The Future Lawyer Weekly Briefing – W/C 1st July 2024

A Battle of Tax Policies

A series introducing law students to the real world of tax.

Tax policies remain a central and heated issue for the upcoming general election on 4 July. The following brief explains the tax law behind:

• “Frozen thresholds”,
• Abolishing carried interest, and
• Reducing national insurance rate.

Fiscal drag and stealth tax

Frozen tax thresholds mean more tax. The thresholds determine amount of money taxed at the certain rate. As in 2024, the first £12,570 one earns is tax free, the next £37,700 is taxed at 20%, and the next £74,870 at 40%, with earnings above at 45%.

One might expect tax thresholds to move in line with increasing prices and earnings. But when the thresholds are frozen, more of one’s income is taxed at the higher rates (40% or 45%), leading to more tax receipts for the government. The effect of this heavily criticised stealth tax is often referred to as “fiscal drag”.

Both conservative and labour have planned to keep the thresholds frozen till at least 2027/2028, bringing an estimated 4.5 million taxpayers into the 40% zone.

Carried interest

Should profits from investing businesses be treated as income or capital gains for tax purposes? This question underpins the taxation of private equity and hedge fund managers, whose carried interest currently enjoys the favourable capital gains tax rate of 28%, rather than paying 45% like other sole traders and income earners.

The fundamental tax principle at play is the distinction between income and capital. Income is generally taxed at higher rates because it is recurring and reflects an individual’s earning power. Capital gains, on the other hand, are taxed at lower rates to encourage investment and reward risk-taking.

Under current rules, private equity and hedge fund managers can treat carried interest – their share of the profits from investment funds – as capital gains, thus benefiting from the 28% tax rate. This is significantly lower than the highest income tax rate of 45%, which would apply if these earnings were classified as income.

Proponents argue that carried interest should remain under capital gains taxation to incentivize investment and economic growth. They claim that the risk taken by these managers in investing and growing businesses justifies the preferential tax treatment. Critics in Labour, however, argue that carried interest is essentially a form of compensation for services rendered and should be taxed as ordinary income. They contend that this would ensure a fairer tax system and increase revenue for public services.

An often-overlooked aspect of the carried interest debate is co-investment. Many private equity and hedge fund managers invest their own money alongside their clients’ funds. This co-investment aligns their interests with those of their investors. The tax treatment of carried interest as capital gains rather than income can significantly impact the returns on these personal investments.

National Insurance

Often described as a hidden income tax, National Insurance (NI) represents more than 14% of UK’s tax revenue. NI contributions fund state benefits such as the National Health Service, pensions, and unemployment benefits.

NI is paid by both workers and employers. Class 1 primary contributions, paid by employees, are calculated as a percentage of earnings above a certain threshold (same as income tax). Additionally, employers pay Class 1 secondary contributions based on their employees’ earnings.

Class 1 secondary contributions, effectively a payroll tax, are often seen as an additional tax on employment. This can discourage hiring and affect wage growth, as employers factor these costs into their labour budgets.

Tax professionals often argue that NI is a hidden form of income tax because it effectively reduces take-home pay. Unlike income tax, which is visible on pay slips, NI contributions are less transparent to workers

Conservatives propose reducing the class 1 secondary NI rate to alleviate the financial burden on workers and employers. Such proposals aim to stimulate economic activity by increasing disposable income and reducing employment costs.

Reducing NI rates could lead to short-term economic benefits, such as increased consumer spending and job creation. However, it also raises concerns about the sustainability of funding for essential public services.

Article by David Zheng

Freedom of Speech secured on UK University campuses?

Higher Education Act 2023

The Higher Education Act (2023), intended to secure freedom of speech on British university campuses, will come into full effect on August 1, 2024. Some academics perceive the Act as ‘conflating’ the impact of “cancel-culture”, whereas some welcomed the Act in its securing of intellectual discussions and freedom.

The primary aim of the Act was to prevent Student Unions (SU) and universities from prohibiting speakers with controversial views, as well as protecting staff and students who were being ‘no-platformed’, a term used to describe those whose platform was taken away.

Challenges and Opposition to Freedom of Speech

While the idea of such an Act has persisted for some decades now, with many critics of the legislation proclaiming its protection of Holocaust deniers and extremist Islamist views, it actualised during a time when this discourse had changed.

Since the 2010s, those who were being ‘no-platformed’ were individuals holding views considered transphobic or racist. Several notable academic staff have been targeted for such views on social media in prestigious institutions like the University of Oxford. Academics were stripped from their posts, such as the Professor of History, Selina Todd.

A highly publicised example overseas was the ‘cancellation’ of Psychologist Dr Jordan Peterson. Public demand for university (and even government) action led to many university seniors firing the accused staff. The Conservative government’s emphasis on the independence of governing bodies at universities gave authority to this legislation in protecting freedom of speech for all.

The Free Speech Union, an independent organisation that promotes the freedom of speech through funding and events, described the introduction of two systems that academic complaints will have to go through: the OfS’ (Office for Students) Director for Free Speech and Academic Freedom, and eventually bringing in the County Court if the legislation is violated, as a vital last resort mechanism.

How is Society Affected by this Legislation?

Depending on one’s political alignment, whether one perceives the legislation as a positive implementation varies across the nation, having widely impacting societal implications. Those on the left have generally seen this as a permit for academic staff, visiting speakers, and students to make controversial remarks without facing consequences for ‘hate crimes’. However, those on the right have perceived this as a method to protect individual liberties and freedoms in intellectual contexts.

Regardless, the promotion of intellectual freedom and discussion is of the utmost importance in educational institutions: to allow students to discuss and debate ideas, to prevent a stagnation of intellectual growth, allowing for a more nuanced and logical understanding, removing the subjective emotional aspect that motivates the ‘cancel-culture’.

At the same time, during a debate in 2021 following the Queen’s Speech, the Labour Party’s Shadow Education Secretary challenged the reprisal of Holocaust deniers, to which the Conservative former minister Sir Edward Leigh replied on the Bill’s “unintended consequences”, advocating for manners, morale and principle in the enactment of this legislation.

This added nuance demonstrates that the legislation is beyond mere political motive but aimed to transcend individual liberty and freedom to all British people, especially within universities.

Legal Criticism

As some of the critics point out, the legislation comes with a rhetoric of futility and scepticism. Legal involvement naturally has a place in all sectors of society, particularly legislation that targets specific institutions, so the involvement of firms to protect academic staff, speakers and students would increase because of this.

The higher education specialist at Pinsent Masons Julian Sladdin claims that universities and colleges would be encouraged to ‘promote, rather than simply secure, free speech’, and strengthen powers already in place.

Sladdin hints at a more centralised structure in governing university bodies which could oversee increasing involvement by firms specialising in Higher Education, as well as in Tort to protect targeted individuals from defamation of character.

What is yet to be seen is whether this legislation would see an increase in the protection of individuals likely to be ‘no-platformed’, and how this would be conceptualised by legal involvement and growing centralise administrative university bodies.

Article by Shiven Chudasama

Suspension, Cancellation, and Termination

Legal Implications of the Red Sea Crisis on International Carriage Arrangements: Chapter 3

International commerce heavily relies on maritime transport, which handles 80% of global trade. The Red Sea crisis, a key bottleneck, affects 30% of the world’s container trade and 15% of all maritime trade, disrupting shipping routes, ports, merchants, shipowners, financial institutions, and consumers.

The crisis raises significant humanitarian, environmental, and security concerns, but this article concentrates on the commercial and legal challenges it presents. These include increased costs, contractual complexities, and liability issues.

Legal issues

Legally, the crisis prompts the potential invocation of force majeure clauses or contract frustration if carriers terminate agreements linked to the region, possibly excusing them from delay liabilities. Shipowners might seek indemnities for higher costs due to longer alternative routes.

Additionally, the crisis could spike insurance premiums for vessels and cargo, leading to disputes over cost distribution between carriers and merchants. This crisis compels shipowners to weigh safety against contractual duties within the crisis-afflicted Red Sea region.

The following questions are of legal importance:

1. Can shipowners deviate from the canal against contractual terms or refuse charterers orders to sail through the Suez Canal?
2. Can shipowners refuse to call at a nominated port located along the crisis impacted region?
3. Can Shipowners suspend, cancel or terminate contracts on the basis of the crisis?
4. Who assumes liability for damage to cargo or delay in delivery?

The article addresses the third question.

Suspension, Cancellation, and Termination

The question of termination or cancellation of contracts of carriage involving the red sea is of particular significance in consideration with the crisis on the red sea. This makes force majeure and frustration crucial legal concepts to consider for stakeholders involved in international shipping involving the Red Sea during this period of the crisis. The success of invoking either force majeure or frustration depends on a detailed legal analysis of the specific contract wording and the severity of the disruption caused by the Red Sea crisis.

Wording of the force majeure clause

Where VOYWAR 2013 or CONWARTIME 2013 have been incorporated into the contract, Clause (b) allows shipowners to give notice to charterers to cancel the charterparty if prior to the commencement of loading it appears in its reasonable judgement that the performance of the contract may expose the vessel to war risks. It is significant here that the cancellation must happen prior to loading the cargo on the vessel.

If the contract contains a force majeure clause, the specific wording of the clause is particularly important, due to strict construction under English law. Does the clause cover the crisis on the Red Sea?

If it does not, the clause cannot be invoked. Does the clause require that performance be rendered impossible or that performance is merely hindered? While the latter could readily be decided in the affirmative, it becomes contestable, in the case of the former, if the option of an alternative route through the Cape of Good Hope indeed renders performance impossible. This will be decided in the negative, following the decision in Tsakiroglou v Noblee Thorl. Although the court may have decided otherwise if the goods had been of a perishable nature.

Also important are the time limit for invoking the clause, required notices and notice periods. Where these pre-conditions exist in the clause, they must be strictly complied with. Moreso, where the party invoking the clause had no intention of performance, he should not be excused under the clause. Intention to perform and the supervening event should exist for the clause to apply.

Jurisdictional differences

Whereas force majeure has same effect in civil law as in English common law, the intricacies in applying the doctrine under both laws are different and significant. While English law limits interpretation of the clause to parties’ contract, civil law extends interpretation to statutory provisions. Consequently, the same case may be determined differently depending on which law applies.

Frustration

Frustration can be a recourse if no termination or force majeure clause exists. Unlike force majeure, frustration need not be expressly provided to be invoked. It occurs where a change of circumstances, without fault of either party, so radically impedes performance of a contract that it would be unjust to hold the parties to their contractual obligations.

But is the crisis a frustrating event? The mere fact that performance has become more expensive or time consuming will not, without more, frustrate a contract. Considering that the Cape of Good Hope is a practicable alternative for performance of shipments through the Canal, albeit more expensive and longer, the courts will be disinclined to determine the crisis as a frustrating event.

However, it is believed that where the contract expressly restricts shipment (performance) through the Suez Canal or the cargo is of a perishable nature and may perish if shipped through the Cape of Good Hope considering the longer time, a claim of frustration should be successful on these grounds.

A force majeure clause in a contract is advised (as opposed to relying on frustration) because it gives parties a degree of control over: the inclusion or exclusion of triggering events; the severity of impact on a party who invokes the clause; and what effect the clause will have on the invoking party’s contractual obligations.

Once terminated, shipowners have no obligation to carry the cargo to its destination or to discharge it. The carrier’s duty is to make it available to the charterers.

Article by Ebenezer Ajayi