The decision in HMRC v A Taxpayer [2023] UKUT 182 (TCC) was handed down on 28 July following an appeal by HMRC in response to the First-tier Tribunal (FTT) decision in May 2022. This is the first case of its kind to examine the meaning of “exceptional circumstances” for the purposes of the Statutory Residence Test (SRT) under paragraph 22(4) Schedule 45 Finance Act 2013. Whilst the FTT decision provided some hope for a broader meaning of exceptional circumstances, taxpayers will be concerned to note the much narrower construction adopted by the Upper Tribunal.

The facts of the case

The taxpayer left the UK to live in Dublin on 4 April 2015, following UK tax residency in at least one of the previous three tax years. She had received legal advice regarding the SRT and her move to Dublin was motivated by this. She was aware that to avoid being UK tax resident for the 2015/16 tax year, she could spend no more than 45 days in the UK. However, she visited the UK for a total of 50 days during the course of the tax year.

She filed her 2015/16 self-assessment tax return on the basis that she was non-resident and that five of the 50 days she was present in the UK was due to exceptional circumstances. The relevant stays in the UK were split over December 2015 and February 2016. HMRC subsequently opened an investigation into her return and rejected her claim of exceptional circumstances for the five days, issuing her with a tax bill of over £3 million. The taxpayer appealed the decision, and the case went to the FTT.

During the course of the FTT hearing, the taxpayer put forward the case that she had been in the UK due to her twin sister’s alcoholism, depression and threats of suicide. She also claimed that her sister’s two minor children had been neglected and the house was in an unliveable state. The taxpayer’s defence was made up of two prongs:

1. Her sister had threatened suicide which constituted “exceptional circumstances beyond her control” and the taxpayer was unable to leave the UK until her sister was “in a place of safety”
2. Her sister was unable to care for her children and the taxpayer was unable to leave the UK until care arrangements had been made for the children

Whilst the FTT rejected the first ground, it accepted the second on the basis that the combination of care requirements for the taxpayer’s sister and her children constituted exceptional circumstances with a heavy weight being placed on the taxpayer’s moral obligations towards the children.

The judgment

HMRC’s appeal was successful, and the decision made by the FTT was overturned by the Upper Tribunal (UT), with the taxpayer being found UK tax resident for 2015/16. The UT noted that the taxpayer was aware of her requirement to keep a clear record of her days in the UK following the legal advice she had taken and, also, that she would be considered UK tax resident if she stayed in the UK for more than 45 days, unless exceptional circumstances applied. The UT stated that the FTT had erred in law in deciding that moral obligations and obligations of conscience can qualify as exceptional circumstances.

The UT were particularly critical of the taxpayer’s vague record keeping and inability to account for her movements for the five days in question. This was compounded by the fact that the taxpayer did not stay overnight with her sister for all five days, but instead spent some nights at her family home with her husband who was still living just seven miles away from her sister.

The taxpayer’s case was further weakened by the fact that her sister had two very good friends that would check on her several times a day. Her brother also lived 20 miles away and the taxpayer admitted that he had promised to keep an eye on their sister.

Conditions required to satisfy exceptional circumstances

The key finding of this case was that a moral obligation and obligations of conscience in themselves do not constitute exceptional circumstances. Paragraph 22(4) contains five conditions, all of which must be satisfied for each of the days for which the taxpayer is claiming the exceptional circumstances exemption for it to apply:

• the circumstances were exceptional;
• the circumstances were beyond the person’s control;
• the person would not be present in the UK at the end of the day but for those circumstances;
• the circumstances prevented the person from leaving the UK; and
• the person intended to leave the UK as soon as those circumstances permitted.

It was concluded that serious illness and death are not exceptional nor out of the ordinary. A moral obligation does not alter this position. The sister’s alcoholism and depression themselves and their consequences for family members, including children, are not uncommon or unusual. The definition of exceptional is not defined and its ordinary meaning is applied. The circumstances themselves did not stop the taxpayer from leaving the UK as alternative arrangements for the care of her sister and her children could have been made without the requirement for her to remain in the UK. Additionally, it was found that the taxpayer had made no care arrangements following either visit.

Take away points

It is crucial that individuals keep clear records of their day counting and their activities during their time in the UK, particularly if they are seeking to rely on the exceptional circumstances exemption for any of those days. Whilst an individual is not expected to produce “an itemised timeline for each day”, sufficient evidence must be provided to show that all five parts of the statutory test apply on each individual day.

HMRC give examples under paragraph 22(5) of what could be construed as exceptional circumstances, such as war, civil unrest or natural disasters or a sudden life-threatening illness or injury. The sister’s alcoholism and depression were not sudden and were documented as far back as 1996.

HMRC provide very prescriptive examples in their guidance such as explosion on a ship resulting in specialist hospital care or a parent staying in the UK to look after their minor child in hospital following a serious accident. The exceptional circumstances are limited to 60 days and if those circumstances surpass this amount, they will be included in the individual’s day count for the purposes of the SRT.

For exceptional circumstances to apply, it must be something out of the ordinary, outside of the individual’s control and but for those circumstances, they would not have been in the UK. Whilst certain circumstances may be upsetting and infer a moral obligation (such as the serious illness of a family member), this does not qualify these circumstances to become exceptional just by their underlying nature coupled with a moral obligation. Whilst quite blunt, the UT stipulated that serious illness is commonplace and death is universal and could not be considered exceptional circumstances.

If you have any questions regarding the SRT or what is considered exceptional circumstances, please contact a member of the Tax, Trusts & Succession team.

Michelmores has announced the appointment of Cheryl Brady as a Partner in its Transactional Real Estate team.

Cheryl qualified as a real estate lawyer in 2006 and has extensive experience within both commercial and residential property. Prior to focusing on property development in 2012, she dealt with a wide variety of commercial property transactions.

Since 2012, Cheryl has advised on property transactions which involve potential development of the land. She has acted for both landowners, developers and promoters through the complete life cycle of a development including site assembly, planning, site acquisition, funding, site setup of the development and most importantly the onward sales to housing associations, other developers, commercial purchasers and plot purchasers.

Cheryl currently focuses on acquisition of land for development for housebuilders. She is involved in a variety of sites including large mixed-use development sites and small sites often with complex issues to be addressed.

Commenting on the move, Cheryl said:

“I am excited to be joining Michelmores at a period of continued growth for the Firm. The Firm’s Real Estate group continues to go from strength-to-strength and I am looking forward to being part of its continued success over the coming years.”

Emma Honey, Head of the Real Estate group at Michelmores, comments:

“We are very pleased to welcome Cheryl to the Real Estate group. With Cheryl’s considerable expertise, I look forward to seeing our Real Estate department continue to progress and I congratulate her on this important appointment at the firm.”

Cheryl joined the Firm as a Partner in September 2023.

Following the governments proposal to scrap Nutrient Neutrality, it has been announced that the proposed amendments to the Levelling Up and Regeneration Bill (LURB) have been blocked by the House of Lords.

Concerns were raised about the impact these amendments would have on water pollution, further worsening an already significant issue. Additionally, the proposed amendments meant that Local Planning Authorities (LPA) would have to assume that wastewater from developments would NOT adversely affect a habitat site. This assumption would have applied to a vast range of planning decisions.

Baroness Hayman of Ullock, opposing this amendment, states, “we do not agree with the powers being introduced” by the proposed amendments which would mean, “abandoning legal protections for the nation’s most precious and sensitive habitats” as being the only means of meeting housing requirements. Adding that the way in which the Government have introduced these amendments is “entirely inappropriate.” Being proposed at the very last minute together with “excessive regulatory powers” and with no public consultation, which the Baroness states is, “frankly, astounding.”[1] Baroness Scott of Bybrook on the other hand, disagreeing with Baroness Hayman’s proposal, states that, ” What is being proposed instead amounts to dithering and delay—and adds confusion rather than clarity.” Instead, the Baroness emphasises that the additional investments being put into Natural England’s nutrient mitigation schemes, such as, nutrient credits, will ensure that any additional nutrient flow from new housing will be offset.

The Government defeat is not a surprise given that they have tried to significantly amend a Bill at the final reading stage. That was ambitious on any analysis but even more so when the proposed changes included powers to amend any EU or domestic environmental legislation. The Government could try and introduce a standalone Bill to deal with nutrient neutrality, but the question is whether they have enough Parliamentary time to do so before the next general election. There is no ability for the House of Commons to further debate this issue as part of the process of passing the LURB. The House of Commons can only debate amendments from the House of Lords and there were none as the amendment was rejected.

The result restores the status quo with a private market for phosphate and nitrate credits supplying diversified income for farmers and landowners. Existing deals for such credits will proceed although it is notable that all of the transactions that Michelmores are instructed on were unaffected by the Government’s announcement about the LURB amendments on 29 August. The private market for nutrient credits is developing well and will only become more efficient as time goes on. Market forces will establish realistic pricing. Developers and landowners need to collaborate in private deals against a backdrop of Governmental consistency and not uncertainty.

[1] https://hansard.parliament.uk/lords/2023-09-13/debates/4DD90393-6CD9-4F2D-A340-E99C96A8DF62/Levelling-UpAndRegenerationBill

On 31 August 2023, the House of Commons’ Science, Innovation and Technology Committee published its interim report on the governance of AI which covers many things including the question of AI and copyright. Unfortunately, the report does not reach any firm conclusions and so, until legislation is adopted, we will have to see if the UK Intellectual Property Office’s development of a voluntary code of practice on copyright and AI offers any answers.

So what is the current position regarding copyright and AI?  In this article, we are going to discuss, with the increasing use of AI:

• why AI created works are not protected by copyright in the UK;
• what it would take for such works to be protected by copyright; and
• how the meanings of “original” and “author” will need to change if AI created works are to be protected by copyright.

Having spent quite some time writing this article to answer the above questions (with no help from AI), we assert our copyright and take full responsibility for its content.

This article describes why the requisite intellectual creativity is lacking in an AI generated work and why we hope that, in order to protect the intellectual creativity human authors have put in, copyright will not be afforded to AI generated works for quite some time. Not least because if you asked AI to answer these questions, AI is not liable for its output if it gets the answers wrong!

It is important to remind everyone that the primary purpose of copyright law is to reward an author for the creation of an original work. It took more than 250 years after the development of the Gutenberg printing press for legislators to recognise this with a copyright statute[1] and so perhaps we should not be too critical of the government for taking its time over this question in the context of AI.

Meaning of author

Section 9 of the Copyright, Designs and Patents Act 1988 (the Act) defines “author”, in relation to a work, as the person who creates it; and, according to section 154 of the Act, a work qualifies for copyright protection if the author was at the material time a qualifying person[2]. AI does not satisfy the definition of qualifying person. There is some debate as to whether AI generated works fall within the definition of “a literary, dramatic, musical or artistic work which is computer-generated” so as to make “the author” “the person by whom the arrangements necessary for the creation of the work are undertaken” but the general view is that it does not.

Therefore, in order to qualify the person making the arrangements for the AI generated work as the “author”, this definition will need to make clear that it covers AI generated works.

Meaning of original

Another problem is that at present, AI generated works are not “original”.

The Act does not contain a definition of “original work”, but case law has developed the precedent that works are original when they are independently created as the “author’s own intellectual creation”. Independent creation simply means that you create the work yourself, without compromising it with, or copying it from, another pre-existing work.

AI produced works fail this definition. This is because AI works are neither:

• independently created because the AI is mining pre-existing sources; nor
• are they the result of the author’s own intellectual creation because the output is based on probability and algorithms not intellect. What has to be considered is the fact that AI is performing an essentially mechanical function dictated by its software engineers.

If we set AI generated works against this background, it is more understandable why the immediate output resulting from an input into ChatGPT is not afforded copyright protection.

What about copyright infringement?

Further, it is important to be mindful that in creating a work, AI uses all the available sources out there and if the content used by AI is already protected by copyright, then there is the risk that the work created using AI, will amount to copyright infringement.

Does this mean that an AI generated work is automatically an infringement of copyright?  Not necessarily as a copyright owner needs to show that a “substantial part” has been reproduced. This could be very difficult to establish unless the AI was operating on a very narrow body of underlying texts.

Legislative changes

Therefore, the legislation will need to address the definition of “original” to include AI works derived from the works of others. In addressing this issue, the legislation will need to consider whether:

• compensation should be paid to the copyright owners of the works on which the AI works are based; and
• the test for copyright infringement needs to have a “fair dealing” defence which allows the creation of AI works based on AI’s application to an existing body of copyright protected works.

So what if you ask AI to write a story for you today? Does the above analysis mean that copyright will never subsist?

Not necessarily.

The answer will very much depend on the degree of intellectual creativity that the real person, who wants to qualify as the author, applies to the initial draft of the AI generated work. The more intellectual creativity applied, the more the human author’s skill, labour and judgment is likely to qualify their contribution as “original” and create a protectable copyright work.

A moral question?

There is also a moral question (and one of moral rights).

Take for example a screenplay entirely generated by ChatGPT (and without further amendment or editing). Would it be fair and in line with copyright principles, if the “screenwriter” who asked AI to create the draft, to sit back and relax whilst still enjoying a nomination for “the best screenplay” award based on an original copyright work for which they claim the paternity right?

As things stand now, the answers are no, it wouldn’t be fair; and no, it wouldn’t be in line with copyright principles to claim to be the author.

Idea vs expression of the idea

It is also important, however, to remember that copyright does not protect ideas, but protects the expression of the idea. Therefore, if in creating a plot for you, AI suggests a story about  a young wizard, who goes to a school of magic, and his purpose is to fight a bad guy, then as long as that young wizard is not called Harry Potter, the school of magic is not called Hogwarts and the bad guy is not called Voldemort, you might still be able to create a successful and original work without infringing another author’s copyright[3].

Conclusions and takeaway points

The copyright implications for works generated by AI are still unclear and rapidly developing. The Government is aware that this is an area that needs to be watched closely and which needs to be regulated properly and soon[4]. Until then, no matter how complex the area is, the basic principles of copyright will apply.

Therefore, to avoid facing infringement proceedings and/or disappointments, use common sense and ask yourself: “am I proud of my work?”, “is this really my work?”, “is this work original and creative?”, if the answers are “no”, then think again. Where an author creates a work without reference to any existing subject matter, it will be rare that it does not attract copyright protection.  Even if you use AI as your starting point, if you make that work your own, then copyright will be available to you.

Please contact Iain Connor and Lorenza Picciano, who specialise in intellectual property disputes, if you have any questions about intellectual property or brand management.

[1] Statute of Anne 1709

[2] S.154 of the Act

[3] Please, refer to our previous article here: When your copyright claim disappears in a puff of smoke … ! to understand more on this point.

[4] The government’s response to the House of Commons Science, Innovation and Technology Committee’s interim report is due by 31 October 2023, so it will be interesting to see whether the momentum continues over the next couple of months.

Michelmores has advised Cornwall’s St Austell Brewery on the acquisition of The Bath Pub Company, growing its 184-strong West Country pub estate.

The deal, which completed for an undisclosed amount, sees the independent company take over the operation of four of Bath’s most well-known pubs.

The Locksbrook Inn, The Moorfields and The Hare & Hounds bring the total number of sites in St Austell Brewery’s managed pub estate to 43. The Marlborough Tavern is now part of the company’s leased and tenanted estate and will continue to be operated by Justin Sleath, The Bath Pub Company’s co-founder and commercial director.

The acquisition of The Bath Pub Company further strengthens St Austell Brewery’s presence in and around Bath where it already owns four tenanted pubs – The Griffin, The Swan, The Hop Pole and The Salamander. Michelmores also helped the company acquire Bath Ales in 2017, a deal which included a brewery in Warmley and a local distribution network.

The Michelmores team advising St Austell on the transaction was led by Partners Richard Cobb and Richard Walford, with support from partners Karen Williams, Cathy Bryant and David Thompson and lawyers Victoria Miller, Jonny Lane, Siobhan Murphy, Gruff Cartwright, Zilah Nelson and Justin Barrow.

Richard Cobb comments: “We always enjoy working with St Austell brewery and are pleased to have helped the team secure The Bath Pub Company. This is an exciting acquisition of a high quality and well-located portfolio of pubs with substantial investment and gives four more good reasons to be in Bath!”

Kevin Georgel, Chief Executive, St Austell Brewery said: “We’re extremely proud to become the new owners of such a high-quality and well-respected pub company in Bath.

“We are fully committed to developing the quality and size of our pub estate. As such, we are investing significantly in our existing pubs, whilst also acquiring new sites and businesses such as The Bath Pub Company. The Locksbrook Inn, The Moorfields, The Hare & Hounds and The Marlborough Tavern all have a strong alignment with our long-term plans and are a perfect fit for us, in terms of market and consumer positioning.”

Michelmores’ award-winning Corporate team of 25 specialist lawyers advises clients across the UK, US, EMEA and beyond – on capital markets, mergers and acquisitions, management buyouts, impact investing, energy projects, microfinance initiatives and more.

Find out more about our Corporate team here.

Nutrient neutrality has been in the political crosshairs since its inception and I have written previously about the fragility of the marketplace Nutrient neutrality: Are developments with outline consent caught by the requirements?.

Developers see it as a time consuming barrier to new houses which don’t contribute as much nutrient pollution as other sectors. Environmentalists regard it as a useful tool which ensures that new development does not contribute to an already significant pollution problem. Offering a solution are those involved in the private market for nutrient credits generated by taking land out of agricultural production.

Developers assert that 100,000 new homes are currently being held up by the requirement for nutrient neutrality and this is borne out by the experience of our residential development team. Others have argued that this statistic does not take account of the maturity of the private nutrient credit market which was becoming established.

In support of those assertions, a number of stakeholders, including the National Trust, CPRE and the Woodland Trust, co-signed an open letter to Rishi Sunak on 20 July 2023 which explained that over 70,000 homes have existing mitigation measures in place or in the pipeline. What will happen to those private credit deals which are agreed or in the process of being agreed, or the schemes created by numerous local planning authorities?

Notwithstanding that, the concerns of the developers seem to have been listened to as amendments to the Levelling Up and Regeneration Bill (“LURB”) have been proposed which will remove nutrient neutrality as a planning consideration if the Bill is approved by Parliament. The report stage of the Bill is to be concluded in the next fortnight, during which these amendments will be debated and voted upon.

A number of questions arise:

1. What is changing?
2. How will those changes affect existing private credit deals?
3. What should developers and landowners do in the light of this announcement?
4. How will the problem of nutrient pollution now be tackled?

What is changing?

The Government amendments to the LURB tabled on 29 August will change the Habitats Regulations so that nutrient pollution from housing developments will no longer be part of the planning process.

New clauses will be inserted into the Conservation of Habitats and Species Regulations 2017 (“Habitats Regulations“) which will require a local planning authority to assume that nutrients in urban waste water will not affect any relevant protected site. Those changes will only apply to developments where the wastewater is treated by a wastewater treatment works or private treatment system regulated by an Environmental Permit.

These changes are made possible by a new clause in the LURB at 159A which gives the Secretary of State wide powers to publish regulations which “may make any provision the Secretary of State considers appropriate” about the operation of any “relevant enactment.” That definition includes any domestic legislation or retained direct EU legislation relating to the environment so the winds of change may strengthen.

As a result, an appropriate assessment under the Council Directive 92/43/EEC on the Conservation of Natural Habitats and Wild Flora and Fauna (“EU Habitats Directive”) will no longer be required.

The amendments will have to reverse the current position, established in C G Fry v Secretary of State [2023], where the High Court determined that the relevant provisions of the Habitats Directive remain part of UK law due to the European Union (Withdrawal) Act 2018 (“Withdrawal Act 2018“).

How will those changes affect existing private credit deals?

The LURB amendments include a provision that the amended section 159 will come into force on “such day as the Secretary of State may by regulations appoint.” This is in contrast to the vast majority of the remainder of the LURB which becomes law on the day of Royal Assent or within 2 months of that date. A reasonable punt at a date of Royal Assent might be sometime in October which would suggest that we won’t see any regulations implementing these changes until some time in 2024 at the earliest.

Given the likely delay in publication of the necessary implementing regulations, the parties to any existing private credit deals may well decide just to carry on as the opportunity cost of trying to extract themselves may be too great. The likelihood is that those already involved in deals have developments which are ripe for commencement and as such may as well proceed. This may be because the cost of the credits has already been factored in or that reneging on deals will bring forth legal costs, loss of deposits and potential reputational issues.

In addition, the reality is that although the medium for compliance may have changed the cost will remain. The GOV.UK announcement 100,000 more homes to be built via reform of defective EU laws – GOV.UK (www.gov.uk) confirms that it “intends to work with the house building industry to ensure that larger developers make an appropriate and fair contribution to this scheme….” which perhaps indicates that this announcement is better news for the small and medium sized developers. In any event, there will be a cost associated with nutrient pollution and whether that is met through a private credit, Nutrient Mitigation Scheme Credit or through funding capital works as part of a Protected Site Strategy will be determined by the cost of each option.

The Michelmores Natural Capital Team have completed numerous private credit deals and those were already being influenced by the auction results of the Nutrient Mitigation Scheme Auctions in the Tees Valley Catchment. Those realised prices form a floor in the market and although that market is catchment specific once the Nutrient Mitigation Scheme is rolled out more widely (pump primed by £280 million of promised funding) then that pricing effect will similarly ripple outwards.

It follows that the market for private credits will likely remain providing they are priced competitively alongside the other mitigation options. They remain a useful turn key solution for developers who are naturally focussed on the business of building houses. It is then a question of land management economics as to whether it is worth landowners entering into such schemes or catchment approaches and nature based solutions .

What should developers and landowners do in the light of this announcement?

This is a difficult question to answer at this early stage. We still have to wait for the comments of the House of Lords and any possible changes they propose. The immediate effect of the announcement is to increase the levels of uncertainty and that will not change until we see the secondary legislation that is authorised by the LURB.

I have been asked whether such a change in policy can be challenged. There is quite a lot in that question but essentially the Government will be seeking to change domestic legislation to ensure that nutrient neutrality is no longer part of the planning process.

Brexit has made these changes possible as nutrient neutrality is a creation of European law with the Habitats Regulations transposing the requirements of the EU Habitats Directive.

Since Brexit, domestic legislation derived from EU law, such as the Habitats Regulations, continues to have effect pursuant to section 2(1) of the Withdrawal Act 2018. Similarly, the pre-Brexit case law of the CJEU lives on in relation to the interpretation of EU law.

The LURB amendments will amend the Habitats Regulations and will have to get through Parliament to become law. If that process is completed lawfully then the Government will only be susceptible to Judicial Review if they make decisions in respect of that new legislation which are wrong or unreasonable.

During this period of continued uncertainty, developers (and landowners with their own development aspirations) who wish to bring forward projects may conclude that securing private credit deals is the best option. This is an alternative to speculating on political outcomes and whether or not the new regime is a more cost effective solution than the existing one.

The Government suggests a variety of alternative strategies to tackle the problem, including increased funding for Natural England’s Nutrient Mitigation Scheme and the use of catchment scale schemes and Protected Site Strategies, meaning there will still be an important role for landowners in providing nutrient mitigation solutions if the amendments become law.

How will the problem of nutrient pollution now be tackled?

The Government has announced a package of measures to combat the problem of nutrient pollution including the expansion of the Nutrient Mitigation Scheme as set out above and the implementation of Protected Site Strategies.

Water companies are also being encouraged to actively consider nature based solutions to treat wastewater as well as the statutory 2030 upgrades. A catchment permitting approach will be allowed so water companies will be judged on the collective performance of all wastewater treatment plants. This would, in theory, allow some wastewater treatment plants to discharge at levels above the accepted limit if other plants were over achieving.

The GOV.UK announcement refers to £225 million of funding to reduce runoff from agriculture which will be policed by 4,000 inspections each year to ensure water pollution is minimised.

The LURB amendments will have no effect beyond 2030 which is the deadline for the upgrading of wastewater treatment works in designated catchment areas. My back of an envelope calculations estimate that if those upgrades are achieved then the requirement for nutrient credits would roughly halve. The pressure is on the water industry to improve infrastructure but funding has also been made available to enable other sectors to reduce their impact on protected sites.

The Government have previously stated that they intend to “crowd in” private schemes rather than crowd them out and allowing the private credit market to be one of the mitigation solutions would achieve that goal.

Whilst recent developments in Artificial Intelligence (‘AI’) services might have some of us fearing increasingly harmful cyber-attacks, evermore convincing deepfakes and even seeing Robert Patrick’s T-1000 chasing after us in our rearview mirrors, we cannot ignore that AI is already an important part of our day-to-day lives.

First invented in the 1930s by Georges Artsrouni, AI has gone through numerous evolutions and is still traditionally focused upon detecting patterns, automation and generating insights. It is currently employed in the workplace – pun very much intended – to undertake tasks such as filtering spam, automated CV screening, task allocation and performance management. The use of this type of AI has long been widely accepted within the workplace.

Generative Artificial Intelligence (‘GenAI’) is a type of AI, which learns from existing data patterns to produce new types of content, such as text, imagery, videos, audio and synthetic data. This has been a common part of our day to day lives since the introduction of basic chatbots in the 1960s. However, with the introduction of OpenAI’s chatbot ChatGPT in November 2022 and more recently Microsoft’s Co-Pilot in March 2023, GenAI has become far more advanced and can be used to solve complex problems, draft articles in seconds – unfortunately for me, not this one – and even prepare detailed and entertaining speeches and presentations. It’s also become incredibly user friendly and, without any sign-up costs, entirely accessible to the average person. It’s therefore hardly surprising, that more and more people are using it. And that’s the rub!

GenAI sounds awesome, so why not use it in the workplace?

According to the latest available data, ChatGPT currently has over 100 million users. And the website generated 1.6 billion visits in June 2023. It’s not hard to see why it is so popular: ChatGPT generates responses, which are quick, contextually relevant and ‘human like’. However, there are a number of limitations with its function, which means that relying on its responses can be inherently risky. ChatGPT learns from the data inputted by its users, which it then uses to inform other users. This means that if users input sensitive, fabricated, biased or, indeed, malicious data, this can then be presented by ChatGPT to other users as fact. Now you can start to see why this would make employers and, well, any of us a little nervous…

Our recent article on AI discusses this and the possible ramifications for human roles within businesses more broadly.

Hang on, surely the government is going to legislate so that users and employers are protected, right?

Whilst there is no doubt that the use of GenAI can increase productivity and be an effective tool to aid employees in their roles, appropriate safeguards must be put in place to manage risk and protect businesses.

You may recall that in March 2023, the UK government’s White Paper confirmed that the UK did not intend to introduce specific legislation nor a single governing body to regulate AI; instead it would support existing regulators to regulate AI in their sector. Following on from this, the House of Commons library published a paper on 11 August 2023 on AI and employment law, which assesses how AI is currently (and will in the future be) used at work, alongside the current legislation and policy developments.

So we need to take steps to safeguard our businesses

How your employees use GenAI is likely to depend on the sector in which your organisation operates, and the type of work it carries out. As a medium-term option, we would encourage businesses to undertake a review of (1) how the people in their organisation are currently using Chat GPT and other GenAI and (2) how these tools might be used by their organisation/employees in the future, so that they can tailor their safeguards accordingly.

What’s the rush?

This, however, overlooks the immediate issue…employees are using ChatGPT and other GenAI now! With the staggering figures quoted above, it stands to reason that many of these users will be using ChatGPT et al for work related purposes. Therefore, employers need to work fast and get a GenAI policy in place as quickly as possible.

With GenAI growing in competence every day and user numbers similarly building, smart employers should be getting a basic policy in place immediately and then looking to finesse and tailor that policy to their business and sector needs over the coming weeks. Failure to do, puts businesses at risk of their employees sharing sensitive company and client data via ChatGPT and using it to obtain information and documents, which may well contain fabricated, biased and/or malicious data.

GenAI policy

Okay, well, what should this basic policy include?

When looking to introduce such a policy, consideration should be given to the following:

• Level of prohibition: will you prohibit the use of GenAI completely or will you put limitations on who can use it and/or what it can be used for?
• Guidelines for its use: if you are going to allow staff to use tools like ChatGPT for certain tasks, you should make sure the permitted functions are expressly listed so there can be no confusion.
• Set parameters for its use: general guidelines on how to use GenAI should be expressly set out in the policy, for example:
• It should only ever be used as a starting point, not as a finished product.
• All content must be proofread and checked for factual accuracy by a human with appropriate expertise before it is used.
• Confidential information and personal data should never be divulged. Even things like your company name and other identifying features should not be disclosed when using GenAI.
• Highlighting its limitations: your staff need to be aware of GenAI’s inherent restrictions. For example, ChatGPT is based on data stored in its bank and so if that data is incomplete, inaccurate or biased (even discriminatory), it means the responses produced will be the same. Also be mindful that the bank is outdated and doesn’t have the most recent information available.
• Designated team or person: will you have a steering group or designated individual who will oversee the company’s approach to GenAI?
• Transparency: consider how you will go about ensuring that AI generated content is clearly identified as such – both internally to other employees and externally to clients.
• Data privacy and confidential information: as highlighted above, it is essential that no confidential information or personal data is shared with GenAI tools. For example, ChatGPT has no obligation to keep this information private and instead can use the information to improve and develop its systems.
• Interaction with other policies: you will need to consider how your ChatGPT policy will interact with other relevant policies, such as data protection, IT and communications, privacy, recruitment (if you are using ChatGPT/AI to make recruitment decisions) your disciplinary policy and even your grievance policy if GenAI is misused or there’s a breach of your GenAI policy.

Additional points to consider

As well as having an effective policy, running training sessions and an awareness campaign should help embed expectations and encourage employee buy-in. Those of us that experienced the internet and then the social media revolutions in the workplace will know all too well that this is an incredibly fast moving area, and your policy will have to be regularly monitored and updated to ensure it’s up to date and manages risk appropriately.

If you’d like help drafting a GenAI policy, or if you have any other AI-related employment or immigration queries, please do not hesitate to contact Lynsey Blyth.

The requirement that developments in certain catchment areas be nutrient neutral has been criticised by many developers. We have explained how the system works in previous articles – see Nutrient neutrality: The basics. The issue remains controversial, with many seeing it as yet another obstacle to much needed housing development, whilst others regard it as a long overdue recognition of the environmental cost of development.

The policy of nutrient neutrality has delayed planning applications over the last three years at every stage and has consequently become a political issue. The policy has been threatened before with Liz Truss arguing for its removal – but we all know how that ended. Now it is the turn of the current Prime Minister to question its future as he is apparently seeking to use the Levelling Up Bill to avoid the impact of the Dutch Nitrogen Case.

The recent case of C G Fry v Secretary of State [2023] considered whether the Natural England advice note, which started the whole nutrient neutrality delay, catches developments which already have outline planning consent.

The case

In the C G Fry case Somerset Council (“Somerset LPA“) had granted outline planning permission for 650 houses, community and commercial use, a primary school and associated infrastructure. As usual, the outline consent was subject to various conditions or reserved matters.

The planning permission was due to be implemented in eight phases with the first two being commenced under separate reserved matters approvals.

In June 2020 the developer, C G Fry (“Claimant“) obtained reserved matters approval for the third phase of 190 dwellings (“Development“). The approval was subject to a number of conditions but none of them related to nutrient neutrality.

In August 2020, Natural England published their advice note, which dropped the nutrient neutrality bombshell onto the desk of all the affected local authorities, including the Somerset LPA. The Development had the potential, adversely, to affect the Somerset Levels and Moors Ramsar Site, so an appropriate assessment under the Habitats Regulations 2017 (“Appropriate Assessment“) was required. Whilst the 2017 Regulations do not designate Ramsar Sites as protected areas, the National Planning Policy Framework (“NPPF“) grants them the same level of protection.

In June 2021 the Claimant sought discharge of a number of the conditions, none of which went to the principle of the development, which had been established under the outline planning consent. The Somerset LPA withheld approval on the basis that an Appropriate Assessment was needed.

Appeal

In April 2022 the Claimant appealed arguing that an Appropriate Assessment was not needed at the discharge of conditions stage or, if it was, it should be confined in scope to matters being considered for the conditions in question.

The Somerset LPA maintained that an Appropriate Assessment was needed and their own shadow calculations showed that the Development would have an adverse impact on the Ramsar Site.

The Inspector dismissed the Claimant’s appeal finding that the NPPF overarching protection was legitimate as discharge of conditions was part of a wider consent process, which would permit the Development to have an adverse effect on the Ramsar Site. An Appropriate Assessment was required at the discharge of conditions stage. The unfulfilled requirement for an Appropriate Assessment was an issue of material significance, which outweighed the delay in housing delivery.

Written Ministerial Statement

In July 2022 the Secretary of State for Environment Food and Rural Affairs issued a Written Ministerial Statement which confirmed that “the Habitats Regulations Assessment provisions apply to any consent, permission or other authorisation, this may include post-permission approvals, reserved matters or discharges of conditions.”

The Claimant therefore launched this claim for statutory review under section 288 of the Town and Country Planning Act 1990 (“1990 Act.”)

Legal Framework

Nutrient neutrality is a creation of European law with the 2017 Regulations transposing the requirements of Council Directive 92/43/EEC on the Conservation of Natural Habitats and Wild Flora and Fauna (“Habitats Directive.”)

Prior to Brexit the provisions of the Habitats Directive could be relied upon directly in the English courts to trump domestic law, including the 1990 Act. That reliance is also possible in circumstances in which the wording of the 2017 Regulations fell short of achieving the level of protection required.

The Court of Justice of the European Union (“CJEU“) adopts a strict precautionary approach to the assessment provisions of the Habitats Directive, so authorities have to make certain that development will not adversely affect protected sites.

Further, the CJEU held in the Dutch Nitrogen Case (which prompted the Natural England advice note referred to above) that the Appropriate Assessment must be capable of removing all reasonable scientific doubt as to the effects of development on a protected site.

Since Brexit, domestic legislation derived from EU law, such as the 2017 Regulations, continues to have effect pursuant to section 2(1) of the European Union (Withdrawal) Act 2018 (“EU Withdrawal Act“). Similarly, the pre-Brexit case law of the CJEU lives on in relation to the interpretation of EU law.

Case law (drawing on examples relating to environmental impact assessments) has established that an Appropriate Assessment can be carried out at the reserved matters stage.

Grounds of Challenge

The Claimant’s case was that the additional phosphate loading, caused by the development, was irrelevant, as it fell outside the matters left to be determined in a planning context after the grant of the outline permission. In addition, none of the conditions associated with the reserved matters application related to the phosphate issue.

The first line of attack from the Claimant was that the 2017 Regulations only apply to the formal grant of planning permission and not the approval of reserved matters or discharge of conditions. The Judge agreed with this strict interpretation but found that the Appropriate Assessment requirements applied due to Article 6 (3) of the Habitats Directive, a purposive interpretation of their provisions and case law binding him.

Habitats Directive – Article 6 (3)

The Claimant argued that the Habitats Directive had no status in the UK legal system as there was no EU or UK case law dating from before Brexit. The Judge disagreed with that view confirming that Article 6 (3) remains part of UK law. This is due to it having been accepted as binding by the CJEU in a previous case, as it was closely related to another provision of the Habitats Directive, which was the key clause in that case. This is because the EU Withdrawal Act states that previous case law will be recognised “whether or not as an essential part of the decision in the case.”

Article 6 (3) requires that an Appropriate Assessment must be carried out before a planning project is approved. A planning consent is part of agreeing a project when it consists of implementing development. In turn, the discharge of pre-commencement conditions is a necessary step in the implementation of development. In the Fry case the conditions could not be discharged without an Appropriate Assessment being undertaken.

Purposive Interpretation

The 2017 Regulations demand a purposive interpretation so that they apply to subsequent consent stages such as reserved matters applications and discharge of conditions. This approach stems from the strict precautionary approach which the CJEU has adopted to the assessment provisions of the Habitats Directive.

The Claimant’s case was that the precautionary approach is already observed as the 2017 Regulations require an assessment at the outline stage “whether before or after obtaining approval of any reserved matters.” Leaving aside the obvious timing issue in this case (that the Natural England advice note was issued after the grant of outline permission) the Judge identified the potential for negative environmental issues only surfacing after the initial stages of a multi-stage planning process. It must be remembered that in such a multi-stage process there is no implementing decision until the reserved matters are approved and conditions discharged. This is because any development in breach of such requirements is unlawful.

Caselaw

The Judge’s view was that existing caselaw provided authority for the proposition that an Appropriate Assessment can apply at the reserved matters or discharge of conditions stage, even if there has been a grant of outline planning permission under which the subsequent approval is the implementing decision. All the cases concerned the interpretation of the Habitats Directive and the 2017 Regulations and the point that the facts were different was no basis for undermining the principles they established.

Any arguments that the 2017 Regulations must be subservient to the 1990 Act is met by the long-established principle of the superiority of EU law over domestic UK legislation, which is preserved by the EU Withdrawal Act.

Conclusion & leapfrog appeal

The conclusion is that the Habitats Directive and the 2017 Regulations mandate that an Appropriate Assessment must be undertaken before a project is consented, regardless of the stage it has reached.

An interesting postscript to this case is that permission has been given for a leapfrog appeal straight from the High Court, bypassing the Court of Appeal, to the Supreme Court. This is a rare event and reserved for the cases of the highest public interest. The securing of a leapfrog appeal is a significant feather in the cap of the Claimant’s legal team led by Charles Banner KC of Keating Chambers. By way of illustration, the last example was the Brexit challenge brought by Gina Miller. An expedited appeal to the Court of Appeal is the consolation prize in the event that the Supreme Court do not grant permission to appeal and either decision will be eagerly awaited by all involved in nutrient neutrality schemes.

As I approach the end of my Training Contract, and like my fellow trainees, I now appreciate the breadth of work conducted in the four seats but also the various ‘non-chargeable’ opportunities that have shaped my Training Contract. We are encouraged to participate in the Firm’s several initiatives which allows for that well sought after ’rounded’ experience that everyone talks about. This factor was also considered in our NQ job applications (my colleague George explores the application process a bit further here). Given the wealth of benefits, both from personal and professional perspectives, below are a few examples of opportunities that I have been involved over the last two years.

Client specific events

Across the seats, there have been opportunities to attend and support the Firm at events where we invite clients and contacts. These events would serve as opportunities to foster relationships in a more relaxed and ‘non-legal’ context.

Examples include partnering with the Women in Telecoms & Technology (WiTT) to host a Women in Tech event and hosting clients for lunch whilst hearing from authors talk about their books and inspirations. I have enjoyed finding out more about the clients that we assist and in turn collaborate with colleagues from other teams.

Sector specific events

As the header suggests, depending on your current seat or interest, you will have the opportunity to attend events (alongside other people) that target certain areas of law which often presents itself as a business development opportunity.

As a Commercial and Corporate trainee, I have been involved with the day-to-day running of MAINstream. This is the Firm’s initiative to encourage investment in the South West by connecting angel investors with innovative start-ups. My colleague Will and I cover this in some detail in a previous article here, but after the pitch events, I had the opportunity to hold conversations with both investors and founders of interesting companies. This allowed me to talk about different topics and on instances where I have little knowledge about a sector, I have become more comfortable to ask questions or to simply listen to those that know more than me.

Team collaboration is heavily encouraged at Michelmores. Whilst in Corporate and supporting the Agriculture team with coordinating our podcast series, I attended the Cereals 2023 event, given our mutual focus on Natural Capital. This two-day event allowed me to put my networking skills to the test and it was insightful to see how other senior fee earners network and interact with existing contacts or potential new clients.

Internal business development

As a Firm, we want to attract the best talent and as trainees we get the opportunity to meet prospective candidates and talk about our experiences. I have attended a few Q&A panel, open days and law fairs. I found these useful when researching firms and having the opportunity to delve into others’ experiences further can give context to a nice brochure / website.

Michelmores’ programme ‘Momentum’ has partnered up with VisionPath to create opportunities for disadvantaged students in the South West. As my colleague Charlie discusses here, volunteering to run presentations on a range of skills aimed at secondary school students was rewarding. It also allowed us to talk to students who had an interest in law but might have not had the opportunities to explore this further. Ultimately, connecting with the schools in this way equipped students with skills and tools but also encouraged those with an interest in law to apply for work experience at the Firm.

Mostly offline but don’t forget your online presence!

Whilst most activities raised rely on in-person events, our online presence is as important. Producing website content like this article (as part of our ‘Trainee Blog’ series) or other sector specific articles enables a wider audience reach. You might not have the time to attend every event and speak to every person – a useful article that can point people in the right direction or update them on an important legal point is always welcomed.

This leads me to the next point: do not be shy to show off your work. This is something that might not come easy for a lot of people but try to get in the habit of posting on social media (e.g. LinkedIn) about the content you have put out. If not comfortable at first, then share and repost content from other colleagues.

Final thoughts

I have enjoyed partaking and supporting the various events over the last two years – it’s something that lawyers will continue to focus on in their careers and it’s the interesting and more social aspect of the usual day-to-day work. A few take aways from me:

1. Be natural and yourself;
2. Don’t underestimate the importance of just listening in to conversations;
3. Have an awareness of the different pockets of practice areas in the Firm;
4. Remember it’s all a learning process and you will find your preferred style; and
5. Don’t forget to have fun in the process!

Introduction:

There may be a variety of reasons why a landlord and/or tenant may want to undertake a surrender and re-grant of a lease. The parties may wish to update the covenants to which each is bound, or to put the lease onto a surer footing by extending the term. Further, in farming or agricultural contexts, it may be preferable for the parties that the lease qualifies as a farm business tenancy under the Agricultural Tenancies Act 1995 (or an agricultural holding under the Agricultural Holdings Act 1986) and enables them to agree more specific terms relating to their legal relationship. In such situations, the parties will often enter into an express agreement to bring to an end to the existing lease and immediately replace it with a new lease.

Aside from the commercial implications, there are a number of tax issues which must be borne in mind when considering such an express surrender and re-grant of a tenancy. This article discusses those tax issues in brief (and for completeness, the article focuses on express surrenders and re-grants rather than the transactions which could amount in law to a surrender and re-grant of a lease, such as a variation to increase  the demised area under a lease).

Stamp Duty Land Tax (SDLT):

A surrender and re-grant involves two acquisitions for SDLT.  Firstly, the landlord makes an acquisition on the surrender as the freehold is enlarged, and secondly the tenant makes a different acquisition when it is granted the replacement lease in the usual way. For SDLT, a surrender and re-grant is therefore a land exchange.

The SDLT rules on land exchanges (where one of the limbs of the exchange is a major interest such as a freehold transfer or the grant of a lease) are ostensibly very punitive: SDLT is payable by reference to the market value of the interests passing (if the actual chargeable consideration provided is less than the market value – which it often will be). So, the landlord and tenant can both face a market value charge to SDLT even where little if any actual cash passes between them.

A measure of relief is however available provided that the new lease is granted in consideration of the surrender of the existing lease and the surrender and grant are between the same parties (it is prudent to specifically state this in the documentation). If so, the market value rule is switched off and SDLT is only payable by reference to any other chargeable consideration provided (for example, if one party pays the other a cash sum). Overlap relief on rent under the new lease may also be available.

Care must be taken to ensure that the parties to the re-grant are indeed the same as to the surrender (for example, specific SDLT rules apply where a nominee is involved). Similarly, where the parties are connected and one of them is a company, that company can also face a possible market value charge to SDLT, notwithstanding the above relief.

VAT:

VAT on a surrender and re-grant can be far more complex than meets the eye. As above, since land transfers are made between the same persons in opposite directions, there arises a barter transaction for VAT (as a supply is ‘paid for’ otherwise than in cash).  Whether VAT actually arises, however depends on whether the landlord and tenant have opted to tax their interests.

A barter is complex as it requires a subjective valuation of the consideration received. So, upon the landlord’s acquisition, the question is what would the landlord subjectively decide to pay the tenant for the surrender if the landlord chose to pay cash (and not to grant the replacement lease)?  If the tenant has opted to tax their interest for VAT, the landlord needs to account to the tenant for VAT on this subjective amount. The reverse analysis broadly applies on the re-grant.

Generally, the value of the supplies for VAT will be of equal value, but not always. It also goes without saying that where cash is also paid (for example cash paid to a tenant on the surrender element), VAT would also be due on that part of the consideration. So, for example, if a lease reversion is worth £1m and the landlord pays the tenant £100k and grants a new lease of broadly the same terms, the landlord is required to account for VAT of £20k in relation to the cash payment and £200k in relation to the value of the surrender.

Often, the actual accounting for VAT can be simplified by using VAT-only invoices.  So, where no cash changes hands on the surrender and re-grant, the parties can give each other a VAT invoice as if they had made a supply with an amount of VAT due. While the invoice records the amount of VAT arising, there can be a set-off such that there doesn’t need to be an actual payment of cash representing VAT from one party to the other and then vice versa.

The VAT analysis on surrenders and re-grants can be very complex and it is essential that each party (and their accountants) understands their obligations at the outset.

Capital allowances:

Where a property contains fixtures on which a tenant has claimed capital allowances, the surrender of a lease of the property by a tenant for cash consideration counts as a ‘sale’, such that a landlord may be able to claim capital allowances on the portion of the payment that is attributable to those fixtures at the property. The parties would be able to agree this apportionment using an election.

However, on a surrender and re-grant, the re-granted lease is treated as the same qualifying interest which the tenant held (i.e. the original lease), so that the tenant is not treated as having made a disposal for capital allowance purposes. This means the tenant can continue to claim allowances as normal and there does not need to be any apportionment.

Inheritance Tax (IHT):

A typical surrender and re-grant scenario will not generally give rise to any IHT implications unless there is a transfer of value pursuant to section 3 Inheritance Tax Act 1984.

There will often be situations where there is a clear transfer of value, such as a surrender for no consideration where there have been no commercial negotiations. A transfer of value may also arise where the tenant and landlord are connected to each other, for instance under the “close companies” provisions of the IHT legislation.

Each case will turn on its own specific facts, so it is important to take proper advice from the outset.

Capital Gains Tax (CGT):

CGT arising on a surrender and re-grant is generally a more complex area.  Where a party to the transaction is a limited company, it is corporation tax rather than CGT which will apply.

For the landlord, the re-grant will usually amount to a part disposal of the freehold of the property out of which the new lease is granted. The landlord’s position will depend also on whether they receive a premium from the tenant or whether the circumstances are such that a notional premium may be imputed.

A surrender is usually considered to be a disposal by the tenant for CGT purposes. Generally, the consideration for the surrender will be the value of the new lease granted by the landlord in addition to any consideration actually provided. However, this will not necessarily be the case where the parties are connected, or the transaction is not on an arm’s length basis.

Where there is a disposal, whether there is CGT to pay will depend upon whether there is a chargeable gain. This will be a question of valuation in each case. Certain reliefs may also be available to mitigate any tax liability.

The tenant can often rely on HMRC’s Extra Statutory Concession D39. Where the five conditions set out in the Concession are met, the surrender by the tenant will not be regarded as a disposal. The five conditions are as follows:

• The transaction, whether made between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arm’s length;
• The transaction is not part of, or connected with, a larger scheme or series of transactions;
• A capital sum is not received by the tenant;
• The extent of the property in which the tenant has an interest under the new lease is the same as that under the old lease; and
• The terms of the new lease (other than its duration and the amount of rent payable) do not differ from those of the old lease. Trivial differences are ignored.

In addition to these conditions, the Concession will only apply where the new lease extends the term of the previous lease, as opposed to the demised property.

Again, a case by case analysis of how the CGT rules apply to the specific facts is key.

Overall, a number of complex tax issues can arise on a seemingly straightforward surrender and re-grant, particularly where the parties involved are connected, the land in question is opted to tax or where one of them is a company. If you have any questions on the matters raised in this article, please contact Nerys Thomas or Anthony Reeves.

Michelmores’ capital markets team has advised long-standing client Allenby Capital in a new transaction with AIM-quoted Deltex Medical Group plc. Deltex, the UK manufacturer of the TrueVue™ oesophageal doppler monitoring (ODM) system, has raised £1.89 million by a placing, subscription and retail offer via the REX retail platform. Allenby is Deltex’s nominated adviser and was its sole placement agent in relation to the placing.

The Michelmores team was led by London-based corporate Partner, Ian Binnie, with support from corporate Solicitor, Gruff Cartwright.

Commenting on this fundraising, Ian Binnie said:

“This was an important transaction for Deltex so we were pleased to have supported Allenby Capital in the placing. It is interesting to note the increasing use of retail platforms such as REX as a cost-effective method of extending participation in secondary fundraisings to existing shareholders.”

For more information about the Firm’s equity capital markets team, visit our website.

Introduction

The UK’s National Security & Investment Act 2021 (“the Act”) provides a mechanism for the UK government to scrutinise the acquisition of control over a UK business or asset, and to intervene on national security grounds, including potentially preventing the acquisition. While the regime is similar in some respects to other countries’ ‘foreign direct investment’ (FDI) regimes, the UK regime applies equally to all domestic and international transactions.

So, for anyone acquiring any control over UK businesses and assets, the regime is an important factor to consider and potentially to take account of in deal structures and timetables.

There are no minimum turnover thresholds and very limited exceptions. Indeed, the regime even captures intra-group corporate restructurings and reorganisations.

Mandatory pre-notification

The Act imposes a mandatory suspensory notification regime in relation to acquisitions in 17 different industry sectors.  The 17 sectors are:

It is the acquirer’s responsibility to make a notification to the Cabinet Office. Failing to pre-notify and obtain clearance from the government in relation to a relevant acquisition in any of these 17 sectors is an offence (leading to potentially significant fines and imprisonment) and the transaction will be void.

In terms of control thresholds, notifiable acquisitions are those where:

• the acquirer’s shareholding goes from: (i) 25% or less to greater than 25%; (ii) 50% or less to more than 50%; or (iii) less than 75% to 75% or more;
• the acquirer’s percentage of voting rights goes from: (i) 25% or less to greater than 25%; (ii) 50% or less to more than 50%; or (iii) less than 75% to 75% or more; or
• the acquisition gives voting rights which enable the acquirer to secure or prevent the passage of any class of resolution.

There is no limitation period for the government to take action in relation to an acquisition that qualified for mandatory notification.

It is possible to make a retrospective notification in relation to a transaction that should have been notified. Subject to government approval, this can have the effect of making a transaction not void.

Voluntary notification

To obtain comfort in relation to transactions which do not fall within the mandatory notification requirements, an acquirer can make a voluntary notification.

This process is typically used by those involved in transactions:

• falling just outside the 17 sector definitions;
• involving lower degrees of control (e.g. material influence);
• asset acquisitions (particularly within the 17 sectors); and
• any other situations where national security issues may be a risk.

Non-notified transactions

The government has up to five years post transaction to investigate non-notified transactions concerning acquisitions outside the mandatory regime and to take action in relation to them.

This is reduced to six months where the Cabinet Office is ‘made aware’ of an acquisition. It is not entirely clear what is required, short of a voluntary notification, for the Cabinet Office to be ‘made aware’ of a transaction. It has been suggested that it might be sufficient for the transaction to be publicised, e.g. on a company website or the trade press. However, this is yet to be clarified.

Call-in notice

The government may issue a ‘call-in notice’ if it reasonably suspects that an acquisition may give rise to a national security risk.

The government is required to publish a statement about its intended exercise of the call-in power. This emphasises the flexibility of the power, but also that the government’s intention is that it should only be used for the purpose of dealing with risks to national security and not to interfere arbitrarily with investment.

The government statement says that it will consider the following risk factors:

Target risk: whether the target could be used in a way that raises a risk to national security;

Acquirer risk: whether the acquirer has characteristics that suggest there is or may be a risk to national security from the acquirer having control of the target; and

Control risk: the level of control the acquirer obtains through the transaction.

Investigation timetable

The investigation timetable can be suspended if the government issues an information notice or an attendance notice, requiring further information or to interview someone.

During the assessment period, the government has wide powers to prevent ‘pre-emptive’ action by means of an interim order.

Notifications can be made at a relatively early stage in a deal process (e.g., based on heads of terms).  However, should the deal change in any substantial detail, a new notification would have to be made and the process starts again. Therefore, parties intending to notify should generally wait until the key acquisition details, particularly relating to ownership and control rights, are unlikely to change before making notification to government.

Transparency

Notifications and clearance decisions are not made public.

Similarly, while the government does publish final orders (where it has concerns about a transaction and is taking action), these decisions do not contain detailed reasoning. The decisions simply state the parties and include a high level summary of the action taken to protect the UK’s national security interests.

The government is however required to publish an annual report, which contains various statistics which provide some insight into the operation of the regime.

Risk management

Finally, the government states (and experience confirms this) that for most transactions the risk to national security is low. For example, the government believed that there could be between 1,000 and 1,830 notifications per year with 70 to 95 call-ins per year.  However, to date (covering the year and a half or so of full operation of the Act) there have only been 17 final orders where issues were found and action taken, and only five of these have so far resulted in transactions being prohibited (although this does not include transactions which were withdrawn before this stage was reached).

Consistent with the government expectations, the transactional risks might therefore be said to be low for most transactions caught by the regime.

However, given the potentially very serious sanctions for failing to notify and non-compliance with the process, the process risks are high, particularly for transactions involving one or more of the 17 defined sectors.

Therefore, it is essential that acquirers factor in managing these risks when planning and executing transactions involving UK targets.

Challenging a final decision

While the government’s decisions under the Act can be challenged in the courts, this is only on a judicial review basis (and in some respects a limited judicial review at that). Therefore, such challenges can be expected to be an uphill battle.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek specific legal advice.