Commercial/Employment UPDATE

Issue No.7 March 2005

Employment- Permanent Health Insurance

A permanent health insurance (PHI) policy provides a replacement salary to an employee who is off sick. Many employers pay the premiums for such policies as a benefit for their employees. Employers should, however, be aware of the potential pitfalls of not dealing with these policies correctly. Consider the case of the ill-fated Blunder Limited:

Stephen Naïve, MD of Blunder Limited, decides that the company needs to improve the benefits it offers its employees in order to retain staff more effectively. He negotiates a good deal with a medical insurance broker and opts for a scheme that offers 75% of earnings to employees who become unable to perform their existing job. Blunder Limited does not have written contracts of employment with its 15 employees but, keen to get full credit for the policy, Stephen posts the details on the company notice board and circulates the policy booklet.

Shaun Sicknote has been working as a warehouseman for Blunder Limited for just over 3 months and has already a history of intermittent illness. Shortly after the PHI scheme has been adopted, Shaun is struck down with an acute inflammation of the earlobe. After a couple of months absence from work, Shaun successfully applies to the insurers for payment under the PHI policy.

Stephen is furious with Shaun and given his many previous bouts of illness considers him nothing more than a malingerer. He also considers Shaun a disruptive influence in the warehouse and wants to avoid any chance of him returning to Blunder Limited. He knows that Shaun has been employed for less than one year and will not therefore be able to bring an unfair dismissal claim. He writes to Shaun giving the agreed one month’s notice the termination of his employment.

Unfortunately for Blunder Limited, Shaun visits a good firm of solicitors and is advised that he has a potential claim against the company for the loss of the benefits he was receiving under the PHI policy. Whilst Shaun was not a high earner, compensating him for 75% of his salary for the foreseeable future would be extremely expensive. From his informed position, Shaun negotiates a large settlement which leaves Blunder Limited well out of pocket and Stephen red faced at the next board meeting.

If PHI cover is provided, employment contracts should state that the employer reserves the right to terminate by reason of incapacity even if this results in lost PHI benefits. Furthermore, it is advisable for the contracts to provide that benefits are provided in accordance with the rules of the PHI policy and that the employer may change the policy or the level of cover at its discretion.

Share issues- VAT may be recoverable

It has long been the case under UK VAT law that an issue of shares is a VAT exempt supply. This means that the costs connected with making such supplies are not recoverable.

A case currently before the European Court of Justice (ECJ) is challenging this position. The first stage of the ECJ decision making process is for the Advocate General to issue an opinion. The second stage is for the ECJ itself to make a final decision. Historically, the ECJ decision usually follows the Advocate General’s opinion although this is not always the case.

The Advocate General in the current case has opined that an issue of shares is not a supply at all (let alone an exempt one) and that VAT on the costs of such issue is therefore recoverable.

If the ECJ decision does follow the Advocate General, it means that companies that have had share or rights issues may be able to recover some or all of the VAT that they previously could not. As there is a 3 year limit on making retrospective claims, any companies that have made such share or rights issues may wish to consider lodging protective claims to ensure that they do not lose out on the chance to recover VAT.

Note:

Please note that this newsletter is not intended to be a comprehensive statement of the law and should be used for guidance purposes only. If you require specific legal advice please contact Mark Machray or Edward Bond or by telephone 020 7493 2903.