Does the Modern Slavery Act apply to your corporate group?

22nd January 2016

The Modern Slavery Act 2015 is now in force. We have been asked a number of times how the Act applies in the group context, particularly whether an overseas parent company with UK subsidiaries is subject to the Act.

Does the Act apply?

There are two tests, both of which must be satisfied for the Act’s reporting obligation to apply:

• a turnover test. Does the turnover of the commercial organisation amount to £36 million or more? The regulations which specify how the turnover is to be calculated state that the total turnover of a commercial organisation is its own turnover together with the turnover of its “subsidiary undertakings”. The turnover need not derive from UK activities
• a jurisdiction test. The commercial organisation must “carry on business” (or part of its business) in the UK. It need not be incorporated in the UK. There is no de minimis exception, so that if the organisation carries on any part of its business, however small, in the UK it will be subject to the reporting requirement (subject to meeting the turnover threshold). The Government’s guidance as to whether a company incorporated outside the UK carries on business, or any part of a business, in the UK will be determined, in the words of the guidance, by applying a “common sense approach” (whatever that means). It adds: “We anticipate that applying a common sense approach will mean that organisations that do not have a demonstrable business presence in the UK will not be caught by this provision. Likewise, having a UK subsidiary will not, in itself, mean that a parent company is carrying on business in the UK, since a subsidiary may act completely independently of its parent or other group companies” [our emphasis]. This suggests that if a UK subsidiary is doing what the overseas parent is telling it, the parent will be caught. If the UK subsidiary is allowed to act autonomously then the parent is unlikely to be caught. A delicate balance will need to be struck in each case. If the parent is caught it will have to include in its annual statement the steps taken in relation to each of its subsidiaries where those subsidiaries form part of its supply chain or part of its business (even if the subsidiaries themselves don’t meet the £36 million threshold and/or are overseas companies).

Is it possible to prepare a group statement?

Where a parent and one or more subsidiaries in the same group are required to produce a statement, the parent may produce a statement that the subsidiaries can also use to meet their own reporting requirement, provided the statement fully covers the steps that each of the subsidiaries in question has taken in the relevant financial year.

Transitional arrangements

The reporting obligation does not take effect in relation to financial years ending before 31 March 2016. A company with a financial year end date of 31 December will therefore need to issue its first statement for the financial year from 1 January 2016 to 31 December 2016. A company with a 30 April year end date will have to issue a statement in respect of its accounts for the 1 May 2015 to 30 April 2016 period but will only need to detail the activities undertaken since October 2015.

WM Comment

The steps that corporate groups will need to take to be in a position to give the reporting statement under the Act will vary from case to case. Most will share a common starting point, however, namely the undertaking of an internal risk assessment. We have been advising clients on how to do this, the types of question they should be asking and of whom. Please contact us if you need assistance or advice on how to go about doing this.