Chapter 5   Identifying
Chapter 5   relevant
Chapter 5   legislation

The sheer volume of legislation, rules, statutes and directives facing small firms seems to have increased at an exponential rate, even more so as the UK is drawn ever closer into the tangled web of the European Union where bureaucracy rules supreme and the harmonization of the laws of its member states appears to be the sole acknowledged route to Nirvana. Why, I ask, should anyone want to go to heaven if they can get a job as a bureaucrat or, better still, a solicitor in Brussels? However, coming back to the real world, actually identifying the legislation which is relevant to any particular new small business can be a nightmare, even without the fact that the laws are constantly changing and thereby placing additional demands on owner-managers who have to understand and comply with them.

The objective of this chapter is to list and briefly describe a range of the most important pieces of legislation which might affect small businesses and their owners. The intention is not so much to produce a legal compendium or reference text, as to assist the readers to identify those areas of the law which are relevant to their own particular businesses, and where they will need to examine the implications of that legislation in more detail. Remember, ignorance is no excuse in the eyes of the law so, if a piece of legislation sounds remotely relevant to your business circumstances, check it out.

This chapter covers much of the underpinning knowledge requirements of Unit A3 of NVQ Level 3 Business Planning, entitled ‘Investigate the requirements of any legislation you have to comply with in setting up and running the business’. Unit A3 relates to setting up and operating the business legally, and to identifying any health and safety and environmental legislation which might be appropriate to the particular business. For the NVQ candidate, it is as important to identify which legislation is not relevant to a particular business proposition, and to be able to explain why that is so; as it is to pick out those laws which are relevant. This is because the justified or argued elimination of legislation which is not relevant to the business, is a valuable means of demonstrating the candidate's competence, knowledge and understanding of the subject.

Many organizations will be subject to very specific legislation which is only relevant to their own particular field of operation (e.g. abattoirs, breweries, fishing, road transport or zoos), and it is simply not practical to try to address all of these. Instead, this chapter looks at the main items of legislation, which have applications to broad sections of business operations, and groups these under five headings:

•   health and safety and related legislation;

•   environmental and trading legislation;

•   employment law;

•   financial and company law;

•   anti-discrimination law.

Health and safety legislation

Health and safety legislation has existed under a number of guises for many years, but it was only in the 1970s that its real importance was acknowledged and made properly enforceable. Prior to that the emphasis was made, for example, on provision of safety guards on machinery, but without enforcing their use, or for ensuring adequate toilet facilities where more than five staff were employed. Post-1974 the emphasis switched to that of care for employees, visitors, customers and passers-by, and to risk assessment and prevention of accidents in the workplace.

Factories Act 1961 and Offices, Shops and Railway Premises Act 1963

Under the Factories Act the employer (‘occupier’ of the factory) has a responsibility to protect the employees against any risks of the industrial environment to which they might be regularly exposed. This involves ensuring safe systems of work, safe access and clear gangways, and fenced and guarded machinery. Occupation of premises and the name and nature of the business must be notified to the Health and Safety Executive, including notification if any mechanical machinery is used. Written details of any death or serious injury resulting from industrial accidents must also be notified within three days of the incident. Under the Offices, Shops and Railway Premises Act prospective occupants must notify the appropriate local authority at least one month before the start of occupation of the premises; and must subsequently notify any accidents or industrial diseases. Safety requirements required by the Act are similar to those specified under the Factories Act, but employers must also avoid overcrowding premises, and must provide adequate water and sanitation facilities, heating, lighting, ventilation and first-aid facilities.

Health and Safety at Work Act 1974

Whereas the previously mentioned Acts were fundamentally concerned with the provision of basic minimum standards of safety and hygiene in the workplace, the Health and Safety at Work Act was designed to extend this provision (and the employers’ liability to ensure it) much further. It is the duty of the employer to provide safe working systems and a safe and secure working environment for all staff, customers and visitors to premises, as well as the general public, passers-by and, in some cases, even potential trespassers. The Act applies not only to business premises, but to all public places, local authority premises, hospitals, entertainment sites, community halls, shopping centres, etc. Responsibility also extends to any staff working away from the main place of work, such as lorry drivers, or contractors’ staff working on site. It also requires sites to be securely fenced against intruders who might inadvertently injure themselves on a hazard within the site. Long gone are the days when building site workers would lean over the side of scaffolding to wolf-whistle at passing girls. These days, apart from probably being accused of sexual harassment, the chances are that most scaffolding will be covered by a mesh screen to prevent any loose objects falling on passers-by, and leaning over the scaffolding would be regarded as an unsafe practice. If television adverts for a certain popular fizzy drink are anything to go by, it will probably be the girls doing the whistling anyway!

Another major requirement of the Act is the need for every employer with more than five staff to produce and regularly update a written Health and Safety Policy Document for the organization or premises, and to ensure that all new and existing staff are made aware of its contents. Employers are also required to carry out regular risk assessments throughout their premises, and across working practices, to identify and minimize any likely potential harm to employees or potential users or visitors to the premises. Appropriate health and safety posters must also be clearly displayed within the premises, and these can be obtained from the local Health and Safety Executive (HSE) offices. Employers must record all accidents or injuries in an accident book kept for that purpose. The HSE must be notified of any deaths or major injuries resulting from accidents at work, and can prosecute employers or owners or operators of premises for negligence if appropriate, the penalties for which are potentially high and in extreme cases might include imprisonment.

Control of Substances Hazardous to Health (COSHH)

All employers and operators of premises where potentially hazardous chemicals are stored, manufactured or used in a commercial or industrial process must carry out specific risk analyses under the COSHH regulations. As part of this process, they must identify suitable preventative actions or remedies in the event of accident, leakage or spillage of any such substances. They must also display appropriate warning notices detailing the nature and potential hazards of the substances, and have the means available to deal with any such events. Staff must be instructed in the safe handling and storage of hazardous substances, and informed of what to do if leakage or spillage should occur.

For example, most agrochemical distributors are required to have impervious flooring and some form of concrete bund around the site so that any leakage can be contained to avoid the contamination reaching local drains or watercourses. Within the site they would have to have sand or other inert substances to soak up spillage, and masks for staff to avoid breathing noxious fumes. Whilst this might sound like an extreme example, most industrial cleaning agents contain bleach or chemicals which might come under COSHH regulations, and even the peroxides and perm lotions used by hairdressers can have some quite damaging effects on human skin if mishandled!

Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 1982

These regulations, often referred to as RIDDOR, require the owners or operators of businesses or premises to notify the responsible authorities of certain specific events or illnesses. For example, the local Environmental Health Authority would need to be notified of an outbreak of food poisoning, particularly if it involved the staff of a food manufacturer or distributor, or the customers of a specific catering outlet. The HSE must be notified of any major accidents or substantial injuries to employees, and the local Medical Officer must be notified of outbreaks and individuals who contract specified illnesses such as meningitis or polio.

Fire regulations

The local fire brigade is responsible for advising operators of premises and for inspecting the premises to ensure that they comply with fire regulations. These will vary according to the size, type and use of premises. For example, a small workshop may just require a specified number of water and powder fire extinguishers, whereas a restaurant kitchen will also usually need to have fire blankets available to cover any burning cooking oil. At a more complex level, a residential home or hotel will have to provide fire exits and escape routes, emergency lighting, regularly tested alarm systems, staff training, and fire-doors at regular intervals along corridors, which are designed to withstand fire for certain minimum periods. Unless the premises comply with the regulations, the fire brigade may refuse to issue or renew the necessary licence, and the hotel will be unable to operate. Fire regulations may also be relevant to materials used for partitioning within offices, to storage of inflammable materials and to the external access routes to premises.

Environmental and trading legislation

These types of legislation have been linked together as being in the interests of members of the public at large, both in terms of protecting their interests as consumers and their interests in the protection of the living environment as a whole.

Environmental Health Act

The Environmental Health Department of local authorities are particularly concerned with aspects of public hygiene and food safety. In the case of public health and hygiene, the Environmental Health Act empowers local authorities to carry out or enforce the safe removal and disposal of refuse, and the extermination of vermin or other risks to public health. They are also responsible for monitoring and licensing the operation of funeral parlours.

In recent years the food safety role has become much more prominent, with all manufactures, suppliers, distributors, and retailers of food or drink having to register with their local authority. Specific standards are prescribed for the safe preparation, handling and storage of food, and premises are regularly inspected to ensure that these standards are met on an ongoing basis. There is the risk of enforced closure of premises in cases of default, and heavy fines where food poisoning is found to result from poor food handling or contamination, which is quite realistic when we remember that the clostridium and streptococcal bacteria found in kitchens are potentially lethal.

The food-handling regulations prescribe minimum levels of training for staff, i.e. the Basic Food Hygiene Certificate, with higher levels for supervisors. They also prescribe the types of washable materials suitable for covering walls, ceilings and floors, fly screens for protecting windows and vents, the quality of stainless steel for work surfaces and the colour coding of knives etc. used for different purposes to avoid cross-contamination. Operators of food premises are expected to produce, adhere to and record regular planned cleaning programmes for all food production areas, to provide staff with all necessary protective clothing and to provide instruction and supervision in safe food-handling practice.

Town and Country Planning Acts 1971

The principle of development control was introduced in 1947 under the first Town and Country Planning Acts, which were updated in 1971. Local planning authorities such as the district councils are responsible for producing local development plans, controlling and approving new developments, approving the change of use of premises and monitoring the use of specific ‘listed’ buildings and conservation areas. County councils have a role in producing strategic plans and for development control of more major items such as mining, gravel extraction, waste disposal etc.

For any new or expanding business which is planning to occupy premises, it is necessary to ensure that planning approval exists to cover the type of activity for which the premises will be used. For example, if I wish to convert the front room of my home into a shop, I will need to obtain permission for change of use from domestic to retail use. If I wish to rent a farmer's barn to manufacture and sell rustic furniture, I will need to apply for change of use from agricultural to commercial use. Remember, simply applying for change of use for premises does not mean the new use can start straight away. The change of use still has to be approved, and very often there will be specific planning conditions attached to the approval. For example, approval may be granted for a fixed period such as three, five or ten years, it may prohibit any structural change to the premises without further specific approval or it may limit hours of opening or public access.

Building Regulations

Whereas the planning regulations affect the use that can be made of premises, the Building Regulations relate to any changes or modifications to the structure of the premises, including drainage. If I wish to build a conservatory on the back of my house, so long as it falls within a certain size limit, I will not need planning permission; but I will still need Building Regulations approval for the new structure. When an application is made, the plans are submitted to the local council and a building inspector or surveyor will check and approve the structural details, e.g. whether or not the foundations are adequate to support the proposed building. Once building commences, the inspector will visit the premises at specific intervals, to ensure that the builder is actually complying with the details of the plans, and the inspector has the power to stop work or order work to be replaced or improved if inadequate. Naturally, the local council charges a fee for the Building Regulations approvals and inspections.

Local Government Miscellaneous Provisions Act 1982

This is an interesting piece of legislation that gives local authorities discretionary powers to license and/or inspect various business activities. For example, in some districts, all beauticians and massage parlours need to register with the local council. In others, only those performing functions that penetrate the skin (such as tattooing, ear piercing or electrolysis) need to register and be inspected for hygiene purposes. So, in view of the discretionary nature of this Act, if in doubt, call your local council offices to check first.

Control of Pollution Act 1974

This Act was introduced both to update and reinforce some previous legislation, such as the Clean Air Act; and to cover emerging problems and gaps in environmental controls. These included the emission of gases and toxic fumes, pollution of watercourses, and the licensing and control of tipping and disposal of waste materials. For example, every tip site, waste storage or waste transfer station has to be licensed, usually by the county council or local authority with responsibility for waste disposal (as opposed to waste collection). The licence will specify the materials which can be processed or tipped at the site. If any toxic or problematic materials are to be handled, then the conditions of the licence will usually specify the measures that need to be taken for safety purposes. Certain toxic materials can only be disposed above impervious clay soils as a sandy or chalky substratum might allow them to permeate into an underground aquifer and pollute a water supply. I was once involved in a site in Sheffield where a limestone barrier was proposed to stop an underground fire in a very old coke-breeze tip from reaching a coal seam on adjacent land. These are problems inherited from an industrial past, which the Control of Pollution Act is intended to prevent from recurring in the future. It does have very significant implications for any manufacturers whose processes result in the need to store or dispose of toxic materials.

Sale of Goods Act 1979 and 1995, and Consumer Protection Act 1987

These pieces of legislation are designed to protect the interests of the consumer, and are primarily administered by the Trading Standards Officers employed by local authorities. They define the rules under which warranties can be enforced, goods exchanged, refunds obtained, etc. At one time the key definition was that when goods are sold, they must be ‘fit for the purpose’ for which they were designed or of ‘merchantable’ quality. The latter phrase has now been replaced by the term ‘reasonable quality’, which in many ways swings the balance more in favour of the consumer. In the first instance it is the vendor of the goods who is legally responsible to the consumer for any faults or problems, including those inherent in the product itself, but ultimately the cost of repair or replacement goes back to the manufacturer (or importer). In the case of death or substantial personal injury, the liability may extend to all parties with involvement in the product: manufacturer, importer, carrier, wholesaler and retailer. The law requires that terms of trade are expressed in plain and intelligible language. They must not contain any terms that bias the transaction unfairly or unreasonably against the consumer, and inclusion of such terms would render those contracts null and void. In particular they cannot seek to restrict liability or enforce broad indemnities for personal death or injury and any clauses seeking to restrict liability for loss or damage must be reasonable in the circumstances. For example, the manufacturer's warranty or guarantee cannot limit or restrict the consumer's rights as defined in law; neither can it attempt to limit the manufacturer's legal liability for negligence.

Where vendors and manufacturers fail to meet their responsibilities to the consumer, or where goods are considered to be dangerously faulty, then the Trading Standards Officers have powers of prosecution. These days it is quite common for most of the larger high street chain stores to offer refund and replacement facilities which go far beyond the minimum legal requirements, and this can reflect badly on the smaller independent traders who do not have the resources to provide the same terms.

Advertising standards

These are not so much statutory regulations, but a code of standards that are designed to encourage good practice within the advertising industry, and to discourage adverts which are considered in bad taste, offensive, inaccurate misleading or libellous. The code of practice is administered by the Advertising Standards Authority, which itself was set up by the government for the purpose.

Data Protection Act 1984

Under this Act all computer users who store details or information about private individuals, or information of a personal nature, must register with the Data Protection Registrar. This ruling applies whether the holders of the information are private individuals, sole traders, partnerships, limited companies or public limited companies. It does not apply, however, to information about individuals which is stored on manual systems such as card index files. The onus is on the holder of computer data to register under the Act, and not to wait until registration is queried or challenged.

Anyone who thinks that their personal data might be stored within a computer system has a right to be informed if that is the case, and a right to see the stored information on payment of a reasonable fee. For example, the two biggest credit reference agencies which operate in the UK will provide a copy of any information held against a named individual or private address on payment of a fee, which is currently £2. This enables people who are refused credit to check on whether or not the reason for refusal might be based on erroneous or inaccurate information.

Employment law

Employment law is a very complicated and constantly changing subject. For that very reason, all businesses are well advised to seek professional guidance where disputes or areas of doubt might arise, as the consequential expenses and risks of facing industrial tribunals can be crippling to a small business which is struggling to establish itself. Even professional personnel managers who subscribe to receive regular updates to changes in the law still have to think carefully when giving advice. So, it is even more important for the owner-manager, who must double as the firm's personnel specialist, to tread carefully.

Employment Acts

Many of the provisions of the various Employment Acts overlap with other legislation, described below. Fundamentally, in law the employer is obliged to:

•   provide a safe and secure working environment;

•   pay staff at agreed rates and at agreed intervals;

•   provide staff with contract of employment;

•   inform staff of health and safety policies, and discipline and grievance procedures;

•   ensure that staff do not exceed permitted working hours;

•   provide staff with paid leave for holidays, statutory sickness pay, paid maternity leave;

•   pay staff for redundancy as appropriate, and give suitable notice to terminate employment;

•   treat staff fairly and reasonably, particularly where dismissal is concerned;

•   not discriminate against staff in any way.

In return, the employer has the right to expect staff to:

•   put in a fair day's work for a fair day's pay;

•   observe workplace rules and health and safety policy;

•   act in a safe, competent and reasonable way alongside other employees;

•   act honestly, and not against the employers’ interests;

•   take care of the employer's property;

•   honour the employer's ownership of any patents or inventions developed within work time or in the workplace;

•   not disclose any confidential information about the business to outsiders;

•   obey lawful and reasonable instructions from the employer.

Employment Protection Act 1975

This gives employees who have been with an organization for at least two years, automatic rights to, and guarantees of, the minimum levels of statutory redundancy pay if faced with that prospect. They are also allowed paid time off work to look for alternative work if facing redundancy. After six months of employment, female staff are entitled to receive statutory maternity pay and, after two years in employment, their jobs must be kept open for them if they wish to return to work after their period of maternity leave. Also after two years, employees have the right (with legal redress via industrial tribunal) not to be unfairly dismissed from employment. Since 1995, all of these rights apply to part-time as well as full-time workers.

European Working Hours Directive 1998

The UK, by opting out of the EU Social Chapter, had previously avoided having to implement the Working Hours Directive. However, as many EU countries felt that the opt-out gave the UK an unfair trading advantage, it was resurrected under the auspices of EU health and safety legislation. It came into force in the UK in October 1998 and basically requires that no employee shall work in excess of an average of forty-eight hours per week over any seventeen-week rolling period. Employers must take ‘all reasonable steps’ to ensure compliance with the Directive. As is immediately obvious, for any substantially sized organization running a shift system, the calculations and administration involved are horrendous and, whereas larger organizations should be more able to accommodate the cost incurred therein, for smaller firms that cost constitutes another substantial overhead burden.

Certain professions (such as doctors) are exempt from the Directive, and there is a clause that permits employees to opt voluntarily for exemption from the forty-eight hour limit. However, for that voluntary option to be valid, there must be no pressure from the employer and the employee's approval must be given in writing. For it to continue, employees must regularly (e.g. at six-month intervals) be given the option to change their minds or renew their decision to opt out of the Directive.

The Directive also specifies minimum breaks (eleven hours) between periods of work, plus a minimum break of twenty-four hours in each seven-day week and a compulsory rest break if working more than six hours in a day. The minimum paid annual leave entitlement of at least three weeks, was raised to a minimum of four weeks per year in 1999. Again, the resulting financial burden of funding extra paid holidays will have a substantial impact on the operating costs of many smaller businesses.

Contracts of Employment Act 1972

Within two months of starting employment, every employee must be provided with a written contract of employment which specifies the nature and location of their work, the rate and methods of payment, hours of work, holiday entitlement, period of notice, etc. If the employee has not already been informed of the organization's health and safety policy, this should normally be provided at the same time, along with a copy of any discipline and grievance procedures. Whilst these do not actually form part of the contract of employment, their provision both constitutes good practice and, in the case of the health and safety policy, forms part of the employers duty under that legislation.

Employer's Liability (Compulsory Insurance) Regulations 1972 and 1998

All organizations, whether they are sole traders, large commercial businesses, public sector bodies, educational institutions or charities, if they employ any staff in any capacity, part-time or full-time, must take out employer's liability insurance to cover their staff for the risk of accident or injury in the workplace. A copy of the current certificate of insurance must be displayed in a prominent position on their premises, where it can be seen by employees. From January 1999 the minimum sum to be insured increased from £2 million to £5 million for any one claim, and employers are now required to keep all past insurance certificates for a period of forty years.

Minimum wage regulations

In October 1998, under an EU Directive, the government introduced a basic minimum wage for all employees of £3.60 per hour with a slightly lower level for very young employees. Whilst seen by many people as a positive social move, the wisdom of this is still arguable, as some employers have simply removed other staff benefits (such as paid tea breaks) to offset the cost. In some cases, others who may previously have paid higher rates now regard this as the industry accepted standard, and have reduced wages accordingly. Certainly for some poorly paid staff such as carers, domestic and security staff, the minimum wage is a positive move, but for many newly established or struggling small firms it simply increases overhead costs. Either way, it is a legal requirement with which businesses must now comply.

Financial and company law

These are grouped together primarily because the laws which relate to the legal format and structure of businesses invariably, within the definition of those, become involved with the financial aspects of capitalization and distribution of profits, which in turn have implications for taxation etc.

Finance Acts

The Finance Acts are the means by which the government is able to raise money by taxation, and to operate its fiscal policy. As such, they are effectively revised or modified every time there is a new government budget, which is usually at least once a year. However, they also define some of the processes and procedures within which businesses must operate, and act as a convenient mechanism to modify other more significant pieces of legislation. An example of the latter is shown below under the Partnership Act section.

HM Customs and Excise VAT regulations

Value added tax is another legacy of membership of the EU, the rates of which have climbed slowly but steadily since its introduction, to the current level of 17.5 per cent. The tax is based on the concept that at each stage of the supply or production of goods or services, value is added to those goods or services, and that added value is taxed. Some products, such as food, childrens’ clothing, animal feeds, etc. are zero rated and attract no VAT. Currently, any business which has a sales turnover of £50 000 or more per annum, must register with HM Customs and Excise and must charge VAT on the value of its invoices to customers. It must pay to Customs and Excise, every quarter, the sum of all VAT collected in that quarter, less any VAT which it has paid to its suppliers during the same period. Dates for payment are fixed and penalties for transgression can be heavy. Be warned! Unlike other creditors, Customs and Excise do not need to obtain a court order before sending the bailiffs into your premises to confiscate your stock or equipment.

Laws of taxation

These are essentially derived from the Finance Acts as principles in law, but the specific operation of the tax system (in terms of rates of taxation, tax-free allowances etc.) are modified each year by the government as part of the annual Budget. Amendments to taxes, and the introduction of new taxes are usually made under changes to tax regulations, rather than by introducing specific new Acts of Parliament. The influence of the EU on tax law is expected to become increasingly significant over the next few years, because of the pressure from several continental companies for the UK to ‘harmonize’ its tax laws with those of other parts of Europe. This is largely because some of our European neighbours regard the UK's less onerous company tax system as giving UK businesses an unfair advantage! Whatever happened to the old adage ‘If you can't stand the heat, get out of the kitchen’? The laws on taxation are quite complicated, and this is one particular area where the advice of an accountant or taxation specialist can often more than pay for what it costs. Remember, tax avoidance is legal, tax evasion is not. The two are often finely divided, with the difference between them being only accurately determinable by an experienced taxation expert.

Companies Act 1985 and 1989

The Companies Act formulates the rules under which all limited companies, and public limited companies operate. It specifies the registration requirements, and the annual returns which have to be made, reporting the accounts and financial situation of the company etc., including:

•   The annual accounts: profit and loss account, balance sheet, cash flow statement, debtors and creditors figures, details of any material changes in methods of accounting.

•   The capital value of the company, numbers and types of shares issued, paid-up share value, details of loans and debentures, and any investments made by the company.

•   The proposed dividend payable to shareholders.

•   The names of directors, details of directors’ expenses, remuneration of lowest and highest paid directors, schedule of directors’ interests, directors’ annual report.

•   The names of auditors, details of auditor's remuneration, auditor's annual report.

For small companies with a turnover of under £350 000, and balance sheet of under £1.4 million, non-audited accounts with an abbreviated balance sheet can be submitted if supported by an accountant's statement confirming that the accounts agree with company records. A copy of the directors’ report and the profit and loss account must be provided to shareholders.

In either case, the company must hold an annual general meeting to which all shareholders are invited. Day-to-day management is carried out by the board of directors.

Partnership Act 1890

As can be seen by the date, this is a very long-standing statute. When a partnership is established it is usual for the partners (or their legal representatives) to produce a legally binding partnership agreement which specifies a number of details:

•   The names and addresses of the partners.

•   The name and the nature of the business, and its trading activities.

•   The effective date of commencement of the partnership.

•   Decision-making procedures, and any arbitration or dissolution arrangements.

•   The relative capital inputs of the partners.

•   Banking arrangements, accounting periods, production of annual accounts etc.

•   The way in which profits and losses will be divided and, if necessary, arrangements made with creditors.

The partnership agreement, once signed and witnessed, is a legally binding document. In the absence of a formal partnership agreement, the Partnership Act specifies that profits and losses will be allocated equally between partners in the business. It also prescribes that if a partner wishes to resign, the whole partnership must be wound up and a new partnership formed by any remaining partners. This is obviously an onerous process, particularly in professional partnerships (accountants, solicitors etc.) where changes are relatively frequent. To overcome that problem Section 113 of the Finance Act 1988 allows for the production of a ‘Notice of Election to Continue Partnership’ wherein a partner could leave, or another join, without having to dissolve or rewrite the partnership agreement, thereby simplifying the whole system for income tax purposes.

Another key aspect of the Partnership Act is that it specifies the ‘joint and several liability’ of all partners for partnership debts, whereby each partner is liable not only for their own share of the debt, but also for the debt as a whole, in the event of default by other partners.

Business Names Act 1985

Names of limited companies are registered with the Registrar of Companies at Companies House, and before a name is registered there is a search process to ensure that the name has not already been used by an allocated company or allocated to a newly formed but inactive company. The Registrar can provide advice on names, which must not be offensive or constitute a criminal offence.

In the case of partnerships or sole traders there is no registration requirement by law, and proprietors can use their own names or can trade under other names, e.g. ‘John Smith trading as Wonder Web Internet Services’. It is a legal requirement however, for company letterheads and documents to show the registered company name and number, and the names of company directors, and the registered office. In the case of partners and sole traders, where they are not trading under their own names, they must be identified as proprietors on all business documents.

Copyrights, Designs and Patents Act 1988

As stated earlier, any inventions, designs or intellectual material produced by employees during working hours belong to the employer organization. Patent registration is a means of formally and legally establishing sole rights to an invention, and any competitors who wish to produce the same products will have to do so under licence from the patent holder. However, patents are usually only granted for a fixed period of time, and once this expires the invention can be produced by anyone.

Copyright law usually relates to printed material, designs, drawings and graphics, electronic data, films and music. It does not protect the idea but prevents the copying of material by giving the owners of the copyright the legal right to sue anyone who breaches the copyright. In Britain, that protection lasts for seventy years. The copyright will usually belong to the author or creator of the material, although where this is an employee of a business, the copyright would normally belong to that business, it having commissioned the work.

Consumer Credit Act 1974

There are two aspects of this legislation of relevance to small firms. The first is that any business advising about or giving or arranging extended credit for customers, such as hire purchase or leasing agreements, must be licensed to operate under this Act. The other aspect is that of unincorporated businesses (sole traders and partnerships) where any loans raised by individual proprietors for business purposes, and which are less than £15 000, are regulated under the terms of this Act. These terms include appropriate ‘cooling off’ periods after signing, during which the borrower can change their mind; and the requirement that once a fixed proportion of repayments have been made, recovery of goods or enforcement of payment requires a court order.

Insolvency Act 1986 and Company Directors Disqualification Act 1986

One of the main objectives of the Insolvency Act Act was to curtail the legal but improper practice of operating what were known as ‘phoenix’ companies, particularly in the building and double glazing industries. This is the practice trading for a while, accruing debts, bleeding the business of cash by paying high directors’ salaries and then liquidating businesses overnight. A new limited company surfaces a few days later under another name, with the same directors, operating from the same premises, producing the same goods or services, but having dumped previous creditors without much hope of payment. The Insolvency Act made it a criminal offence for any individual or company director to knowingly continue to trade whilst insolvent. The penalty for failing to take corrective action, or for failing to inform creditors of an insolvent situation, involves the company directors being made personally liable for all company debts, being barred from future directorships and, in some cases, for facing charges of fraud.

It is also no longer possible for company directors to put businesses into voluntarily liquidation and appoint themselves as liquidators. One spin-off from this has been the upsurge in private insolvency practitioners (often described as vultures with accounting qualifications) and their agents, for whom this was almost a licence to print money, particularly during the early 1990s when the rate of bankruptcy amongst small firms hit an all-time high. Insolvency practitioners operate almost in a monopoly market, charging fees well above those of their fellow accountants, so that by the time the assets of the insolvent business are liquidated, and the fees paid, there is often nothing left for the remaining creditors. But on a positive note, it does mean that all bankruptcies and insolvencies are investigated and the reasons subsequently reported to the Department of Trade and Industry. It also facilitates a monitoring system so that company directors who are involved repeatedly in liquidated companies can be identified and, if necessary, barred from holding directorships or positions of authority in future for up to fifteen years.

Businesses which are profitable, but insolvent due to cash flow problems, can continue to trade by virtue of voluntary agreements with creditors wherein, if at least 60 per cent of creditors agree to forestall action to recover debts, the insolvent business can negotiate a planned schedule of repayments to creditors. If the required proportion of creditors agrees, then the voluntary agreement is legally binding on all creditors, as is the schedule of repayments. The Act also introduced the statutory demand for payment, whereby creditors could demand payment within twenty-one days, and if this was not made, they could apply for an immediate winding-up order against the business.

Contract law (debt recovery etc.)

This law is essentially different from any statutory law in that the laws of tort or contract have not been established and precisely defined by Act of Parliament, but have evolved over a period of time as a result of numerous cases in civil law which have formed established precedents. However, as a result of this process there are established procedures within the civil courts, which facilitate the recovery of debts that are proven under civil law, e.g. where failure to pay within a specific time has resulted in a breach of contract. These recovery processes are discussed in more detail in Chapter 8.

Property law

Like the civil law relating to tort or contracts, the law that affects purchase, ownership and leasing of property is a mixture of statutes and case law. Some aspects of these will be examined in more detail in Chapter 13. If anything, this is an area where proper legal advice is more important than just about any other, particularly where legal liabilities are concerned. One example which has always been contentious is that of long-term leases, where a leaseholder who sells on the remaining lease to another party will still remain liable for any subsequent debts on that lease (such as non-payment of ground rent by the new leaseholder). Similarly, if the new leaseholder becomes insolvent, the responsibility for the lease will revert to the original leaseholder.

Anti-discrimination law

Broadly speaking, you are not allowed to discriminate against any employees or applicants for vacant jobs, on the grounds of race, colour, religion, ethnic origin, gender or marital status.

Race Relations Act (1976) and the Equal Opportunities Commission

This was one of the earlier moves to prevent discrimination in the workplace, wherein it became illegal to discriminate against individuals on the basis of skin colour, race or ethnic origin or nationality. When recruiting, you must not discriminate when advertising the job or in determining the terms of the job offered. An employer must not knowingly allow discrimination to continue in the workplace, or to discriminate against staff when considering training or promotion opportunities, or when involved in selecting staff for redundancy or dismissal. A Code of Practice has been produced by the Commission for Racial Equality to guide and assist employers.

The Equal Opportunities Commission (EOC) takes a more positive approach to the problem of discrimination. It expounds that not only should we be discouraging discrimination on the basis of race, religion, colour, ethnic origin, gender, age, size, and disability, but that employers and communities should take a more positive role in giving people the opportunity for employment, promotion and training. The key to this is to judge people on their abilities and potential, rather than on their disability or ethnic origin. The EOC also produces a Code of Practice for the guidance of employers.

Disabled Persons Employment Act 1944

As a result of the many injured and disabled service personnel returning from military service, this Act was introduced to facilitate and improve employment opportunities for them. Any organization which employs more than twenty staff has a legal duty to ensure that at least 3 per cent of its employees are drawn from those registered as disabled; and that facilities are available in the workplace to accommodate them. This may sound quite onerous for employers, but it must be considered within the context of the Department for Education and Employment (DfEE) definition of disabled persons as those who are registered as disabled for employment purposes (i.e. holders of DfEE Green Cards). This does not mean that all such people are wheelchair bound or physically incapacitated, as many holders of Green Cards are simply restricted in the range of work which they can do. For example, someone with a back or leg injury may not be able to move heavy loads in a factory, but could be fully competent in a sedentary or clerical position in an office, where their disability would probably not even be noticed by their colleagues. However, they still contribute towards the 3 per cent quota of disabled staff.

Disability Discrimination Act 1995

Following on from the previously mentioned legislation, the Disability Discrimination Act is really an attempt to promote the inclusion of disabled persons in the workplace and, again, we are not just talking about severe disabilities, but anyone who qualifies for a DfEE Green Card. There has always been a tendency in the past, and not necessarily a conscious tendency, for anyone who admits on a application form to being registered as disabled to be overlooked during the recruitment process – even if the disability is only relatively minor. As in the example quoted above, a person with arthritis may be ‘disabled’ in terms of having limited leg movement or lifting capability, but could have excellent analytical, financial or computing skills which can be exercised whilst sitting down.

Under this Act, disabled individuals have the right not to be discriminated against either during the process of recruitment or within their employment. This also means that they must be given equal opportunity to receive training or to be considered for promotion. Employers must also provide reasonable means of physical access and working systems to allow them to exercise their rights.

Sex Discrimination Act 1975 and 1989

When advertising job vacancies, or when interviewing staff, it is unlawful to discriminate on the basis of gender. Certain exemptions do exist, for example, where gender is specifically relevant as a genuine qualification for the job, such as mineworkers where the working conditions are deemed unsuitable for women or rape counsellors where a male counsellor would be entirely inappropriate or unacceptable for the needs of the clients. No longer can a pub landlord advertise for a barmaid; the advert must be for a bar person. There are, of course, still those inventive characters who try to find a way around the system: ‘Bar person wanted – must be capable of filling a size 14 red rubber gym-slip.’ The mind boggles! This still constitutes sexual discrimination, as it gives preference to one gender over the other.

Equal Pay Act 1970

The Equal Pay Act stipulates that an employer must give men and women equal rates of pay and other employee benefits and pensions, terms of contract etc. where they are carrying out the same or similar jobs as each other. However, in some circumstances differences in pay and conditions are acceptable, for example, in jobs where specialist skills or knowledge are required differential rates can be paid to reflect differing levels of qualifications and/or experience, or perhaps extra annual leave may be allocated as a reward for long service.

Trade Union Reform and Employment Rights Act 1993

It is illegal to discriminate against members of staff on the grounds of trade union membership or participating in trade union activities (unless this interferes with normal working duties and has been carried out without the approval of management). You do not currently have to recognize trade unions, although this situation may change if the EU has its way; but you cannot prohibit staff from belonging to a trade union. Even if there is no trade union involved, staff consultation is still required where redundancy is a possibility or where the potential sale of the business would affect the livelihoods of more than twenty staff. You are entitled to receive at least seven days’ notice of any official industrial action by trade union members, during which time members must be balloted. Failure to do so could render the trade union liable for any losses resulting from a breach of contracts with your commercial customers. Unofficial activity is not the responsibility of trade unions, but would no doubt constitute a breach of contract of employment by the participants, possibly justifying termination of employment.

Sources of information

The main purpose of this chapter has been to summarize the purpose and significance of the various key items of legislation which are relevant to a small business, and which corresponds to the NVQ Unit A3 ‘Investigate the requirements of any legislation you have to comply with in setting up and running the business’. However, there is one aspect which needs further mention, and that is the way in which information is sought and gathered. Element 3.4 of the NVQ involves the ways in which information is assessed and utilized. Essentially this involves ensuring that:

•   When consulting or using any published sources of information you must check to make sure that they are not out of date, and that the usefulness of the information has not been superseded by changes in circumstances or more recent events. For example, government population census information may be well prepared and reliable but, if it is only updated once every ten years, the 1991 census data will not be of much use in the year 2000. In contrast, internet data is often relatively new and regularly updated.

•   The source of the data needs to be checked for its reliability. Again, although very dated, the population census data is generally accepted as coming from a reliable source, whilst the provenance of Internet data, although more current, may be less reliable. Data and statistics can easily be manipulated or modified to prove or disprove a particular argument, so the source and objectivity should be checked and carefully evaluated, especially if it is to be used as the basis for market research. Is the source reliable? Has the data been verified or evaluated by any external agency or academic institution?

•   If you are unable to find the necessary information, or you need help in utilizing it, then you should turn to an appropriate person to get the right advice. For example, in the case of financial information, you might turn to an accountant, a bank manager or a business counsellor from the local enterprise agency. For advice on insurance, an independent insurance broker might be appropriate. In each case, it is important to ensure that the chosen adviser is suitably qualified and experienced for the job. There are many people who advertise themselves as offering accounting services, but a properly qualified accountant will display their qualifications, such as FCA, ACCA or CIMA. Similarly, you will find many local advertisements by financial advisers who might be able to give advice on personal investments and sell you an insurance policy or a private pension (and make plenty of commission for themselves in the process), but who are not qualified to give advice on business finance.

•   As a rule of thumb, if you are in doubt about who to turn to for proper advice, try your local Citizens Advice Bureau or enterprise agency, who will generally be able to provide a list of names of suitable local people. Failing that, the local library will be able to give you the address of the relevant professional organization that can put you in touch with a local member. Finally, bear in mind before committing yourself to using a professional adviser, that these people have to make their living from the provision of advice and professional services, so be prepared to pay the going rate for their professional fees. If the thought of this bothers you, do not be afraid to ask them what the advice will cost before you commit yourself.

Further reading

Clayton, P. (1991). Law for the Small Business. Kogan Page.

Commission for Racial Equality (1976). Code of Practice for the Elimination of Racial Discrimination and the Promotion of Equal Opportunity in Employment. CRE.

Croner's Reference Book for Employers (updated bi-monthly). Croner Publications.

DTI (1996). Setting Up in Business: A Guide to Regulatory Requirements. DTI. URN 96/916.

DTI (1997). Setting Up in Business: A Guide to Legislation Requirements. DTI. URN 97/524.

Equal Opportunities Commission: Code of Practice. EOC.

Equal Opportunities Commission (1985). Equal Opportunities: A Guide for Employers. EOC.

Holmes, A. (1995). Law for Small Businesses. Pitman.

Keenan, A. (1993). Company Law for Students. Pitman.

Ruff (ed.) (1995). Principle of Law for Managers. Routledge.

Weaver, M. and Palmer, S. (1999). Information Management. Butterworth-Heinemann.