this means for business. We also highlight the impact of other post-Brexit reforms in areas where EU-derived law remains relevant in the UK. Learn more about the impact of the REUL Act on data, e-commerce, tech and IP with this briefing.

The UK Government and the EU have reached an agreement on changes to the post-Brexit arrangements for Northern Ireland. Here are the key points for UK businesses trading with Northern Ireland:

• Wider impact: For businesses which do not have any activities in Northern Ireland, the deal has a number of wider ramifications which are broadly positive. Read this briefing for further explanation.

• Goods trade: For businesses based in the mainland UK which supply goods to Northern Ireland, the Windsor Framework will not deliver frictionless trade, but it does represent a significant improvement on the existing Northern Ireland Protocol.

• Subsidies: The state aid position is broadly unchanged; this means that EU law will still need to be considered when assessing the legality of subsidies and other forms of state support offered by the UK.

• Democratic accountability: Although the "Stormont Brake" is hedged around with numerous conditions, experience of similar mechanisms under the EEA Agreement suggest that it may have value as a "political safety valve".

For further detail and discussion, read our briefing The Windsor Framework: is it a good deal for business?

Following Brexit, there is no longer a comprehensive, overarching framework governing the reciprocal recognition and enforcement of civil court judgments between the UK and the EU. However, there are signs that this state of flux may ultimately be resolved. The 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters 2019 (2019 Hague Judgments Convention) provides a relatively full framework for the recognition and enforcement of civil and commercial judgments between contracting states.

The 2019 Hague Judgments Convention will come into effect between the EU (except Denmark) and Ukraine on 1 September 2023. At the time of writing, it has also been signed (but not ratified) by Costa Rica, Israel, Montenegro, North Macedonia, Russia, the United States and Uruguay.

Meanwhile, the UK Government has launched a consultation on whether the UK should join the 2019 Hague Judgments Convention. If the UK does join (as most UK-based lawyers hope will be the case) then it will apply as between the EU and the UK and provide greater certainty in this area than presently exists.

For an explanation of the current position in the UK on recognition and enforcement of civil court judgments following Brexit, read Beyond Brexit: Dispute Resolution and watch a 5-minute video guide to Post-Brexit Dispute Resolution.

Importing EU goods into the UK: More change on the way (and more disruption)

Following repeated postponements, in April 2023, the UK Government finally published its plans to introduce full border controls on imports of goods from the EU. The key points for UK-based businesses reliant on imports from the EU are that this may mean further disruption and that it will be important to ensure that EU trading partners are fully prepared for the changes.

Imports from the EU will be subject to the same controls as imports from the rest of the world. This means an increase in red tape for EU imports, although various simplifications and improvements to border control processes mean that imports from the rest of the world may benefit from a reduction in red tape. 

Our briefing explains the changes in more detail and what businesses need to do to prepare. It also includes a useful timeline of the expected changes.

UK signs up to Trans-Pacific trade pact

The UK has signed an agreement to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), covering 11 countries.

Despite the size of this trade agreement, its impact in practice is expected to be relatively small, mainly because the UK already has trade agreements with 9 of the CPTPP's current members (Australia, Canada, Chile, Japan, Mexico, New Zealand, Peru, Singapore and Vietnam) – and the CPTPP's provisions add relatively little to those existing deals. The only "new" countries from the UK's perspective are Malaysia and Brunei Darussalam. Although China has applied to join the CPTPP, many commentators think that existing CPTPP members are unlikely to agree to its request to accede.

Businesses will not be able to take advantage of the CPTPP as regards trade between the UK and other member countries until all parties have completed their ratification processes; this is not expected to be completed until the second half of 2024.  Watch this space for more commentary on the UK's accession to the CPTPP and its post-Brexit trade agreements more generally.

The Digital Markets, Competition and Consumer Bill is likely to become law in the UK in 2024.

It will give the UK Competition and Markets Authority (CMA) significant new powers to enforce UK consumer protection law, including the ability to impose fines of up to 10% of global annual turnover (which is higher than many jurisdictions, including the EU) and to sanction enhanced consumer measures, such as redress schemes. The Bill also promises to tighten up the law on subscriptions and fake reviews - but in our view, the real game changer for B2C (business to consumer) businesses is the new enforcement regime. For more, read this briefing.

The Bill also contains measures designed to allow the CMA to intervene in the tech sector with a view to promoting competition, along with a raft of changes designed to streamline and improve the effectiveness of the existing competition law and merger control regimes.  For more detail, see this briefing.

It will be interesting to see how far the CMA looks to use its greatly enhanced powers to enforce consumer protection law in conjunction with other measures set out in the Bill, notably its new powers to intervene in digital markets and its strengthened powers to carry out competition investigations and market inquiries. Take a look what recent CMA activity tells us about the rationale for the new legislation once it is in force, and how it has highlighted a desire for key reforms to the UK competition law regime.

The UK Competition and Markets Authority (CMA) has published an open letter to online B2C businesses, highlighting certain practices that may mislead consumers. The focus is on claims relating to the need to act urgently (such as countdown timers) and price reductions. As we explain in our briefing, enforcement action is already being taken over these issues – and with plans to allow the CMA to impose substantial fines for breaches of consumer law, the risks of non-compliance are poised to escalate.

Mid-contract price rises in consumer contracts: to advertise fairly

In late 2022, the UK Advertising Standards Authority consulted on guidance that would require mid-contract price rises in consumer contracts to be more prominently stated in telecoms advertising. As we explain in our briefing, this may also be of interest to other B2C businesses outside the telecoms sector – particularly those which operate a subscription model.

The following briefings may be of interest to businesses which make use of English-law governed contracts:

• Force majeure: In MUR Shipping BV v RTI Ltd, the Court of Appeal ruled that a force majeure clause did not apply because the party unable to comply with its obligations had offered suitable alternative performance. In doing so, it reversed the decision at first instance, where the court ruled that the shipowners were entitled to insist on being paid in US dollars, not euros, as required by the contract. As our briefing explains, this case highlights the difficulties in relying on force majeure clauses, even where (as here) the contract is affected by US sanctions.
  
  
• Good faith: In Re Compound Photonics Ltd, the Court of Appeal provided some useful guidance on the meaning of good faith in a shareholder's agreement. Read our detailed briefing for more.
  
  
• Construction of settlement agreements: In Maranello Rosso v Lohomij, the Court of Appeal confirmed that, where the natural meaning of the wording of a settlement agreement and its factual matrix indicate that it is objectively intended to cover claims of fraud or dishonesty, that agreement will be given effect, even where these is no express reference to such claims in the relevant clause. Although a court will not readily conclude that a release includes claims for fraud and dishonesty without express wording, there is no rule of law to that effect. The case confirms that claims in fraud and dishonestly will not be given special treatment by the court when construing settlement and release clauses, and may be released by general wording. A useful reminder to carefully consider what claims you are releasing in a settlement agreement and to take care in the claims asserted in pre-action correspondence. For more, read our briefing.

For more, read our recent Dispute Resolution Case Round-up.

The Economic Crime and Corporate Transparency Bill (ECCT Bill) is expected to come into force later this year and introduces measures which aim to improve the quality and value of information on the UK companies register and prevent the abuse of corporate structures in economic crime. The reforms have significant impact on the day-to-day corporate management of companies incorporated in England and Wales, as this briefing explains.

Notably, the UK Government is creating a new "failure to prevent fraud" offence. An organisation will be liable where a specified fraud offence is committed by an employee, agent or other associate, and the organisation does not have reasonable fraud prevention procedures in place. It does not need to be demonstrated that the employer knew about the fraud. If convicted, an organisation can receive an unlimited fine.

UK-registered organisations should review internal policies and procedures to ensure that they are fit for purpose and implement an effective strategy for monitoring and communicating potential risks.

The UK Financial Reporting Council (FRC) recently published a consultation on its proposals to revise the Corporate Governance Code (Code). The proposed changes are targeted and aim to:

• provide a more robust framework of effective risk management and internal controls;
  
  
• achieve greater transparency on malus and clawback arrangements in directors' remuneration;
  
  
• make other improvements to the current Code, including in relation to environmental, social and governance ("ESG") considerations, directors' time commitments and reporting on diversity; and
  
  
• make other changes where the FRC feels reporting needs to be improved, based on its research and assessment of reporting against the Code over the past three years.

The new Code is expected to apply to financial periods beginning on or after 1 January 2025 to allow companies sufficient time for implementation.  For more, read this insight.

The UK Government introduced the Data Protection and Digital Information (no. 2) Bill to Parliament in March 2023 (DPDI No.2), withdrawing its previous Data Protection and Digital Information Bill (DPDI No.1).

Promoted as "a truly bespoke, British system of data protection", as it transpires, DPDI No.2 is a modest uplift to DPDI No.1 and, overall, the package of reforms is not a dramatic departure from the UK GDPR, the framework of which is retained. Our briefing looks at the recent changes.

The EU and the UK are each determined to regulate online content and protect users from online harms. The EU got there first. Its Digital Services Act (DSA) impacts all online intermediaries operating in the EU at varying levels and is already in force.

17 February 2023 marked the DSA's first milestone, the deadline for online platforms and search engines to publish average active user figures. The European Commission has already begun to identify the very largest online platforms and search engines, which will face the most stringent controls and responsibilities, and which have to start complying with those obligations 4 months from designation. The compliance deadline for other entities within the scope of the DSA is later – 17 February 2024.

Meanwhile, the journey of the UK's Online Safety Bill, which has seen four Prime Ministers since its inception as the Online Harms White Paper, has been a troubled one. Our briefing looks at the obligations on online intermediaries under the DSA and the key similarities and differences compared with the Online Safety Bill.

There's now a new route to transfer personal data to the US under EU GDPR – for the time being at least.  The European Commission adopted its adequacy decision for the EU-US Data Privacy Framework.  Only transfers to US organisations that have self-certified their participation in the framework will benefit from it.  It means that data exporters subject to EU GDPR transferring data to certified US organisations do not have to rely on alternative transfer mechanisms, such as standard contractual clauses, nor to undertake a "transfer impact assessment" to complete that transfer compliantly.  But will it last?  Max Schrems has already announced that he will challenge it in the Court of Justice of the EU and so this is unlikely to mark an end to the uncertainty that has hung over international data transfers since Schrems II.  The UK plans to extend this framework for its own "data bridge" in respect of the US – but that's not finalised yet.  Our briefing provides more detail about the implications of the adequacy decision.

The tech giants will certainly welcome the arrival of the adequacy decision. In May 2023, Ireland's Data Protection Commission ordered the suspension of Meta's transfers of Facebook users' personal data to the US (and imposed a €1.2bn fine). Anticipating the arrival of this adequacy decision, Meta applied for, and was granted, a stay on the suspension – for more, read our briefing. Data protection authorities across the EU will no longer be able to suspend transfers of personal data to the US that benefit from the adequacy decision for lack of adequate safeguards.

The regulation of AI

The UK Government recently published its White Paper on how it proposes to regulate AI. Designed to encourage investment in AI in the UK, it aims to reduce the regulatory burden on businesses and follow a pro-innovation approach, relying on existing regulators and regulatory structures, rather than establishing broadly applicable AI-specific regulations or a dedicated AI regulator.

The UK is choosing to take a very different approach from the EU (as set out in the EU's draft AI Act), which is far more prescriptive, although the Government recognises the need for interoperability between its framework and the regulatory approach in other jurisdictions. Our briefing compares the UK and the EU approaches to regulating AI.

Intellectual property law also has a significant part to play in striking a balance between encouraging innovation and investment in AI, on the one hand, and protecting rightsholders, on the other. Our briefing looks at IP rights in AI systems and in AI-generated content, the potential infringement risks that can arise from training AI and from its outputs, as well as at the UK Government's response to these issues.

The recent intervention by the Bank of England to transfer ownership of Silicon Valley Bank UK Limited to a private sector purchaser, HSBC UK Bank Plc, highlights the risk that a corporate borrower might be faced with a non-performing lender.

In our briefing What happens when a lender fails to fund?, we explore the risk that a lender might renege (voluntarily or involuntarily) on its funding commitments. Touching upon the different types of lender entities in the market, we examine why there are often varied reasons behind such a failure to fund. We also revisit market standard provisions designed to mitigate the risk posed by so-called "defaulting lenders" and explore the options for a borrower faced with a lender that is unable to honour its lending commitments.

Calling time on Sterling Libor

Sterling LIBOR (the reference rate of interest for many UK-based financial contracts) was discontinued from 31 December 2021 and, for a limited time period, a synthetic version of the rate is now published for use in legacy contracts. The Financial Conduct Authority recently announced that the 3-month synthetic sterling LIBOR setting (which is the last remaining tenor) will cease at end-March 2024. This means that there will be no sterling rate quoted after this date. Most companies have already worked with their lenders to remove any remaining LIBOR-related exposures in their loans.

Read our latest quarterly Dispute Resolution newsletter covering recent key developments in the UK dispute resolution sphere. This edition considers a number of cases on contractual construction - from force majeure and good faith to valid notification of potential warranty claims. We also spotlight the recent increase in creative collective proceedings applications before the Competition Appeal Tribunal and the European Parliament's proposals on the regulation of litigation funding in the EU.

The UK Government has announced plans to limit the length of non-compete clauses in employment contracts to three months. The proposed three-month limit, once made law, will be a significant change. It will result in employers being unable to enforce, in the UK, a non-compete lasting longer than three months. The usual UK common law rules on enforceability will still apply to any non-compete of three months or less, i.e. the employer will still need to show the restriction goes no further than necessary to protect a legitimate business interest.

On the UK Government's own estimate, around 5 million employees are subject to a non-compete clause in Great Britain, with a typical duration of around six months. In the UK Government's view, such periods can adversely impact the worker affected (as their future mobility is restricted) and also the wider economy (due to the impacts on competition and innovation).

Read this briefing for more.

Fire and Rehire

The UK Government recently consulted on a draft statutory Code of Practice on the use of "fire and rehire" to change terms of employment. "Fire and rehire" is a tactic used to implement changes when employees do not agree to them - the employer dismisses the employee and then offers re-employment on a new contract with the revised terms.

The draft Code emphasises that "fire and rehire" should only be used as a last resort, after the employer has engaged in meaningful consultation and explored all alternatives. Where an employer unreasonably fails to follow the Code, the Employment Tribunal will have the power to increase compensation awarded for any relevant claim by up to 25%.

Workplace Sexual Harassment

The UK Government plans to introduce a new positive duty on employers to take reasonable steps to prevent workplace sexual harassment. The duty will be enforceable by the Equality and Human Rights Commission, under its existing powers, and will be backed up with a statutory code of practice detailing the steps employers should take. UK employers who fail to take reasonable steps to prevent sexual harassment could also face an uplift in compensation if an employee brings a successful claim. The duty is contained in draft legislation, which is currently progressing through the UK Parliament.

Third Party Harassment

In addition to the new duty to prevent sexual harassment, a proposed new UK law will impose on employers a new duty to prevent all forms of harassment of staff by third parties. Employers will be liable if they fail to take reasonable steps to prevent any form of harassment of staff by someone outside the organisation, such as a customer, client, supplier, or contractor. As with existing harassment laws, a single incident will be enough, and the employee does not need to be the target of the harassment.

The new law is likely to have a particular impact on the service sector such as hospitality and retail, where employees could be harassed by simply overhearing offensive conversations between customers.

Zero hours, casuals and short-term workers

Following a June 2022 report showing that 3.7 million workers in the UK were in insecure employment, to improve job security for individuals labelled as casual and zero hour workers, the UK Government is now introducing a new right for certain workers to request a more predictable working pattern.

Workers with at least 26 weeks' service, and who have a lack of certainty in terms of the hours, days, or times of their work, or if they are on a fixed contract of 12 months or less, will be able to make an application to their employer to vary their terms and conditions to provide more certainty. Employers would have to follow a set procedure when considering such requests and only reject a request on specified business grounds.

In practice, the new right will capture many casuals and zero hours workers, as well as agency workers and those on short fixed-term contracts. The proposal is contained in the Workers (Predictable Terms and Conditions) Bill, which is currently making its way through Parliament, but there is no date for implementation yet.

Holiday and Business Transfers (Post-Brexit changes)

The UK Government has recently consulted on proposed changes in relation to statutory holiday and the rules on employee information and consultation on a business transfer. In summary the proposals are:

• Holiday: employers will be able to pay rolled-up holiday pay, which is currently unlawful under EU case law, and holiday pay may be limited to basic pay only (currently EU case law requires employers to include regular payments, such as overtime and commission, when calculating holiday pay);
  
  
• Business transfers: employers will be able to inform and consult employees directly on a transfer of a business or service provision change where fewer than ten employees are affected (currently employers who do not recognise a trade union must arrange for employee representatives to be elected regardless of how many employees are affected).

For more information about these changes, please see this briefing: Post-Brexit employment law: evolution, not revolution? | Travers Smith

Family friendly rights

The UK Government is introducing new rights as follows:

• Carers' leave: employees will be able to take up to one week of unpaid leave per year to care for an adult dependent (such as an elderly relative)
  
  
• Neonatal leave: parents of premature babies will have a right to up to 12 weeks' neonatal leave (in addition to maternity/paternity leave)

There is no confirmed date for when these changes will come into effect.

Reform of the UK listing, prospectus and secondary fundraising regimes continues with the UK Financial Conduct Authority (FCA) publishing its proposals for a radical overhaul of the listing regime earlier this year and HM Treasury having recently published a revised draft of the Public Offers and Admissions to Trading Regulations 2023. In this briefing, we take stock of the wider package of reforms which are aimed at making London a more attractive and trusted place to list and at striking a balance between achieving transparency and market integrity, whilst removing some of the complexities and key frictions that are often seen as too burdensome. We look at the changes that have already been made as well as others that are yet to come.

The ISSB has recently issued its inaugural standards concerning sustainability-related disclosures for international capital markets: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (ISSB Standards).

In response to this, the UK's Financial Conduct Authority has also published a statement emphasising that it intends to update its climate-related disclosure rules to reference the ISSB Standards stating that the ISSB Standards answer "the clear market demand for complete, consistent, comparable and reliable corporate sustainability disclosures".

Whether or not the ISSB Standards eventually become the international harmonising framework for corporate sustainability disclosures is certainly debateable, but it is worth noting that the UK Government has consistently signalled its strong support of the ISSB Standards and with over 40 jurisdictions backing the creation of the ISSB, it suggests that the ISSB Standards may eventually fill the role of the global sustainability standards leader, in what is currently a frustratingly fractured reporting landscape for many. For more about the ISSB, the new ISSB Standards, implementation and alignment, read this insight.

UK Labelling Regime for investment products

Labelling investment products is a tricky business. It is important to make the labels clear and meaningful to investors, and to guarantee some minimum standards so that even unsophisticated investors know what they are getting. At the same time, too much prescription will limit investor choice and narrow the range of products in the market. If done badly, labels can also distort investment and capital allocation decisions in ways that undermine policy objectives and increase investor risk. However, if done well, fund labels can increase investor confidence and, with sustainability-focused products, curb "greenwashing". For more on the UK labelling regime for investment products, read or listen to the latest episode in our Sustainability Insights series.

In line with its public commitment to promote environmental sustainability and help accelerate the transition to a net zero economy, the UK Competition and Markets Authority (CMA) has published its draft Guidance on the application of the Chapter 1 prohibition to environmental sustainability agreements. Once implemented, the Guidance will provide business with greater comfort in assessing the legality and risk profile of their environmentally focussed agreements – at least in the UK.

Following consultation, the final version of the Guidance is keenly awaited. It is expected to be published by the end of the summer. However, given the numerous steps that the CMA has already engaged in, significant changes are not expected. Meanwhile, the European Commission has published its final, revised horizontal guidelines, which came into force on 1 July 2023.

The UK and EU positions are broadly consistent. However, important differences have emerged, for example in the CMA's explicitly more permissive approach to 'climate change agreements'. The scope of the UK and EU guidance also differ: with the Commission covering the concept of sustainability to include not only environmental/'net zero' goals, but also other activities that support social development (including labour and human rights). By contrast, the CMA's focus is specifically on environmental agreements. In our briefing we explore the CMA's proposals in more detail.

The EU is in the final stages of preparing the European Sustainability Reporting Standards (ESRS) that organisations in the scope of the Corporate Sustainability Reporting Directive (CSRD) will need to use for reporting.

The previous version of standards are considered in detail in our February briefing; important changes between the previous and current drafts are summarised in our subsequent briefing. The Commission has proposed that there will be no mandatory disclosures, but rather every organisation will need to consider all data points amongst the 12 ESRS and assess the topics using a "materiality assessment". This will need to consider not just financial materiality (how the sustainability topic impacts the business's bottom line) but also how the business's operations affect the sustainability topic ("impact materiality"). The double materiality aspect makes CSRD reporting particularly challenging.

Further guidance is expected from technical advisory body, EFRAG, on how to conduct the materiality assessment as well as how to draw the boundaries of the business's "value chain", another key but challenging aspect of reporting.

We will be presenting a webinar on CSRD and the ESRS in September; sign up to our mailing list to receive our invitation.

Human Rights and ESG

In the last few months, there have been several significant updates relevant more to the "S" and "G" of ESG than the "E". In particular:

• The OECD released a revised version of its Guidelines for Multinational Enterprises, rebranding the latest text as "Guidelines for Responsible Business Conduct". The revision places greater emphasis on the identification and management of environmental and climate impacts that the business causes, contributes to or is directly linked to. An increasing number of EU initiatives in particular imply reference to or directly reference international regimes on responsible business conduct such as the OECD Guidelines or UN Guiding Principles. Read our full briefing.
  
  
• The Principles for Responsible Investment (PRI) has recently issued Human Rights Due Diligence for Private Market Investors, for private equity firms signed up to the UN-sponsored PRI. Similarly to the OECD Guidelines, the PRI guide relies on an organisation causing, contributing to or being directly linked to a human rights impact, which should be identified through a robust due diligence programme. Read or listen to our update here.

Changes to and completion of the EU's Environmental Taxonomy

The EU Taxonomy Regulation was enacted in 2020 but remains somewhat incomplete. Under the Regulation, an investment may be "environmentally sustainable" if it promotes one of six environmental objectives. Until recently, criteria were only published for the two objectives of climate change mitigation and climate change adaptation. The Commission has now published technical screening criteria which will enable businesses to demonstrate alignment with the remaining environmental objectives relating to water, circular economy, pollution prevention and control, and biodiversity (known as "TAXO4"). The screening criteria are awaiting final publication and expected to enter into force for those reporting under the Taxonomy on 1 January 2024 (which will include any companies newly in the scope of non-financial reporting obligations under CSRD).

At the same time, the Commission has updated the technical screening criteria for the first two climate-related objectives. New economic activities will be included (thus becoming "Taxonomy-eligible"), including some controversial entries, particularly around transport.

Both developments are summarised in our briefing.

Product Regulation in the EU

The EU is working at a rapid pace to ensure that product manufacturers and importers adhere to the highest standards of performance – with much of the body of product regulation being 10 to 20 years old, several updates were needed to better reflect today's technological understanding and societal values. These include an update to the Batteries Regulation and Product Safety Regulation, and new regulations on the prohibition of products made with forced labour and linked to deforestation. We will shortly be publishing a briefing examining some of the many developments product manufacturers and importers should be aware of, so watch this space.

Read our quarterly listing of expected future changes in the UK law affecting work-based pension schemes.

Pensions Dashboards

Pensions dashboards will fundamentally change the way individuals in the UK will access information about their pensions, allowing people to see all of their future pension entitlements in one online place. Regulations have added detail to the framework set out in the Pension Schemes Act 2021, including the staging timetable for pension schemes to connect and provide data and information to the dashboard 'ecosystem'. 

Technical issues have meant that the UK Government recently paused the programme and new scheme connection dates will be announced in due course. Despite the delay, schemes should continue their preparations, as our '10 actions for getting to grips with pensions dashboards' explains. 

Employer Covenant

This briefing discusses ten key questions that the trustees of a UK defined benefit pension scheme should ask themselves when considering their employer covenant (i.e. the employer's obligation and ability to support the scheme), including when there is proposed corporate activity within the employer's group.

Pensions Climate Change Disclosures

The Pensions Regulator has recently published a review of the first wave of UK pension scheme climate change disclosure reports, applauding some examples of good practice but noting potential areas for improvement.

In our article, we give a brief reminder of the pensions climate change governance and disclosure requirements, together with five key messages to take away from the Regulator's review in readiness for the next (and, for many schemes, the first) reporting cycle.

The Renters (Reform) Bill is designed to boost the rights of the UK's large and increasing population of tenants with a view to creating a rental sector that provides secure, high-quality homes. Key features include:

• removing fixed term tenancies and introducing a simpler tenancy structure where all assured tenancies are periodic – improving security for tenants;
  
  
• reforming possession grounds making it easier for landlords to repossess their property, including where tenants are at fault;
  
  
• establishing an ombudsman to resolve renting disputes;
  
  
• setting up a landlord and tenant portal and database to inform both sides of their rights and duties;
  
  
• requiring homes to comply with the Decent Homes Standard;
  
  
• introducing a new process for rent increases.

Overseas Entities Regime: Update

The Register of Overseas Entities went live at the UK's companies' registry, Companies House, on 1 August 2022, and the transitional period expired on 31 January 2023. Following this date, overseas entities which own UK real estate must have registered their beneficial ownership at Companies House. In addition, all of the restrictions on title that have been entered on existing property titles have come into effect and so the Land Registry will only register sales, charges, and leases with terms of more than 7 years if they have evidence of any Overseas Entity ID. For further details, see our briefing. 

We understand that there are still a sizeable number of overseas entities that have not registered, even though criminal and financial penalties can apply. From June 2023, the Register of Overseas Entities (Penalties and Northern Ireland Dispositions) Regulations 2023 have given Companies House the power to levy financial charges on non-compliant overseas entities, which they indicate will range from £10,000 to £50,000 per property owned. Read more about Companies House's approach to enforcement here. 

The Minimum Energy Efficiency Regulations 2015  (MEES) are intended to reduce harmful emissions from the built environment, with a view to achieving net zero by 2050. The MEES regime refers to the rating that a property was given in its energy performance certificate (EPC). Since April 2018, landlords of qualifying commercial properties in the UK have been unable to grant a new lease of a property that scores F or G unless exempt. Some UK properties do not require an EPC and therefore fall outside the regime.

From 1 April 2023, these rules apply to existing leases of non-domestic private rented property in the UK unless there is a legitimate reason permitted by the MEES Regulations and registered on the PRS Exemptions Register. This means that landlords must not continue to let a sub-standard property (i.e. where the EPC rating is F or G) to existing tenants (even where there has been no tenancy renewal, extension, or indeed new tenancy) or grant a lease to new tenants, unless one of the permitted exemptions apply and has been registered. It is anticipated that the next step is that all the minimum requirements for landlords letting commercial property will shift to C by 2027 and B by 2030, although this has not yet been confirmed by the UK Government.

The Building Safety Act 2022 is now in force in the UK, although many of its provisions will be put into place via future secondary legislation. It will impact on the design and construction of all buildings, and the operation of higher-risk residential buildings. It establishes a new safety regime which will be overseen by a new Building Safety Regulator, and imposes safety-related duties that will apply throughout the whole lifecycle of a building. Read our Real Estate Briefing for more general detail and also our briefing on the duty to register higher-risk residential buildings on or before 30 September 2023.

New Fire Safety Regulations

Landlords, operators and managers of buildings in England that contain two or more residential units which share communal spaces are impacted by the Fire Safety (England) Regulations 2022 (Regulations) that came into effect  in January this year. Brought in as a response to the 2017 Grenfell Tower fire in a high-rise residential building in London, the Regulations impose additional fire safety duties on 'responsible persons', with criminal sanctions for non-compliance. For more, read this briefing.

The UK Spring Budget 2023 firmly focused on economic growth and investment, with a move to a generous new annual expensing regime for capital expenditure and the abolition of the pensions lifetime allowance, all aimed at increasing business investment and boosting the workforce.

Less prominent were the raft of smaller measures and changes aimed at reducing administrative burden and addressing practical challenges in applying the law, many of which have come out of consultations between HMRC and the UK business community. This Briefing looks at the Budget announcements in further detail.

Multinational top-up tax

The UK Government has gone ahead with its implementation of OECD BEPS Pillar Two, also known in the UK as "multinational top-up tax". This measure is aimed at large multinational corporates, but there are various exclusions, including for investment funds and pension funds.

The income inclusion rule was implemented into UK law by the Finance (No.2) Act 2023 and will take effect in relation to accounting periods commencing on or after 31 December 2023.

The Act also implements a domestic top-up tax requiring large groups or standalone entities (groups or entities that meet a €750m turnover threshold test) to pay a top-up tax where their UK operations have an effective tax rate of less than 15%. Unlike multinational top-up tax, domestic top-up tax will apply to large domestic groups and entities in additional to large multinational groups and entities. This will also take effect in relation to accounting periods commencing on or after 31 December 2023.

A first draft of the undertaxed profits rule (UTPR) was published in July 2023. The UTPR is expected to be included in Finance Bill 2024, but it is not yet clear when it will come into force. The UK Government has previously stated that the UTPR will not come into force before 31 December 2024.

Permanent establishments

The UK Government is currently consulting on changes to the definition of permanent establishment and profit attribution rules relating to permanent establishments to more closely align them with the current position in the OECD model tax convention. If adopted, changes would be made to the UK's domestic rules, including introducing the expanded definition of permanent establishment contained in the model convention. The UK's starting position when negotiating tax treaties would also change to adopt that definition, but its existing treaties would be unaffected.

From 6 April 2023, the maximum value of shares an individual can hold under a tax-advantaged Company Share Option Plan (CSOP) has doubled from £30,000 to £60,000 (calculated by reference to the value of the shares at the time of grant). This increase is welcome news for UK companies operating CSOP plans as the previous limit, which had not changed for nearly 30 years, was soon reached by employees. 

Also, CSOP is now accessible to a wider range of companies because the rules on the shares that can be used for options have been relaxed. Previously, UK companies with more than one class of ordinary share could only grant CSOP options over the class that either gave employees control of the company or was majority held by non-employees.  From 6 April this rule has been removed, meaning that UK companies are now able to grant CSOP options over any ordinary class of share for employees, including so called 'growth shares', should they wish to. The changes apply to options in existence on 6 April that have not yet been exercised as well as those granted on or after that date.

Save As You Earn (SAYE) bonus rate calculation

The UK tax office, HMRC, has announced that the mechanism for calculating bonus rates for SAYE participants will change from August which is expected to result in a bonus being provided to new participants for the first time in nearly 10 years. Read this briefing for more.

Review of SAYE and Share Incentive Plans (SIP)

The UK Government has launched a Call for Evidence on the two tax-advantaged all-employee plans, SAYE and SIP, to consider opportunities to simplify and improve the schemes. It is likely that the UK Government will be asked to consider increasing the financial limits on individual participation and perhaps reducing the vesting/holding periods for tax relief to be available.

Official Rate of Interest for employment tax purposes increased to 2.25% from 6 April

Where a company makes a loan to an employee (for example, to fund the purchase of shares) there will be UK income tax and national insurance contributions to pay if the interest charged is at less than the "official rate".  From 6 April, the official rate rose from its previous level of 2% to 2.25% so companies with such arrangements in place should consider the implications this will have.

Enterprise Management Incentives (EMI): HMRC guidance on discretion and improvements to the grant process

At the end of last year, HMRC provided some welcome clarification on the use of discretion within EMI plans by publishing guidance on the circumstances in which it can exist or be exercised without putting the tax-advantaged status of an award at risk. Since 6 April, the grant process for EMI has been improved by removing the need to state restrictions attaching to shares in option agreements and dispensing with the requirement for participants to sign a working time declaration (although they must still meet the statutory working time conditions).

Changes to the Capital Gains Tax (CGT) annual exemption

The reduction in the annual CGT exempt amount (down to £6,000 from £12,300 on 6 April and then halved again to £3,000 from 6 April 2024 onwards) is unwelcome news for participants in UK tax-advantaged share option plans. This is because many of them have been able to use the allowance against gains realised when they sell their option shares to make participation in the plan effectively tax free. Some participants can transfer their shares to a spouse or civil partner first, to take advantage of double the allowance. The same issues arise for participants in share incentive arrangements that are not tax favoured but benefit from capital gains tax treatment.