Business Flashcards
Sole traders key characteristics:
Costs
Risk
Structure
Formalities
Privacy
Finance
Costs - low - no set-up costs
Risk - higher risk as unlimited personal liability e.g. home/car might be used to pay debts
Structure - No formal structure
Formalities - No formalities
Privacy - good privacy as no reporting requirements
Finance - would have to get personal loan
Partnership key characteristics:
Costs
Risk
Structure
Formalities
Privacy
Finance
Costs - low set-up costs as no formalities to comply with
Risk - unlimited joint (in contract) or joint and several (in tort) liability for the debts and obligations of the partnership incurred while they are partners
Structure - have some flexibility with structure and can adopt a partnership agreement or use the Partnership Act default provisions
Formalities - no formalities
Privacy - good level of privacy as no reporting requirements
Finance - personal loans
When does a partnership form?
When 2 or more people are working together with a view to making a profit
Key characteristics of an LLP:
Costs
Risk
Structure
Formalities
Privacy
Finance
Cost: costs involved in setting up
Risk: limited liability so limited to amount put in
Structure: The organisational structure of an LLP is flexible and should be decided between the members in a formal written members’ agreement. In the absence of such an agreement Regulations 7 and 8 of the Limited Liability Partnerships Regulations 2001 will apply.
Formalities: requirement to be registered at CH
Privacy: less privacy as there are reporting regulations e.g. to file annual accounts
Finance: can get loans in the name of the LLP and can create floating charges
Who is a “person with significant control” in a company?
Someone who owns more than 25% of the shares or voting rights in the company OR
Has the power to appoint or remove a majority of its board of directors OR
otherwise exercises significant influence or control over the company
When should a business register for VAT?
What is the threshold?
What is the de-registration threshold?
- If at the end of the month its sale o taxable supplies exceeds the threshold
- should register within 30 days of the end of the month
- will commence as VAT reg from 2 month after the end of the month - If anticipate to exceed threshold within 30 days
- should register within the 30 days
- will commence as VAT reg from beginning of 30 days - Can register voluntarily
Registration threshold
- £85,000
De-registration threshold:
- £83,000
Examples of reduced rated VAT items:
Heating and power, smoking cessation products, elderly and child aids
When does a VAT invoice need to be sent?
VAT invoice to be sent to customer within 30 days o charging std/reduced rate on supply
When does VAT payment need to be made to HMRC?
- Every 3 months
- It is due 1 month 7 days after the end of the VAT period
- If business pays more than £2.3 million in VAT/year then make payments on account every month and settle the balance when do the quarterly VAT return
3 special VAT schemes:
- Retail scheme
- Cash accounting
* businesses earning less than £1,350,000 - output tax is accounted for when the invoice is paid (but input tax can only be recovered when the business pays the supplier) - Annual accounting
* businesses earning less than £1,350,000 can do an annual tax return instead of quarterly
* still make quarterly payments but settle the balance at end of year when do the return
What is corporation tax payable on?
All income profits and capital gains that are made by a body corporate during an accounting period
What is TTP?
Total taxable profit
The sum of a company’s income profits and chargeable gains
What is the financial year?
1 April - 31 March
Same for all companies
Basic proforma for TTP:
Chargeable gains =
Sale proceeds LESS
(Allowable expenditure)
(Indexation allowance)
(Capital/trading losses)
+
Income profits =
Income receipts LESS
(Deductible expenditure)
(Capital allowances)
(Trading losses)
What are Capital ALLOWANCES?
Expenditure which relates to a capital asset but is permitted to be deducted from income receipts
Only relate to certain qualifying items of expenditure
Qualifying expenditure = incurred plant and machinery
What are the 3 Capital ALLOWANCES? (those that can be deducted from income receipts)
- Tax written down value
- Annual investment allowance
- Super deduction [Don’t go into depth on this]
How does AIA work with 18% allowance on Capital Allowances?
Allowance for the year would be £1,000,000 plus 18% of the remaining value of the P&M asset
Tax reliefs and exemptions for capital gains?
- Indexation allowance (will be told this)
- Substantial shareholding exemption
- Rollover relief
- Loss relief
What is SSE and what are the conditions?
Who can claim it?
Substantial shareholding exemption
* companies don’t have to pay corporation tax where they are disposing of share sin a trading company or holding co of a trading company
* must have held 10% of the ordinary share capital
* must have held the shares for 12 consecutive months in last 6 years
Claimed by companies NOT by individuals
Who can claim rollover relief?
- Company
- Sole trader
- Partnership
- Individual who buys qualifying asset and both asset and replacement used for business purposes
General effect of rollover relief - how does it work?
When does the new asset need to be purchased?
Sale of asset deducted from cost of replacement asset
Tax postponed until the new asset is sold
Timing:
- New asset purchased within 12 months before or 3 years after the sale of the old asset
Assets the qualify for rollover relief:
- Land and buildings
- Goodwill
- P&M
- Ships and hovercrafts
- Aircrafts
- Lloyds syndicate capacity
When can no rollover claim be made?
If, when the cost of the replacement asset is deducted from the sale price of the asset, the resulting figure is more than the gain made
Special rule on dividend re corporation tax:
There is no corporation tax payable on dividends
[Because dividends are paid out of profits after they have been taxed]
What dates is corporation tax assessed to?
Financial Year i.e. 1 April - 31 March
How long can capital losses be carried forward for?
What can they be set off against?
How long?
- Indefinitely
- BUT to crystallise the loss a claim must be made to HMRC within 4 years from the end of the AP in which the loss arose
What can they be set off against?
- Capital gains
Procedure of payment of corporation tax (2 avenues):
- Companies with TTP of £1,500,000 or less
- Company estimates its tax liability and pays it within 9 months and 1 day of the end of the AP to which it relates
- Company must file a tax return within 12 months from the end of the AP setting out how it calculated the tax liability
- If HMRC accept the calculation then tax computation regarded as finalised 12 months from filing date
- Interest will accrue on over/under payments - Companies with TTP of over £1.5m
- Required to pay tax to HMRC in 4 instalments over the AP
Can capital losses be carried back?
No
Definition of a close company:
What is a participator?
Company is controlled by:
- 5 participators or fewer
- More than 5 participators but everyone is a director
Participator
- person a share or interest in capital or income of the company e.g. shareholder or sometimes a creditor
What are the corporation tax rates?
- 25% if profits of over £250,000
- 19% if profits under £50,000
Method for carrying the trading losses:
Start by setting off against profits/gains in the current AP
THEN carry back (unless the was not trading in the business in which loss occurred in the previous year)
THEN carry forward if any left (if carrying on the trading business in which loss occurred)
Elements to consider - taxation effect on close companies:
- IHT
- Loans to Participators
- Distributions
- Transactions in securities
How are loans to participators treated for tax purposes in a close company?
What is not counted as a loan?
Treated:
- Company has to pay corporation tax on the amount of the loan at the higher dividend rate for income tax
- Must pay this within 9 months and 1 day from the end of the AP in which loan made
- C may claim a refund if the loan is repaid, waived or written off
What is not counted as a loan
- Loan in respect of goods/services normally provided by the company and loan is for not more than 6 months
- Loan, taken in aggregate w other loans to same participator, does not exceed £15,000 AND B works for C full time AND B has no material interest* in the close company
- Loan is in the ordinary course of business for the company
*Material interest = indirect control of more than 5% of the ordinary share capital or entitlement on winding up to 5% of the assets
What financial statements will be prepared in respect of an accounting period?
- Balance sheet
- Profit and loss account
What does the profit and loss account record?
Income - Expenses
It is for a period of time
What does the balance sheet record?
The Net Asset Value of the company
And the capital invested at the bottom
Capital and NAV will be the same
It is a SNAPSHOT
What are the 5 YE adjustments?
- Accruals
- Pre payments
- Bad debts
- Doubtful debts
- Depreciation
2 methods of calculating depreciation:
- Straight line method
(same amount deducted every period) - Reducing balance
(deducted as a percentage of the net book value (reducing balance) each period)
What is an accrual?
Where the benefit has been received but not yet paid for (profit is artificially high)
What is a prepayment?
Where have paid for the benefit of something that has not yet been received - profit is artificially low
What are bad debts?
Debts C expecting to receive but that the company knows with certainty will not be repaid to it
Relate to the asset account
Will be written off and removed as receivables from the balance sheet
Can be done during the year (don’t need to make adjustments) OR will be done at the end of the year in which case will need to adjust
What are doubtful debts?
How may they be recorded?
Debts that business is aware MAY not get back
Not written off the balance sheet but noted on so as to correctly reflect the status
Recorded:
1. Specific doubtful debts (where aware of a particular debtor that may not repay)
2. General doubtful debts
(aware of market conditions and make e.g. 5% provision)
Noted as a liability on the balance sheet and is set off against NAV
Only noted on PL account if the provision has been increased or decreased from the previous year
What is ‘impairment of receivables’ on the balance sheet?
Provision for doubtful debts (a liability in the receivables section)
Main difference in accounting in Partnerships?
Need to prepare a profit apportionment statement to show how the profit is apportioned between the partners
Each partner has their own account (can make ‘drawings’ from) split in two:
1. Long-term capital - investment
2. Current account - can draw at discretion
- Both CAPITAL accounts - ALCIE
What are dividends distributed out of?
The revenue reserve part of the capital
Where are dividends shown in the financial accounts?
On an attachment to the balance sheet called the Statement of changes in equity
Do dividends show up on the PL account?
No
Does a director of a company with model articles have the power to declare a dividend without the need for SH approval?
Yes
Difference between final and interim dividends in terms of the accounts:
Final
- this is a dividend that is proposed by the board but needs to be approved by OR of SH
- once approved it becomes a debt of the company and obliged to pay it to SH
- if paid within the FY then will be in the SoCiE
- if not paid by time accounts drawn up then will be a debt on the balance sheet under current liabilities
Interim
- Ds can declare dividend without SH approval
- Can also rescind at any time so is not a debt
- Only in the accounts if it is actually paid
- Not in PL as it is an allocation of profit not an expense but it will be in SoCiE
What is a term loan called that is repayable in installments?
Amortising loan
Why can a preference share be similar in nature to debt?
Generally holder has no voting rights and gets back a fixed amount every year (a bit like interest)
CAN also have a maturity date on which company must buy back the shares
What is a pledge?
Security provider gives possession of asset to lender until repaid
What is a lien?
Security holder retains possession until repaid e.g. mechanic retaining possession of vehicle until repaid
Disadvantages to the creditor of a floating charge (as opposed to fixed charge):
- C can’t be sure of value of assets
- Rank below fixed charge creditor
- Subject to the ‘prescribed part fund’
- Company free to deal with the assets freely
- Can be avoided on insolvency under the Insolvency Act
What is a guarantee?
Contractual agreement that the guarantor will pay the borrower’s debts in full if the borrower fails to do so
What needs to be delivered to CH to register a charge?
By when?
What is conclusive evidence of registration?
What needs to be delivered:
- MR01 which sets out:
* company creating charge
* date of creation
* persons entitled to the charge
* description of land, aircraft, IP or ships subject to fixed charge
- Fee
- Certified copy of the charge
When?
- Within 21 days of the date of creation
Conclusive evidence:
- Registrar will issue ‘certificate of registration’
Consequences of failure to register charge at Companies House:
VOID against liquidators or administrators and any creditor of the company AND
Debt becomes immediately repayable
Risks of a highly geared company:
- Credit risk - banks less likely to lend
- Less equity to pay back creditors
- Need a higher profit before interest and tax to meet interest payments
Advantages to higher geared company:
- If business has a highly profitable investment opportunity - loan means can invest more in it without using own resources
- MAY be beneficial to SH as does not require dilution of shareholding
What is corporate insolvency?
What are the 4 tests?
When a company is unable to pay its debts
Tests:
1. Cash flow
-LIKELY inability to pay debts as they fall due
2. Balance sheet
- LIKELY that liabilities will outweigh assets
3. Failure to comply with statutory demand over £750
4. Failure to satisfy enforcement of a judgment debt
Indicators that directors should pick up on that a company is in financial difficulty:
- Lots of unpaid creditors putting pressure on
- Overdraft facility fully drawn and bank refusing to lend more
- Loans and liabilities that exceed assets
Options for a company facing financial difficulty:
- Do nothing - Ds face personal liability under IA and breach of DD under CA
- Do a deal - whether formal or informal
- Put company into administration
- Request appointment of a receiver
- Put company into liquidation
Examples of things Co might need to do to have effective negotiations with creditors when in financial difficulty?
- Grant additional security
- Get rid of some Ds
- Sell part of business
- Reduce workforce
- Issue new shares to creditors
Procedure for obtaining a pre-insolvency moratorium including length of moratorium:
Apply to court including a document with statement from a Monitor (licensed insolvency practitioner) that states that it is likely the company will be saved by a moratorium
Length = 20 Business days
- Can be extended for further 20
- Court can approve an extension of up to 1 year
When will a pre-insolvency moratorium terminate?
- Liquid
- Admin
-CVA - Scheme
- Plan
- Expiry
What debts must be paid during a moratorium?
- Monitor’s fees
- Wages/redundancy payments
- Good/services supplied during a moratorium
- Rent in respect of a period during moratorium
- Loans under a contract involving financial services
- Moratorium debts - those incurred because of obligations created during the moratorium
2 types of formal arrangements for companies in financial difficulty:
- CVA
- Restructuring plan (Plan)
Process for getting a CVA:
- If co NOT in liquid/admin then Ds appoint a Nominee (licensed insolvency practitioner)
(if co in liquid/admin then L/A will be Nominee and draft proposals) - Ds draft proposals and company’s state of affairs and submit to Nominee
- Nominee considers and within 28 days reports to court on whether thinks should be put to creditors/ SH
- The Nominee must allow at least 14 days for the creditors to vote on the proposal and the SH must vote 5 no more than 5 days after creditor decision
- Voting majorities required:
- 75% in value of creditors (not including secured creditors)
- majority of unconnected creditors
- simple majority of SH - Nominee must report to court that CVA has been approved
- Nominee becomes the Supervisor and oversees the CVA
Effect of a CVA:
- Binds all UNSECURED creditors - does not bind secured creditors unless they consent
- Creditors can oppose the CVA within 28 days of it being approved by CREDITORS on basis of (i) unfair prejudice (ii) abuse of process
- Supervisor role is to agree creditor claims, collect in funds and pay dividends, ensure company complying with CVA
- Good bc management stay in control
- Trade creditors likely to agree as will get more back this way than liquid
- LL will get less rent but retail properties hard to let (if retail case) so may agree
Purpose of a restructuring plan
To compromise the shareholders and creditors and to restructure liabilities with the aim of rescuing the company
Can be used when a company is in or likely to be in financial difficulty
How does voting work in a restructuring plan?
Creditors divided into classes and 75% of each class must vote in favour of the plan
BUT the court can order a cross class cram down if it thinks it is just and equitable to do so (bind a class that has voted against)
When the court sanctions the plan it is binding on all creditors