BLP (+ Tax) Flashcards
Different legal forms of business
sole trader
partnership
llp
private and unlisted public companies
key considerations when forming a business
x7
costs
risk
structure
formalities
privacy
finance
tax
principal differences between a private and public company
x9: name; min x3; secretary; AGM; trading; written; offer
name must end with
- private: limited/ltd
- public: public limited company/plc
min shareholders
- private: 1
- public: 1
min directors:
- private: 1
- public: 2
company secretary required?
- private: no
- public: yes
AGM required?
- private: no but able to
- public: yes
min share capital to be issued
- private: must have at lease one share (could be incorporate with one share of 1p)
- public: min of 50k (or prescribed euro amount)
certificates required before commencement of trading
- private: certificate of incorporation (can commence business as soon as is incorporated)
- public: certificate of incorporation AND cannot commence business until a trading certificate is issued by Registrar showing that the company’s allotted share capital is not less than the minimum
CA 2006 allows offer of shares to the public?
- private: prohibited
- public: permitted
use of written resolutions?
- private: permitted
- public: not permitted
two key principles of company law which make a company such an attractive business medium for many investors
separate legal personality + limited liability
separate legal personality: a company has a separate from that of its owner(s)
- a company becomes a legal person from the date of incorporation (date of issue of certificate of incorporation)
- from this date, the company has its own existence and personality
limited liability: shareholders’ liability for the company’s debts is limited
- compare with unincorporated models: a sole trader or partners in a partnership
partnerships – formation
traditional partnership is very easy to establish
no formality is required
“relationship between persons carrying on a business in common with a view to making a profit”
NOT a legal entity separate from the partners themselves
“firm”/”partnership” are nouns used to refer to the partners collectively
partnerships – liability of partners
contractual liability + tortious liability
contractual liability
- every partner in the firm is liable JOINTLY with the other partners for all the debts and obligations of the firm incurred while they ar a partner
tortious liability
- in tort, the partners’ liability is JOINT AND SEVERAL
partnerships – tax
the partners each individually pay income tax on their share of profits to HMRC
the partnership agreement
most partnerships will have some form of express written partnership agreement governing
usual min provision x13
- commencement and duration
- partnership name and place of business
- partnership property
- capital, profits and losses
- drawings, salary
- accounts
- dissolution of partnership
- duties, powers and restrictions on partners
– work input and roles; any limits on the authority of the partners
– partnership decision making
– incoming partners
– retirement/expulsions of existing partners
– non compete / other restrictions
limited liability partnerships (LLP)
corporate x6: personality + liability + CH + incorp/reg reqs + floating charge + insolvency law
partnership x4: no share/capital maintenance; no distinction members/partners; members agree x5 (profit, manage, decide, retire, ‘agreement’), tax transparent
corporate characteristics + partnerships characteristics
corporate characteristics x6
- separate legal personality
- limited liability for members
- incorporation and registration requirements
- requirement to file account at companies house
- can create a floating charge over the assets of LLP
- certain provisions of company law and corporate insolvency law apply to LLPs in modified form
partnerships characteristics x5
- no share capital or capital maintenance requirements
- no real distinction between members and management
- members can agree amongst themselves x5
– how to share profits
– management duties
– how decisions are to be made
– how new members are to be appointed
– what retirement provisions shall apply
- member’s agreement (if there is one) is private
- tax transparent
the company’s constitution
constitutional documents under
CA 1985: articles of association + memorandum
CA 2006: article of association
- memorandum only required as part of procedure to register company at Companies House
the company’s constitution – articles of association
x3
– all companies must have them
– they are the main constitutional documents
– purpose is to regulate the relationship between the shareholders, the directors and the company
nature of the contract binds the company and its members to the same extent as if there were covenants on the part of the company and each member to observe those provisions
company <–> articles (contract between the company and the members <–> members
formation of a company
incorporation from scratch + shelf company conversion
incorporation from scratch: by submitting relevant information to Companies House/online
shelf company conversion: purchase of shelf company followed by formalities to enable necessary changes
company decision making
directors + shareholders
directors
- decisions taken by board resolutions at board meetings (BMs)
- board resolution: each director has one vote
- board resolution are passed by simple majority unless the directors have agreed that a particular decision requires unanimity
shareholders
- two different types of shareholder resolution
1 - OR: passed by simple majority OVER 50% of the votes
2 - Special R: 75% OR MORE of the votes
- shareholder resolutions may be passed either at General meeting or in written resolutions – latter for private companies only
shareholder voting – show of hands and poll votes at GM
when shareholders vote on show of hands
- provided the share has voting rights under the Articles
- each shareholder who is present at the meeting will be entitled to one vote
- regardless of the number of shares held by that shareholder
when the shareholders vote on poll
- every shareholder has one vote in respect of each share hef by them
company meetings
BM + GM
BM
- who calls? any director
- notice? reasonable (= whatever notice is usual for the directors to give)
- quorum? 2 directors
- voting? board resolutions pass by majority vote
GM
- who calls? the board (at a BM)
- notice? 14 clear days or short notice
- quorum? 2 shareholders (or 1 for single member company)
- voting?
– OR: >50%
– SR: =/> 75%
company meetings – the GM sandwich
BM –> GM –> BM –> PMMs
where a shareholder vote is required for a certain transaction, is is necessary for the company to hold a series of meetings
a BM is first required to call the GM
a GM is then required for the shareholders to vote on the resolution
a further BM is then required to put into effect the outcome of the shareholder vote and
there may be post meeting matters to attend to such as filings at Companies House
the role of directors vs shareholders
directors
- manage the company on a day to day basis: on an agency basis
- powers derive from MA3 and MA5
- certain actions can only be taken by directors if the shareholders have given authority
- owe duties to the company
shareholders
- own the company
- are able to control key decisions through shareholder resolutions eg to give directors authority to change the articles, or name of the company
what is a director?
3 categories (can overlap)
1 – at law
- de jure
- de facto
- shadow
2 – in practice
- executive
- non executive
3 – the company’s articles may also provide for alternative directors
appointment of directors
governed by the Articles of the company
CA 2006 does not stipulate a procedure for the appointment of directors
companies with MA may appoint director
- by an OR of the shareholders
- by a decision of the directors
usually latter since easier
always check articles as these can set out an alternative procedure
the rights and remedies of shareholders – removal of a director by the shareholder
ultimate sanction by shareholders against a director
under CA 2006, a company (ie the shareholders) may by OR remove a director
NEVER written resolution so GM
special notice (28 days) required of resolution for board
board is not obliged to put resolution on agenda of a GM
if board fails to call a GM within 21 days, shareholders may call it themselves on normal notice
not possible for board to remove a director (unless articles provide for it)
directors who are also shareholders can vote in capacity as shareholder on OR to remove them AND may protect by Bushell v Faith clause into articles or entering into a shareholder’s agreement
a company may pay compensation to a director who leaves office – shareholder approval unless an exceptions apply
the general duties of director CA 2006
x7 duty to: within; success; independent; care; avoid; no benefit, declare interest
1 – act within powers
2 – promote success of the company for the benefit of the members as a whole
3 – exercise independent judgment
4 – exercise reasonable care, skill and diligence
5 – avoid conflict of interests
6 – not accept benefits from third parties
7 – declare any interest in a proposed transaction
transaction with directors
x3: long term; substantial; (quasi) loans/credit
3 types of transactions between the company and its directors (or people connected to them) which are regulated by CA 2006 and which require the approval of the company’s shareholders by OR, in order for the transaction to be valid
1 – director’s long-term service contracts
2 – substantial property transactions
3 – loans, quasi-loans and credit transactions
in these, there is a risk of conflict of interests so potential breach of duties
Director’s long-term service contracts
OR if <2 yrs (guarantee or terminate only specific)
no OR = void + reasonable notice
Shareholder approval by ordinary resolution is required for any director’s service contract which is, or may be, for a guaranteed period in excess of two years (s 188(2)(a) CA 2006).
The guaranteed term is the period during which the contract is to continue other than at the instance of the company where the company either cannot terminate the contract or can only terminate in specific circumstances (s 188(3)).
In the absence of approval the term will be void and the contract deemed to terminate on reasonable notice (s 189).
Under s 188(6)(b) approval is not required by the members of any company which is a wholly owned subsidiary of another company.
If the director is also a director of any holding company, the shareholders of the holding company will also need to give approval (s 188(2)(b)).
Where an ordinary resolution is required, a memorandum setting out the terms of the proposed contract must be made available for inspection by members of the company at the company’s registered office for not less than 15 days ending with the day of the meting and at the meeting itself (s188(5)(b))
Where a written resolution is used, the memorandum must be annexed to the written resolution and sent to all eligible members.
Substantial property transactions
non-cash
before or conditional
sub: 5k + 10% or 100k
no OR approval of wholly owned but yes holding
Shareholder approval by ordinary resolution is required where there is an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company.
Shareholder approval must be given either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained.
‘Substantial non-cash asset’ means an asset other than cash where the value is either: over £5,000 and 10% of the company’s net asset value; or over £100,000.
If the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR (s 190(2)).
Approval is not required by the members of any company which is a wholly-owned subsidiary of another company (s 190(4)(b)).
Loans, quasi-loans and credit transactions
private no w/ plc: OR
plc or private w/ plcs: not wholly but holding OR
For private limited companies which are not associated with a Plc, the only relevant provision is s 197 which provides that an ordinary resolution is required to approve loans to its directors or to directors of its holding company or give guarantees or enter into security in connection with loans to such directors.
Plcs and private limited companies which are associated with Plcs are subject to further restrictions relating to loans to a person connected to a director of the company / holding company; quasi-loans to, or credit transactions with, their directors / directors of a holding company / connected persons and guarantees or security in respect of any of these transactions (s 198 – 202).
Where the transaction is with a director of the holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR.
Approval is not required by the members of any company which is a wholly-owned subsidiary of another company.
Where an ordinary resolution is required to approve a loan / quasi-loan / credit transaction / guarantee or security, a memorandum setting out the proposed contract must be made available for inspection by members of the company at the company’s registered office for not less than 15 days ending with the date of the meeting and at the meeting itself.
Where a written resolution is used, the memorandum must be annexed to the written resolution and sent to all eligible members.
Short notice GMs
90% + (or 95% articles not MA)
GMs may be called on less than the usual amount of short notice if sufficient members agree.
CA 2006 provides that, for a private company, a GM may be called on short notice if this is agreed to by a majority in number of the members who together hold shares with a nominal value of not less than 90% of the total nominal value of the shares which give the right to attend and vote at the GM.
This percentage may be increased to up to 95% by a provision in the company’s articles of association but there is no such provision in the MA.
Where companies have few shareholders, it is often possible for meetings to be held at short notice.
If all the shareholders are available at the time the directors decide to convene a GM, the following sequence of events may be possible. All of this can be done in well under an hour.
BM - Approve notice of GM and consent to short notice.
GM - Vote on resolutions set out in notice.
Reconvene BM - Directors authorise relevant action and PMM.
PMM - carried out.
Post-meeting — dealing with documentation
resolutions (copy) to Registrar of C: 15 days
amended articles + SR filed (+ OR re constitution)
update statutory books (secretary): eg register of members
Copies of all resolutions affecting the company’s constitution must be sent to the Registrar of Companies within 15 days of their being passed.
All special resolutions must be filed as they form part of a company’s constitution (ss 17(b) and 29(1)(a) CA 2006), as do a few particular ordinary resolutions specified by the relevant provisions of the CA 2006.
Copies of any amended articles must also be filed (s 26(1) CA 2006), together with various company forms. The CA 2006 refers in numerous places (e.g. s 87(1) CA 2006) to requirements for notice of certain events and/or decisions to be given to the Registrar of Companies.
The directors will also be responsible for updating the statutory books, e.g. the registers of members and directors, and the BM and GM minute books. If the company has a company secretary he/she will update the statutory books.
the rights and remedies of shareholders
x6
membership rights – CA 2006
shareholder agreements
shareholder rights under CA 2006
the removal of directors CA 2006
unfair prejudice actions CA 2006
just and equitable winding up Insolvency Act 1986
the rights and remedies of shareholders – derivative claims
by member in/for company re proposal/actual/omit due to director
2 stages: prima facie + consider
claim initiated by a MEMBER of a company rather than by the company itself
a) in respect of a CAUSE OF ACTION VESTED IN THE COMPANY and
b) seeking relief ON BEHALF OF COMPANY
a claim may be brought in respect of a cause of action from an ACTUAL or PROPOSED act or OMISSION involving negligence, default, breach of duty or breach of trust by DIRECTOR of the company
2 stage approval for derivate claim
1 – court decides if there exists a prima facie case
2 – detailed consideration of criteria, including evidence from other members; case the proceeds to trial
any remedy is granted on behalf of the company and not the shareholder who brought the claim
the rights and remedies of shareholders – unfair prejudice
personal action by shareholder against company
remedy: buy shares back
CA 2006 allows a member to bring an action on the grounds that the company is being run in such a way that they have suffered unfair prejudice
Any shareholder can bring an unfair prejudice claim under s 994 CA 2006 on the grounds that the running of the company has unfairly prejudiced them.
A claim under s 994 CA 2006 is a personal action brought by the shareholder against the company.
The various orders for relief are set out in s 996 CA 2006 and the most common order would be that the other shareholders or the company buy the claimant shareholders’ shares from them.
the rights and remedies of shareholders – just/equitable winding up
IA 1986: the right for a disgruntled shareholder to apply for the company to be wound up on the grounds that it is just and equitable to do so
equity finance
the rights attached to a class of shares are determined in the company’s articles
ordinary shares
redeemable shares
preference shares
non-voting shares
employees’ shares
cumulative shares
convertible shares
deferred shares
allotment, transfer and transmission of shares
allot: company to (new) shareholder
transfer: between shareholders (x4)
- sale or gift
- transferor gives signed stock transfer form + share certificate
- check articles for restrictions eg pre-emption rights
- stamp duty: 0.5% tax when >1000
an ALLOTMENT of shares is a contract between the company and a new/existing shareholder under which the company agrees to issue new shares in return for the purchaser paying the subscription price
allotment: company –> shareholder A
a TRANSFER is a contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is NOT a party to the contract on a transfer of shares (with the exception of a sale out of treasury shares)
transfer: shareholder A <–> shareholder B
A company can allot new shares or existing shares can transfer between shareholders by sale or gift.
Private limited companies are prohibited from offering shares to the public.
When a shareholder is seeking to transfer shares, the Articles must always be checked to ensure there are no restrictions on transfer or pre-emption rights.
Transfer of shares is effected by the transferor signing a stock transfer form and giving this to the transferee together with the share certificate.
Stamp duty is payable on transfer of shares at 0.5% (min payment £5) where sale price > £1,000.
Transmission of shares is an automatic process in the event of death or bankruptcy of a shareholder.
the procedure for allotment of shares
x6: CAP; authority; ES?; new; BR; admin
1 – check if there is a CAP on the amount of shares that can be issued by the company
2 – check if company directors needs AUTHORITY to allot shares
3 – EQUITY SECURITIES? look at capital and dividend payout on the shares
– if BOTH are capped, the share is NOT an equity security so no pre-emption rights
– if equity securities: disapply pre-emption rights?
4 – is company creating a new class of share? if so, the articles will need be amended (SR) to incorporate new class of shares
5 – BR to allot shares (always required regardless of other steps)
6 – administrative matters (fillings at companies house and updating company registers)
STEP 1: Any cap on the number of shares that may be issued?
How can the cap be removed?
CA 1985: OR
CA 2006: MA = N/A but if Articles = SR
The requirement for a company to have an ASC no longer exists under CA 2006.
Companies incorporated under CA 2006 will not have an authorised share capital and shareholders wishing to impose a cap to restrict the number of shares which such a company can issue will need to amend the Articles (by special resolution) to include suitable provisions.
For companies incorporated under CA 1985, shareholders wishing to remove or amend the deemed restriction in a company’s Articles may do so byordinary resolution. This is despite the fact that removing such a deemed restriction involves changing the Articles, which would normally require a special resolution under s 21(1) CA 2006.
Any such deemed restriction will also fall away due to the company adopting, wholesale, new Articles (eg MA) which do not include provision for any cap (applying s 21(1) CA 2006).
Companies incorporated under CA 2006will not have an authorised share capital. For such companies, therefore, there will be no bar to issuing shares under step 1.
The only exception would be if the company has placed a provision in its Articles limiting the number of shares that may be issued. If such a restriction exists, it can be removed, or the limit increased, byspecial resolutionunder s 21(1) CA 2006.
Per s617(2)(a) CA 2006, each time a company issues shares, its share capital increases automatically.
STEP 2: Do the company’s directors need authority to allot?
private + one class of share = automatic unless CA 1985 = OR
other companies: OR + restrictions + valid?
CA 2006 provides that the directors of a company must not exercise any power of the company to allot shares in the company except:
for private companies with only one class of shares in existence, directors have automatic authority to allot new shares of the same class (unless prohibited by Articles) but CA 1985 = OR.
or
for all other companies, the directors will need to be granted authority to allot the new shares by the shareholders by way of ordinary resolution.
– Authority to allot under s 551(1) CA 2006 can only be given subject to limits in terms of both time and number of shares (s 551(3) CA 2006).
–This means that if the company has already granted its directors a s 551(1) CA 2006 authority, it must be checked to ensure it is still valid.
STEP 3: Must pre-emption rights be disapplied on allotment?
offer to shareholders proportionally or disapply by SR
Any new ‘equity securities’ (defined ins 560 CA 2006) must be offered to the existing shareholders of a company (holding ordinary shares), in proportion to their existing shareholdings, before they can be offered to anyone outside the company.
Where pre-emption rights apply, the most usual approach is for the company to request the existing shareholders to disapply these pre-emption rights byspecial resolution.
STEP 4: Must new class rights be created for the shares?
if yes then SR to amend articles
In order to create a new class of shares, it is necessary for the company, in addition to taking some or all of the steps set out previously, to insert new provisions in its Articles dealing with the rights attached to those new shares.
An alteration to the Articles, you will recall, requires aspecial resolutionof the shareholders under s 21 CA 2006 (except if removing a cap transferred from a company’s authorised share capital in its memorandum).
STEP 5: Directors must pass a board resolution to allot the shares
GM before BM unless GM not needed x4:
- no CAP
- authority not required (private + one class)/previously given
- issuing to existing shareholders proportion or disappply or private: articles
- articles have relevant class rights in article
Any requirements for shareholder resolutions must be dealt with in a general meeting before the board meeting is held at which the new shares are allotted.
A general meeting will not be needed in advance of the board meeting if x4:
has no limit in its constitution on the number of shares which can be issued by the company;
+
does not require directors’ authorisation because the company is a private company with only one class of shares and there is no restriction in the company’s Articles – s 550 CA 2006) or has already given the directors authority to allot shares;
+
is issuing the shares to existing shareholders in proportion to their existing shareholdings and follows the procedure in s 562 CA 2006 or has already disapplied s 561 CA 2006 or is a private company and has taken advantage of s 567 CA 2006 (articles exclude pre-emption rights);and
+
has the relevant class rights in its Articles.
Administrative requirements on allotment
3 things
CHx2: forms 15 days (+ resolutions?)
register x2: members 2 months (+ PSC?)
share certificate to new 2 months
Copies of resolutions to be sent to Companies House within 15 days
Company forms to be sent to Companies House
Updating company registers
– Update register of members within two months
– Update PSC register if necessary
Share certificates: must be prepared and sent to new shareholders within two months
Financial assistance
FA? (in)direct ((guarantee) loan) assistance + financial + (retro) facilitate acquisition = fine/ + 2 yrs prison
Who? public/private for public holding target– prohibition of FA for own shares
Defences x2: narrowly construed: principal part / incidental part of a larger purpose
assistance must be being given; and
the assistance must be financial in nature.
Financial assistance is covered by the rules whether it isdirect(eg a loan given to the buyer of shares) or indirect(eg a guarantee given to a bank in relation to a loan made by the bank to a buyer of shares).
Finally, to fall within the statutory provisions, the financial assistance must be being givenfor the purposeof the acquisition (or, if given after the acquisition, for the purpose of reducing or discharging a liability incurred for the purpose of the acquisition), ie the company giving the assistance must have intended to facilitate the acquisition.
the prohibition on a company providing financial assistance for the purchase of its own shares apply onto
– public companies and
– private companies offering assistance for the purchase of shares in a public holding company (conditional and unconditional exceptions: eg dividend payments)
principal purpose and incidental part of a larger purpose defences (but narrowly construed by court)
financial assistance is a criminal offence and the company and defaulting officers are liable to
– a fine and/or
– up to 2 years’ imprisonment
Financial assistance – conditional exceptions
exceptions x2
- ordinary course of business
- employee share scheme
conditions (1/3)
- private
- public not reduced
- public reduced out of distributable profits
A number of specific types of transaction which will be exempt from prohibition provided certain conditions are met.
These transactions include, for example:
– Money lending in the ordinary course of business (s 682(2)(a) CA 2006).
– Assistance in respect of employee share schemes (s 682(2)(b) CA 2006).
The conditions are that
(i) the company giving the assistance is a private company or
(ii) the company giving the assistance is a public company and the net assets of that company are not reduced by the giving of the assistance or to the extent that they are reduced the assistance is provided out of distributable profits (s 682(1) CA 2006).
Financial assistance –the “purpose” exceptions
Essentially, the purpose exception states that the giving of financial assistance will not be unlawful if the principal purpose in giving it is not for the purpose of the acquisition or if that purpose (the acquisition) is only an incidental part of some larger purpose.
It should be noted however that because of its narrow application as stated in case law and because of the very serious consequences of giving unlawful financial assistance, this exemption is not normally relied upon.
buyback of shares
x3: distributable profits; fresh issue; capital
profits/fresh: contract approved by OR
a buyback of shares takes place when a company purchases its own shares from an existing shareholder
there are 3 ways in which a company may fund a buyback of shares
the company may use
1 – distributable profits
2 – proceeds of a fresh issue of shares made for the purpose of financing the buyback; or
3 – capital (private only?)
Where a buyback is funded out of profits / proceeds of a fresh issue, a contract is required which must be approved by an OR of the shareholders.
buyback of shares – the doctrine of maintenance of share capital
share capital of a company is seen as a permanent fund available to its creditors
companies are not allowed to purchase their own shares
but a company may buy back its own shares (or redeem redeemable shares) provided it follows CA 2006 procedure
Buyback out of profits and/or proceeds of a fresh issue of shares
x4: articles; distributable, contract, OR
Check Articles for any prohibition on buyback
Verify distributable profits
Terms of buyback must be set out in a contract - must be available for inspection at least 15 days before GM and at GM itself (or circulated with written resolution)
Shareholders must approve the contract by OR
Buyback out of capital (PRIVATE companies only)
condition: distributable profits must be used before capital
timing (5-7 weeks) + notification (7 days: Gazette; N newspaper/each; DSS/AR at CH:)+ procedure x6: articles; contract; DSS/AR/accounts 3 months; contract OR; payment SR; creditors
no earlier than 5 weeks, and no later than 7 weeks, after the date of the SR
Within 7 days SR company must give notice to its creditors by:
– Publishing a notice in the Gazette
+
– Publishing a notice in the same form as the Gazette notice in an appropriate national newspaper, or give notice in writing to each of its creditors, and
+
– Filing copies of the directors’ statement and auditors’ report at Companies House. This is so that any interested creditor may inspect these.
x6
Check Articles for any prohibition on buybackand on use of capital
Terms of buyback must be set out in a contract (15 day display)
directors’ statement of solvency (‘DSS’) + the auditors’ report (‘AR’) + accounts (<3 mths old)
Shareholders must approve the contract by OR
Shareholders must approve the payment out of capital by SR
Detailed notification requirements for creditors
Redemption of redeemable shares
no contract needed because already in articles
Redeemable shares are shares which are issued as redeemable shares.
Redeemable shares effectively give the holder temporary membership in the company. They are issued to be redeemed on the occurrence of certain circumstances (for example by providing for redemption on a fixed date and at a fixed price) or may be redeemed at the option of the issuing company or the shareholder.
All details of the redemption, including date of redemption and the price to be paid at that date, will either be in the Articles or determined by the directors.
As a result,a contract is NOT required to redeem shares,irrespective of the source of funding used. This is because the terms of the redemption have already been set out in the company’s Articles (or determined by the directors) prior to the shares being allotted.
Where a company uses capital to fund the redemption there is a lot more regulation and procedure. The procedure is very similar to the buyback of shares out of capital.
income vs capital
INCOME: regular
– receipts: if a receipt is the product of how the taxpayer generates money on a REGULAR basis eg trading profits; interest received on savings account
– expenditure: if an expense is incurred as an integral part of day-to-day TRADING eg bills for heating, rent, marketing, stationary…
CAPITAL: one-off
– receipts: eg if a business owned the premises from which the business operates then any gain on the sale
– expenditure: if an expense brings into existence a capital asset as part of the infrastructure of the business or as a business
assessment of tax
individuals:
- income and capital gains tax
- on the basis of a tax year
- 6 April to 5 April
companies
- corporation tax
- basis of financial year
- 1 April to 31 March
summary of income tax calculation
x7: total, net, taxable, split, band, rates, add (TNT S BRA)
1 – TOTAL INCOME
2 – less available tax reliefs (interest on qualifying loans and pension contributions) = NET INCOME
3 – less personal allowance: £12,570 (reduce by £1 for every £2 of net income above £100,000/ if >125.14k then no personal allowance) = TAXABLE INCOME
4 – split the taxable income into non-savings, savings and dividend income: taxable less (savings + dividend) = non-savings income
5 – calculate whether the personal savings allowance is available (ie looking at the taxable income figure to see which income tax band it ends in)
6 – apply relevant rates
7 – add together the amounts of tax calculated at step 6 TOTAL TAX LIABILITY
summary of capital gains tax calculation
10 steps: value, disposal, net, initial, subsequence, carry, AE
net sale proceeds
total chargeable gain
taxable chargeable gain
A: sale proceeds/market value
B – less disposal expenditure
C = net proceeds
D – less initial expenditure
E – less subsequence expenditure
F = total chargeable gain
G – less carried forward or carried-across losses
H – less annual exemption: 12.3k
I = taxable chargeable gain
J: apply CGT to the taxable chargeable gain (I) at the applicable rate (10% or 20%)
– Broadly, basic rate taxpayers pay 10% CGT and higher and additional rate taxpayers pay 20% CGT.
–It is important to have calculated a person’s income tax prior to their capital gains tax in order to establish this.
capital gains tax – reliefs
x4
1 – business asset disposal relief: reduces the higher rates of CGT from 20% to 10% for gains arising on qualifying disposals
2 – investor’s relief: reduces the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares, subject to a lifetime limit of 10M
3 – rollover relief (replacement of business asset relief): defers liability to CGT
4 – hold-over relief (gift of business assets relief): defers liability to CGT
inheritance tax – business property relief (BPR)
BPR is an exemption which applies to the value of qualifying business assets and is available to LIFETIME transfers and the DEATH estate
Business property includes
1 – a business or interest in a business eg business of a sole trader or partnership
2 – shares in an unquoted company
3 – shares in a quoted company
4 – land or buildings, machinery or plant owned by a transferor but owned for business purpose by either a company of which the transferor was a partner
the transferor must have owned the business asset for at least 2 YEARS IMMEDIATELY prior to the transfer.
BPR not available if the business consists wholly or mainly for making or holding investments
corporate taxation – the VAT charge
VAT is charged on (uk + supply + person + business)
1– any supply of goods or services made in the UK
2 – where it is a taxable supply
3 – made by a taxable person
4 – in the course of furtherance of any business carried on by that person
output v input tax
output: the VAT chargeable by a business when making a supply of goods or services
input: the VAT paid by a person on goods or services supplied to the person
VAT – types of suppy
standard rated: 20%
reduced rated: 5%
zero rated: 0%
exempt
VAT Terminology
1– any supply of goods or services made in the UK
2 – where it is a taxable supply
3 – made by a taxable person
4 – in the course of furtherance of any business carried on by that person
SGS: for consideration
Supply: any not exempt
Person: any required to be registered eg company (reg: 85k /dereg= 83k)
Business: regular economic acitivity
1a – Supply of Goods or Services:Any supply made in the UK of goods or services done in return for consideration.
1b – Made in the UK:The place of supply of the relevant goods or services must be in the UK. There are complex rules for working out the place of supply for VAT purposes in cross-border transactions, which are outside the scope of this Workbook.
2 – Taxable supply: Any supply made in the UK which is not an exempt supply. See below for the various types of supply.
3 – Taxable person:A person who is, or is required to be, registered for VAT purposes. ‘Person’ includes individuals, partners, companies and unincorporated organisations.
– A person is required to be registered: The current registration threshold is £85,000/ The current deregistration threshold is £83,000.
4 – In the course or furtherance of any business carried on by him:‘Business’ is a very wide term and basically any economic activity carried on, on a regular basis. An employee’s services to an employer are excluded. All of a person’s business activities are included in one VAT registration.
In this element we will use the phrase ‘taxable business’ to mean a person who is VAT registered or required to be VAT registered.
standard rated: 20%
reduced rated: 5%
zero rated: 0%
exempt
reduced: dom heat/power, mobility aids for oil, stop smoking, children car seats
zero: 0% on output but can still recover on input!
– certain foods, sewer/water, (construction) new house, books, children clothing
exempt: but not input
– finance, insurance, education, health sale of land (unless new com)
Standard Rated
– Generally, the standard rate of VAT is 20%. A supply by a business will be standard rated unless it falls within one of the other three categories.
– A VAT registered business charges VAT at standard rate on its outputs and recovers any VAT suffered on its inputs (unless it makes supplies which fall into the exempt category below).
Reduced Rated
– A very limited number of types of supply are charged at 5%.
These include supplies such as domestic heating and power, installation of mobility aids for the elderly, smoking cessation products and children’s car seats.
Zero Rated
– Further supplies are zero rated for public policy reasons. Zero rated supplies include food (within certain categories), sewerage and water, books / newspapers, talking books for the blind, new houses and the construction of new houses, public transport and children’s clothing.
– Zero rated supplies fall into the category of taxable supplies. This means that when a VAT registered business makes zero rated supplies it charges VAT at the rate of 0% on its outputs and it can recover any VAT suffered on its inputs. This is therefore a very favourable supply for a business to make.
Exempt
– Supplies that are exempt include the provision of insurance, finance, education / health services and the sale of land and buildings (unless it comprises a new commercial building or the supplier of a commercial building has chosen to make the supply standard rated by waiving the exemption).
– When a business makes exempt supplies it does not charge VAT on its supplies but equally it is notable to recover any VAT suffered on its inputs. This input tax is a cost to the business.
corporation tax is payable on
19%
1 – all income profits
2 – chargeable gains
3 – of a body corporate
4 – that arise in its accounting period
the sum of a company’s profits and gains is known as ‘TTP’ (taxable total profits chargeable to corporation tax)
companies are assessed to corporation tax by reference to the financial year (1 April – 31 March)
because a company can choose its accounting period, it is often different to the financial year, which is the same for all companies
the amount of TTP will determine the amount of corporation tax payable
the rate of corporation tax for the current tax year is 19%
calculation of TTP
chargeable gains + income profits
chargeable gains =
+ sale proceeds
- allowable expenditure
- indexation allowance
- capital/trading losses
income profits =
+ income receipts
- deductible expenditure
- capital allowance
- trading losses
close companies
close if control (>50%) by =/< 5 or any n = directors
a company will be a close company if it is under the control of
– 5 or fewer participants
OR
– any number of participators who are also directors
a participator is a person having a share or interest in capital or income of the company for example, shareholders and some creditors
control means the ability to exercise control over the company’s affairs, normally by voting rights, or the possession of or entitlement to:
– issued shared share capital allowing the greater part (ie more than 50%) of income of the company if distributed
– the greater part of assets of the company on winding up
double entry book keeping, ledgers and the trial balance
bookkeeping ledgers –> trial balance –> ALCIE classification + year end adjustments
ALCIE classification
– profit and loss account
– balance sheet
each transaction will be recorded in two places in the books of the business
– debit entry
– credit entry
at the end of the accounting period, total of debit = credit
every entry on the trial balance will relate to a ledger:
– asset
– liability
– capital
– income
– expense account
before trial balance can be used to prepare the financial statements, year-end adjustment will need to be made to some of the figures to ensure they are accurate for the accounting period
the contents of a profit and loss account
INCOME of a business throughout an accounting period minus EXPENSES incurred in that period
to arrive at a profit (or a loss) figure for the period
a profit and loss account is a summary of the fortunes of a business over a passage of time
the contents of a balance sheet – NAV and Capital
NAV: top half of balance sheet
–the net worth or net asset value (NAV) of the business
– ie the value of the assets it has less the liabilities it owes)
Capital: bottom half of balance sheet
– capital invested in the business to achieve that net worth
year end adjustments
YEA are transactions or modifications to the account entries on the trial balance
they are needed to apply the accruals concept to the preparation of financial statements
this concept requires that
– all income and expenditure must be ‘matched’ to the relevant account period AND
– all current obligations must be anticipated as liabilities and all asset value must be assessed to make sure they can be recovered through future profits in conditions of uncertainty
x5
– depreciation
– accruals
– prepayments
– bad debts and doubtful debts
partnership accounts
within a partnership, each partner will have their own accounts – commonly both a capital account and a current account – these are capital accounts
partners in a partnership will take ‘drawings’ ie a share of the profits of the partnership
surplus profits are distributed to partners in the following order
– interest on their capital
– salaries
– remaining profit will be distributed according to an agreed profit share ratio
the Profit Appropriation Statement must be completed before the Balance Sheet can be drawn up
the top half of a partnership Balance Sheet is similar to that of a sole trader
the bottom half, which shows capital, follows a different format
company accounts
companies prepare accounts because they are obliged to do so by statute
companies are required to make up their accounts by their Accounting Reference Date (ARD)
companies are permitted to change their ARD
there are 3 main differences in the financial statements for companies
1 – format
2 – tax
3 – dividends
the BOTTOM portion of the balance sheet shows what is referred to as TOTAL EQUITY or EQUITY AND RESERVES
companies can make adjustment to the financial statements to reflect the fact that their assets have decreased in value
share capital and reserves
the bottom half of a company’s balance sheet shows the equity and will balance the top half of the balance
there are different entries to consider on the bottom half of a company’s balance sheet
the called-up share capital is the amount of the nominal value of its shares that the company has required its shareholders to pay
there are different kinds of reserves
– capital
– revenue
the share premium account represents the difference between the nominal value of the shares and the amount that the shares actually paid for the shares
a revaluation reserve is created when a company’s directors, as a matter of accounting policy, wish to show more up to date values of non-current assets in the account
company’s balance sheet – top half
the BOTTOM portion of the balance sheet shows what is referred to as TOTAL EQUITY or EQUITY AND RESERVES
dividends
it is not an expense of the business
2 types: interm and final
dividends are paid or payable out of profits generated in the current or previous account periods
the owners of companies are shareholders
shareholders’ return on their investment is the dividend that they may receive
like drawings that a sole trader takes from his business, a dividend is an appropriation of profits (after tax).
it is not an expense of the business
dividends will usually appear in the financial statement called the ‘statement of equity’ because they are transactions between the company and its shareholders
the resulting ‘Retained Earnings’ will appear on the bottom half of the balance sheet, showing the total profits carried forward on the next account period
what is debt finance?
loan facilties or debt securities
a lender will wish to ensure that they are protected as far as possible from the possibility that the borrowing company may be unable to repay the loan
a key method of protection is for the lender to take SECURITY OVER THE ASSETS of the borrowing company
security
x6
pledge
lien
mortgage
fixed charge
floating charge
guarantee
fixed charges
a fixed charge is normally taken over assets such as machinery and vehicles
the creditor can control what the security provider can do with the fixed charge assets
if the charge becomes enforceable, the creditor will have the ability to appoint a receiver of that asset or to exercise a power of sale of the asset
floating charges
floats over the whole of a class of circulating assets
whatever assets in that class happen to be owned by the security provider at any given time are subject to the floating charge, and the security provider is free to dispose of the assets as it wishes until CRYSTALLISATION
crystallisation means that the floating charge stops floating and fixes to the assets in the relevant class which are owned by the security provider at the time of crystallisation
the creditor thus acquires control of those assets and to this extent a crystallised floating charge is like a fixed charge
effect of equity and debt finance on the balance sheet
when a company issues shares or raises finance by way of a loan, it will need to record these changes in its accounts
whether a company chooses equity finance or debt finance, it will have an effect on the balance sheet of the company
when taking finance the general rules are:
EQUITY
– both the NAV of the company will change AND the total equity
– ie both halves of the balance sheet will be affected by the finance
DEBT
– the NAV of the company will not change as a result of the loan and the equity will not change
– ie only the top half of the balance sheet will be affected by the finance
gearing
the ratio of liabilities to shareholder funds (total equity in the balance sheet), or in simpler terms, the ration of debt to equity, is an important indicator of the financial health of a company
this ration is known as a company’s gearing (or leverage)
the higher the ration of debt to equity, the more highly a company is geared
gearing is calculated by the formula:
long term debt (non-current liabilities)
/divided by/
equity (total equity)
x 100%
meaning of insolvency
a company may be wound up if it is unable to pay its debts
there are four tests for insolvency
1 – the CASH FLOW test: an inability to pay debts as they fall due
2 – the BALANCE SHEET test: the company’s liabilities are greater than its assets
3 – failure to comply with a statutory demand for a debt of over 750
4 – failure to satisfy enforcement of a judgement debt
options for a company facing financial difficulties
x5: nothing, deal, administrator, receiver, liquidation
1 – do nothing: directors risk personal liability under IA 1986 and breach of a directors’ duties under CA 2006
2 – make a deal: reaching either an informal or formal (x3) arrangement with the company’s creditors with a view to reschedule debts
3 – appoint an administrator: this is a collective formal insolvency procedure (a procedure which considers the interests of all creditors)
4 – request the appointment of a receiver: an enforcement procedure (where a creditor, or small group of creditors, are acting to pursue their rights and recover their debt)
5 – put the company into liquidation: this is a collective insolvency procedure
insolvency – informal and formal arrangements
formal x3: moratorium; CVA (no court and only unsecured-; RP (court, binds all)
informal arrangements with creditors: these are standstill agreements with a view to not enforcing rights for a period of time to rescue the company
formal arrangements x3
1 – pre-insolvency moratorium: gives the company a temporary breathing space to rescue the company
2 – company voluntary agreements (CVA) – arrangement agreed by the company’s creditors and members to achieve an agreement in respect of its debts; CVAs do not bind secured creditors and there is no requirement for court approval
3 – restructuring plan: court-sanctioned compromise between a company and its creditors and shareholders to restructure the company’s debt
statutory objectives of administration
rescue –> better –> secure/preferential
a) rescuing the company as a going concern
b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up
c) realising the property in order to make a distribution to one or more secure or preferential credits
these cascading objectives are extremely important as they guide the actions of the administrator throughout the process
b) is most likely
receivership
whilst administration is a collective procedure
receivership is an individual enforcement procedure which benefits only the appointing creditor
3 main types of receivers
1 – administrative receivers (rare)
2 – fixed charge received
3 – court-appointed receivers
types of liquidation
liquidation is the process by which a company’s business is wound up and its assets transferred to creditors and (if there is a surplus of assets over liabilities) to its member
2 types
1 – compulsory liquidation
2 – voluntary liquidation
– a) member’s voluntary liquidation
– b) creditors’ voluntary liquidation
following liquidation, the company’s life is generally brought to an end automatically by dissolution
the statutory order of priority
x9: liquid, fixed, other, prefer, create?, float, unsecured, interest, shareholders
1 – liquidator’s fees and expenses of preserving and realising assets subject to fixed charges
2 – amount due to fixed charge creditor out of the proceeds of selling assets subject to fixed charge
3 – other costs and expenses of the liquidation
4 – preferential creditors (the first tier and then the secondary tier)
5 – creation of the prescribed part fund (if available) for unsecured creditors
6 – amount due to creditors with floating charges
7 – unsecured/trade creditors (including payment of the prescribed part)
8 – interest owed to unsecured creditors
9 – shareholders
personal insolvency
the two formal insolvency procedures for insolvent individuals are
1 - bankruptcy: a collective insolvency procedure enabling an orderly collection, sale and distribution of an insolvent individual’s assets for the benefit of all the bankrupt’s creditors
2 – Individual voluntary arrangement (IVA)
– alternative to bankruptcy and is also a collective procedure
– IA 1986 + Insolvecny rules 2016
fraudulent trading
by a liquidator or an administrator against
1 – any person
2 – who is knowingly party to the carrying on of any business of the company
3 – with intent to defraud creditors or for any fraudulent purposes
+ actual dishonesty must be proven for a claim for fraudulent trading to succeed
wrongful trading
by liquid/admin against director (time) unless every step: court applies reasonably diligent person test (may = contribution and/or disqualification)
by a liquidator or administrator against any person who was at the relevant time a director
court must be satisfied that before the commencement of the winding up or insolvent administration, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation (or insolvent administration)
a director may be able to escape liability if they can satisfy the court that, after they first knew or ought to have concluded that there was no reasonable prospect of the company avoiding an insolvent administration or liquidation, they took “every step with a view to minimising the potential loss to the company’s creditors”
the court applies the reasonably diligent person test
a person found to be liable can be ordered to make such a contribution to the company’s assets as the court thinks proper and may also me disqualified
voidable/antecedent transactions
x4
– transactions at an undervalue
– transactions defrauding creditors
– avoidance of floating charges
– preferences
ask: connected? time? insolvent? presume?
both liquidators and administrators have the ability to challenge certain transactions that have taken place within specified statutory periods prior to the insolvency of a company
the aim of a challenge is to restore the company to the same position it would have been in had the transaction not taken place and thereby, increase the funds available in the insolvent estate for the benefit of creditors
questions to ask
– did the transaction involve a ‘connected person’ or ‘associate’?
– did the transaction take place within the ‘relevant time’?
– was the company insolvent at the time of the transaction or did it become insolvent as a result of the transaction?
– is there a presumption available which shifts the burden of proof from the liquidator/administrator to the other party?
voidable transactions – transactions at an undervalue
transaction for an undervalue within 2 years prior to onset of insolvency
company insolvent at time / as a result (presumed with connected persons)
defence: Company acted in good faith and transaction benefited the company
connected person / associate
a person is connected with a company if—
(a)he is a director or shadow director of the company or an associate of such a director or shadow director, or
(b)he is an associate of the company,
A person is an associate of an individual if that person is—
(a)the individual’s husband or wife or civil partner,
(b)a relative of—
(i)the individual, or
(ii)the individual’s husband or wife or civil partner, or
(c)the husband or wife or civil partner of a relative of—
(i)the individual, or
(ii)the individual’s husband or wife or civil partner.]
voidable transactions – transactions defrauding creditors
transaction for an undervalue
intention to defraud creditors
no need for company to be insolvent
defence: No intention + Company acted in good faith and transaction benefited the company
voidable transactions – avoidance of floating charge
floating charge created for no new consideration within 12 months prior to onsent of insolvency / within 2 years if connected person
company insolvent at time / as a result
defence: Valid for ‘new’ monies/’fresh’ consideration
voidable transactions – preferences
company puts creditor in better position and influenced by desire to prefer
within 6 months prior to onset of insolvency / 2 years if connected persons and presumption of preference
company insolvent at time/as a result
defence: No desire to prefer e.g commercial pressure
written resolution
lapse after 28 days
OR and written resolution: memorandum
Where an ordinary resolution is required, a memorandum setting out the terms of the proposed contract must be made available for inspection by members of the company at the company’s registered office for not less than 15 days ending with the day of the meting and at the meeting itself (s188(5)(b))
Where a written resolution is used, the memorandum must be annexed to the written resolution and sent to all eligible members.
poll vote
default is show of hands but
provided you are eligible to call a poll vote (e.g. because you own at least 10% of the voting rights), you can call a poll vote before OR AFTER the resolution has been voted on by a show of hands. So even if the resolution doesn’t go your way on a show of hands, you can always insist on redoing the vote by poll to force the resolution through (or block it) instead.
