The giving of employment references can sometimes cause tensions for employers. Although there is usually no legal obligation to provide a reference (except in certain regulated professions), if you do provide a reference you have a duty to both the subject and the recipient to ensure it is true and not misleading. It is also advisable to handle reference requests consistently to reduce exposure to complaints from individuals that they have been singled out for different treatment because of a particular protected characteristic (such as their age, gender or disability etc.).
ACAS has published new guidance dealing with the giving of employment references. You may find this a useful reference tool. The guide covers what references can include, and also discusses certain circumstances in which you might decide to give a bad reference, suggesting that subjective opinions or comments that are not supported by facts should always be avoided. See here for the new guide: www.acas.org.uk/index.aspx?articleid=5072