Business Flashcards
What does a promoter do?
- effects registration
- negotiates pre-incorporation contracts
- finds shareholders
- enters into contracts before company is incorporated?
What is the effect of a promoter entering into contracts before the company is incorporated?
Promoters are personally liable.
Negated by a novation plus the consent of all parties (including the company)
What is a partnership?
Two (or more) people carrying on a business with a view to profit
How many partners must a limited liability partnership have?
Two
What are the two types of partners that an LLP can have? What are their roles?
- General partners - manage the business and have unlimited liability
- Limited partners - no active role in managing the business, have a limited liability to their capital contributions
What does a company being limited by shares mean?
That their members have limited liability to the amount of unpaid shares that they have
What does a company being limited by guarantee mean?
That they have liability limited to the amount that they agree to (amount is stated in the statement of guarantee)
When are owners / directors personally liable?
- directors of a public company that enters into contracts with third parties before getting their trading certificate
- fraudulent/ wrongful trading
- evading
What is the maintenance of capital rule?
Money invested by SHs must be reserved for the benefit of creditors if the company becomes insolvent
What information must a company make public?
- identity of directors + people with significant control
- company constitution
- company accounts
- certain decisions made by SHs
What liability do general partners have against the company and themselves?
Joint and several unlimited liability
+
Fiduciary relationship towards each other
What formalities must a general partnership’s name comply with?
Must include at least one of:
- surnames of all partners
- forenames of all partners
- initials or forenames of all partners
- if same surname, this with an ‘s’
provisions do not apply to LLPs
If a partnership name does not follow the formalities required, what is the consequence?
It will be deemed a business name, and the disclosure requirements will apply.
What alternative can a partnership do if they do not want to follow the name rules?
Their partnership business name AND all partner’s names must be included on all official paperwork and communications.
OR
Paperwork must include a statement that the full names of all partners are available at the principal place of business.
Who submits a tax return for a partnership?
The nominated member
When is a fixed term partnership brought to an end?
- Death of a partner (if PA applies, this is automatic)
- Bankruptcy of a partner (if PA applies, this is automatic)
- Court order (Partner has to apply)
- Once business activity / venture comes to an end (if PA applies, this is automatic)
- Unlawful business (automatic)
How is a partnership at will brought to an end?
By one partner giving immediate notice to the others to end the partnership
Under the PA, how is the share of net asset entitlement determined?
The amount of capital contributed does not determine the share of net asset entitlement - partner must agree this.
Is interest payable on partner’s capital contributions or loans?
Capital contributions = no interest payable
Loans = interest payable at 5% annually
What is classified as partnership property?
Property brought into the partnership and used within the partnership
Property acquired in the course of the partnership
What is an implied term under the PA as to management of the partnership?
All partners may take part in management, but are not specifically required to
If making any changes as to the nature of a partnership, what is required?
Unanimous agreement
I.e., adding partners, dissolving partnership, removing partners
If a new partner is added to an existing partnership, what is the effect as to how the partnership operates?
If it was a fixed term partnership, it converts into a partnership at will
What are some common grounds for partner expulsion?
- partner no longer holds the relevant qualifications
- partner neglects to perform duties
- partner has a prolonged mental / physical health issue
What is a technical dissolution of a partnership?
A partner leaves / a partner joins, but the business carries on under a new partnership agreement
What is a general dissolution of a partnership?
This means the entire business is wound up (agreement / court order / bankruptcy / death / unlawful business)
This does not apply if partnership agreement stipulates otherwise.
In order to retire from a partnership, what must be done? (at will and fixed-term)
Partnership at will:
- Partner gives notice that they want to retire.
Fixed term partnership:
- Unanimous agreement by all partners, but partnership will dissolve
If a partner dies, what debts is their estate liable for?
Partnership debts incurred before death.
Not liable for partnership debts contracted after the date of death.
If a charge is obtained against a partner’s share, what is the effect?
Partnership will be automatically dissolved, unless partnership agreement allows for the other partners to buy out their share
What is the rule relating to acts of a partner in a partnership?
A partner is an agent of the firm, and their acts will bind all partners unless the partner had no authority.
What order is partnership liability paid from?
- Profits
- Capital
- Partner’s personally
What transactions is a partnership bound by?
Transactions that relate to the firm’s business and done in the firm’s name by an authorised person (irrespective of if they are a partner)
If a partner uses the partnership’s credit for a private purpose, is the partnership bound?
If the transaction relates to the firm’s ordinary course of business, partnership will be bound.
If it doesn’t to the firm’s business, partnership will not be bound unless the partner was specially authorised. Partner will be personally liable.
If there is an agreement that the firm will not be bound by acts of a partner, what is the effect?
Any transactions entered into contrary to this agreement will not bind the firm
What is actual authority in a partnership? (Two types)
Actual authority = partner has authority from other partners
Express authority = partner is given authority
Implied authority = partners have impliedly accepted that partner has authority to represent the firm (all partners have taken an active role in running the business/one partner habitually carries out certain tasks)
What is apparent authority in a partnership?
Where partner does not have actual authority but, to a third party who is an outsider, the partner appears to be so authorised
When is a partnership liable in a situation of apparent authority? Who is liable?
- transaction relates to the type of business that the firm carries on
- transaction is the kind that would be usual to expect the partner to have authority to enter
- third party didn’t know the person had no authority, and dealt with a person whom they thought or knew was a partner
Partner will be personally liable and will be liable to indemnify their fellow partners
If a contract entered into by a partnership is breached, what can the innocent party do?
- sue the partner who entered into the contract
- issue proceedings against the firm (all partners of the firm when contract was entered into are liable)
- pursue individual members of the firm in a personally capacity (partners when the contract was entered into)
When a partner leaves, what debts will they be liable for?
They will remain liable for debts incurred from contracts entered into whilst they were still a partner
How can a departing partner ensure they are not liable for debts once they leave?
They can be discharged by a novation agreement (signed by fellow partners and firm’s creditors)
They can seek an indemnity agreement from the remaining partners that they are released from any liabilities (does not affect creditor rights)
What process must a departing partner follow to ensure they are released from liability for contracts entered into after their departure?
Partner must give notice to everyone with whom they had dealings with prior to leaving and the world at large by:
- Sending notification to all those whom they had dealings with prior to leaving
- Putting a notice in the London Gazette announcing their retirement
- Removing their name from all partnership documents / websites / stationary
If not, partner will be personally liable
Do all third parties need to be made aware of a partner departing?
Third parties with whom the partnership dealt with but were never aware that the departing partner was a partner do not retire notice - partner will not be personally liable
When is notice not required to be given on a partner’s departure?
On death or bankruptcy
What is holding out?
Where a person represents / knowingly allows for somebody else to represent that they are a partner after their departure, they can be personally liable
To be successful in a claim for holding out, what must be shown?
- Person held themselves out / allowed somebody else to hold them out
- Third parties relied on that representation
- As a result of that reliance, advanced credit to the firm
If a partner wants to make a court application for the dissolution of a partnership, what basis can they make this on? (5)
- Partner becomes permanently incapable of performing their part
- Partner is guilty of conduct that prejudicially affects carrying on of the business
- Partner wilfully/persistently commits breaches of the partnership agreement
- Partnership can only be carried on at a loss
- Court thinks it is just and equitable to dissolve the partnership
What is a memorandum of association?
A snapshot of the company and its promoter(s) at the time the company is formed
When does a company not need to register its articles at Companies House?
When they adopt the model articles
What are some common amendments to a company’s articles?
- limit company’s objects (restricting scope of activities)
- increase quorum for board meetings
- remove director’s casting vote
- allow directors to vote on interested matters
- alter director’s duties
- remove special resolution requirements
- alter director’s authority to allot/issue shares
- alter statutory pre-emotive rights
What must be filed at Companies House when forming a private company?
- Articles of association
- Form IN01 (application form) + fee
- Name of company
- Registered address
- Statement of intended business activity
- Statement of PSC (more than 25%)
- Statement of proposed officers (initial directors)
- Statement of capital (shares held, classes of shares, rights attached, nominal value, unpaid amounts)
- Statement of compliance
What is a shelf company?
Company that has gone through information, but is yet to trade
What are some advantages of a shelf company?
- already exists
- particular incorporation date / accounting reference date can be obtained
- faster process (can immediately enter into contracts)
What are common forms that must be filed when acquiring a shelf company?
AP01 = appointment of replacement directors
AP03 = appointment of replacement secretary
AD01 = change of registered office address
**these must be send to CH within 14 days
AA01 = change of accounting reference date
NM01 = change of company’s name
SH01 = issuing of further shares (must tell CH within 1 month)
What specific things need to be filed at CH?
- all special resolutions (within 15 days of passing)
- all unanimous agreements (that would have otherwise needed a special resolution)
- all shareholder agreements that bind a class of shareholders
- all resolutions of all members of a class of shareholders
What statutory contracts do shareholders have with the company?
S.33CA creates a statutory contract between SHs and company, and between shareholders themselves (only parties to the contract can sue, nor third parties).
SHs can sue eachother for a breach of membership right
How can shareholders enter into agreements between themselves?
By use of a shareholder agreement (creates a private contract between shareholders).
E.g., how to resolve deadlocks but shareholders who are also directors cannot determine how they will vote as directors.
What is a shareholder’s entitlement to a share certificate?
SHs are entitled to receive a share certificate from the company within 2 months of allotment / lodging the stock transfer form
When does a person formally become a shareholder?
When their name is entered onto the register of members
What information does the register of members contain?
- SH’s name and address
- Date SH was registered
- Date SH ceased to be a SH
- Number / class of shares held
- Amount paid / agreed to be paid for member’s shares
What is the deadline in which the register of Persons with Significant Control must be updated? When must CH be made aware?
Within 14 days of when the company becomes aware of any changes
CH must be made aware within 28 days from the day of any change
If a shareholder is given insufficient notice of a meeting, what is the effect?
Any business undertaken at the meeting will be invalid
Who can demand a poll vote?
SHs with at least 10% of company shares
Who can circulate a written resolution?
SHs with at least 5% of total voting shares
Who can circulate a written statement?
SHs with at least 5% of voting rights
What specific documents can any shareholder request?
- SH’s statement of capital
- director’s service contract
- memorandum / articles of association
- minutes of all general meetings
Where there is a disagreement between shareholders, how is this decided?
By majority vote
What is the proper claimant principle?
Where a company and SH both have a claim against directors, the company is the proper claimant
What is the internal management principle?
Courts are reluctant to interfere with the internal management of a company
If company is acting within its powers, courts will only interfere if the company instigates proceedings
What is the irregularity principle?
The principle that SHs can be barred from commencing court proceedings in respect of a problem that can be remedied by ratification (majority of SHs)
What is unfair prejudice?
When SHs feel that the company’s affairs are being conducted in a way that is prejudicial to their interests.
Or
Any actual / proposed act or omission is / would be prejudicial
What is an essential part to an unfair prejudice claim?
That there is unfairness to a SH that causes them prejudice due to a breach of the company’s constitution / law / SH agreement
What are some examples of acts constituting unfair prejudice?
- shares being transferred in bad faith
- dividends being unreasonably withheld
- majority awarding themselves excessive benefits
- company’s assets being improperly transferred
- pre-emptive rights not being followed
- minority SHs being excluded
What are the remedies for unfair prejudice?
Petitioning SHs shares are brought by the company (court orders independent valuation of the shares)
Mediation
SH can voluntarily sever links with the company
What are some examples of unfair prejudice?
- transferring shares in bath faith
- unreasonably withholding dividends
- majority SHs awarding themselves excessive benefits
- company assets being improperly transferred
- pre-emptive rights not followed
- minority SHs being excluded
What is a derivative claim?
Where there has been conduct amounting to fraud on the minority, and the minority SHs bring a claim in the name of the company
What are some examples of a derivative claim?
- director has behaved dishonestly
- director has prevented a SH from bringing proceedings against them
Under what grounds can a derivative claim be bought?
- negligence
- default
- breach of duty
- breach of trust
- wrongdoing directors refusing to take action on behalf of company
What is the process for a SH to get permission to bring a derivative claim?
Stage 1 = paper submission to the court
- court will decide if the claim shows prima facie evidence, and will dismiss if not.
Stage 2 = full hearing
When will a court automatically refuse permission for a derivative claim?
When court is satisfied that:
- director seeking to promote success of the company would not continue the claim
- act was pre-authorised
- act has been / would be ratified (by majority SHs)
What will the court consider when determining whether a derivative claim should succeed?
- whether SH is acting in good faith
- importance that a director acting for the benefit of the company would attach
- likelihood of approval / ratification
- whether company has decided not to pursue the claim
- whether SHs could bring a personal claim
- views of uninterested persons
What is the remedy for a successful derivative claim?
The company is wound up on a just and equitable basis
Do directors have a right to salary?
There is no statutory right to renumeration
Who decides on a director’s salary?
SHs can vote through ordinary resolution
Company’s articles can deal with this
When must SHs approve a director’s service contract?
When it gives a guarantee to stay in the position for more than 2 years
How is a director appointed?
By the board of directors passing a board resolution
By the shareholders voting at a general meeting by OR
How is a director terminated?
- they can resign, but must comply with their contract (e.g., notice periods)
- death
- bankruptcy
- removed by board if they have not exercised their powers for proper reasons
If a director’s contract does not give a notice period for them to comply with, what notice must be given?
Reasonable notice
What is the process for a director to be removed by a SH at a general meeting?
- General meeting must be held - not written resolution.
- SHs must give notice of OR to company at least 28 days before.
- Company must give a copy of this notice to the director concerned.
- Company must give SHs notice of the proposed OR / company can give notice by advertisement at least 14 days before.
- Director is entitled to make representations.
- Copy of these representations must be sent to all SHs.
If a director is removed, what can they get?
Compensation for loss of office
What can be done if directors refuse to call a general meeting for the removal of a director?
SHs with more than 5% paid up share capital can insist on a meeting
If SHs with relevant share capital insist on a meeting, when must it be called?
Within 21 days of the request
If SHs are given notice of the general meeting, when must the meeting take place?
Within 28 days of notice
If the board continues to refuse to hold a general meeting at SH request, what can SHs do?
Hold a general meeting themselves within 3 months of the initial request
In relation to their position, what can directors not prevent SHs from do in within the articles?
Directors cannot make a provision that prevents SHs from removing them by OR
In the event of a removal, what relevancy does a bushell v faith clause have?
It gives directors who are also SHs weighted voting rights (but SHs may removing this provision by special resolution)
Who can disqualify a director?
Court has a discretionary power to disqualify a director between 2-15 years
What are some examples of grounds for disqualification of a director?
- being convicted of an indictable offence
- persistent breaches of the company’s constitution
- fraudulent / wrongful trading
- seeking investment in a company that is at a loss
- making unauthorised drawings from the company’s accounts
- failure to keep true accounting records
- breaching fiduciary duties
- TUV / TAP
How is unfitness of a director determined?
- director was / is a director of a company that became insolvent
- director’s conduct makes them unfit to be a director
- taking into account any misfeasance / breach of duty / breach of law
Can a director act as a director during their period of disqualification? If so, what are the consequences?
They can apply for permission to do this from the court, but if granted:
- somebody professionally qualified on the board must keep an eye on the director
- director must accept personally liability for debts
What is a disqualification undertaking? What are the advantages?
Secretary of State may accept a voluntary disqualification undertaking
Shorter disqualification period + avoids court
When is a director automatically disqualified?
- bankruptcy
- mental illness
- doctor’s written opinion that director is mentally / physically incapable
What are the 7 director’s duties?
- Duty to act within company’s powers
- Duty to promote the success of the company
- Duty to exercise independent judgement
- Duty to avoid conflicts of interest
- Duty to not accept benefits from third parties
- Duty to declare interests in a proposed transaction
- Duty to declare interests in an existing transaction
What does the director’s duty to act within the company’s powers involve?
- directors must act in accordance with the company’s constitution
- directors can only exercise powers for the purposes for which they are conferred
What is the director’s duty to promote the success of the company?
Directors must act in a way that they consider (subjective) would be most likely to promote the success of the company as a whole
What 6 factors must a company have regard to when exercising their duty to promote the success of a company?
- Long-term consequences of decisions
- Interests of employees
- Need to foster business relationships
- Impact on the community and environment
- Maintaining a reputation for high standards
- Need to act fairly between members
What does the director’s duty to exercise independent judgement involve?
The fact that directors must exercise their powers independently and cannot delegate their powers - must use their own judgement
However, duty will not be breached if director is acting in accordance with an agreement that has been entered into by the company
What does a director’s duty to avoid conflicts of interest entail?
Directors must avoid situations in which they have / may have a direct or indict interest that conflicts with/ may conflict with the interests of the company
How is it decided if a director has breached their duty to avoid a conflict of interest?
It is an objective test - does not take into account the director’s knowledge
If a director breaches their duty to avoid a conflict of interest, how can this be resolved?
Board can authorise the director’s conduct
Shareholders can ratify
What does a director’s duty to not accept benefits from a third party mean?
Directors cannot exploit their position as a director for personal benefit / to make a secret profit
Cannot accept benefits incurred as a result of their position as a director
When will a director’s duty to not accept benefits from a third party not be breached?
If the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict
Who can authorise a director’s breach of accepting a benefit from a third party?
Only shareholders, not directors
What is a director’s duty to declare an interest in a proposed transaction with the company?
Directors must declare all interests as soon as reasonably practicable - even if a person connected with the director is going to be involved.
When is a declaration of an interest in a proposed transaction not needed?
Unlikely conflict will arise
Other directors are already aware
Director is not aware of it themselves
If a contract is made when a director has failed to disclosure their interest, what is the consequence?
Contract may be voidable
Director may need to account for profits made
What does a director’s duty to declare an interest in an existing transaction with the company involve?
Director must declare all indirect interests as soon as reasonably practicable - also includes interests of those connected with the director
When does a director not need to disclose their interest in an existing transaction?
Unlikely conflict will arise
Other directors already aware
Director is not aware of it
If a director breaches their duty of declaring an interest in an existing transaction, what is the consequence?
It is a criminal offence
How can a director declare their interest in a proposed / existing transaction?
At meeting of the directors
Written notice
General notice
As well as SH ratification, how else can a director be relieved from their breaches of duties?
Court can relieve the director if they are satisfied that:
- director acted honestly
- director acted reasonably
- director ought fairly to be excused
What is a substantial property transaction?
When a company acquires / is to acquire a substantial non-cash asset from a director / somebody connected with the director
What does ‘substantial’ mean?
Value exceeding £100,000
Value exceeding 10% of company’s net asset value and more than £10,000
What is a non-cash asset?
Property / interest in property other than cash
Who must approve a substantial property transaction?
SHs by OR
If a substantial property transaction is not approved, what is the consequence?
The contract is voidable
Directors will need to account for any gain made
Directors will need to indemnify the company for any loss/damage
What loans must be approved by SHs?
Loans to directors / persons connected with directors
If approval of a director loan is by written resolution, what procedure must be followed?
The written resolution must be sent to all SHs at / before the transaction
If approval of a director loan is by general meeting, what procedure must be followed?
The memorandum setting out the loan must be available for inspection by SHs at least 15 days before the meeting
If a loan is made to a director without SH approval, what is the effect?
Loan is voidable
All directors may be liable to account for gain made / indemnify company
Which loans is SH approval not required for?
- up to £50,000 for director’s expenditure on company
- to fund a director’s defence for BOD / negligence / default
- up to £10,000 for whatever reason
How long must company’s accounting records be available for inspection?
At least 3 years
When must annual accounts be filed?
9 months after the year end
When must corporation tax return be filed?
12 months after year end
When must corporation tax be paid?
9 months and 1 day after the accounting year end
What vote is needed to pass a decision at board meeting?
Majority
Chairperson can be appointed (but they only get one vote)
How much notice must be given for a board meeting?
Reasonable notice (depending on circumstances)
When can directors act informally to pass a decision?
Where they unanimously agree (no board meeting required)
What is the minimum quorum for board meetings?
Two
How long must board minutes be kept for?
10 years
What vote is required to pass a board written resolution?
Unanimity
Who can ask directors to hold a general meeting? Within what timeframe must directors pass a board resulting to call a meeting once requested?
Shareholders holding at least 5% of shares with voting rights
Directors have 21 days to pass a board resolution to call a meeting
What must notice of a general meeting state?
- Date
- Place
- Time
- General nature
+ if special resolution:
- Full text of the resolution
- The fact that it is a SR
How much notice must be given of a general meeting?
At least 14 days
How can short notice of a general meeting be arranged?
- Majority of SHs (in number) must agree
- Those SHs must hold at least 90% of voting shares
What is the required quorum for a general meeting?
Two SHs
What must a written resolution specify?
How SHs are to signify their agreement
Within what timeframe must a written resolution be passed?
Within 28 days of circulation
In terms of passing an agreement, what is the main difference between voting at general meeting vs voting by written resolution?
General meeting = required percentage of all votes, then passed
Written resolution = passed as soon as the required majority of eligible members have agreed (does nor require everyone to vote)
If a special resolution is passed, what is the filing requirement?
It must be sent to companies house within 15 days of the decision
What is debt finance?
Company borrowing money to raise the capital required to fund its business operations
What is equity finance?
Company issuing shares (portion of ownership) in return for cash
What is share capital made up of?
Subscriber shares on incorporation
+
Subsequent shares issued to SHs
When is a share premium account used?
When shares are sold for more than their nominal value, the difference between nominal value and purchase price is called share premium (and placed in the share premium account)
What rights do ordinary shares confer?
The right to vote at a general meeting (depending on class of shares)
The right to receive a dividend
What rights do preference shares have?
The right to a fixed return of both a dividend and capital (given preference over other SHs in the event of insolvency)
What rights does a deferred shareholder have on liquidation?
Deferred shareholder is not entitled to a dividend / surplus of assets in the event of liquidation
What are redeemable shares?
Shares that can be brought back by the company
Can class rights be varied?
If the articles set out a method for alteration
If company’s articles does not include a variation clause for class rights, what option does a company have?
Variation can be valid if if it approved by:
- three quarters of the affected SHs in writing
- a SR by the affected SHs
What right does an allotment of shares give?
Gives a person an unconditional right to be included in the register of members
How can directors allot shares if there’s a private company with only one class of share?
Directors must be given authority to allot shares (SH OR)
Company incorporated after October 2009 = director can allot without SH permission (as long as company only has one class of shares)
Company incorporated before October 2009 = directors need SH authority to allot even if only one class of shares
If a company has more than one class of shares, how can a director allot?
Can allot with SH approval (OR), or company’s articles giving authority.
If SHs / articles give directors authority to allot shares, what must the authority state?
The maximum number of shares to be allotted
When the authority to allot will expire
If SHs / articles give directors authority to allot shares, how long does the authority last?
For a maximum of 5 years from resolution / incorporation
If a SH is offered pre-emptive rights, how long must the offer stay open?
At least 14 days
When do pre-emption rights not apply?
Shares are being brought for a non-cash consideration
Shares have been excluded / rights have been disapplied (by SR)
All entitled SHs have signed a waiver to renounce their claim
When can a private company exclude pre-emption rights?
When company’s articles allows
When SHs pass a SR (SR needed for permanent and one-off exclusions of pre-emption)
If a company allots shares for less than their nominal value, what is the effect?
Allotment is void
Purchaser must pay company the difference, including interest
If shares are issued for assets other than cash in a public company, what is required?
An independent valuation of the asset that is being acquired
How are shares transferred?
A stock transfer form signed by the SH + share certificate
When is stamp duty payable on a transfer of shares?
When consideration received is more than £1,000
What is the formal process of transferring shares?
- Transferee sends stamped stock transfer form + share certificate to the company
- Directors can approve - but they have discretion to refuse to register the transfer
- Within 2 months of director approval, SHs name put on register of members + PSC if relevant
- Share certificate issued
Who must authorise the use of debt finance?
No need to authorise - directors have a general power to borrow and give security
What is an overdraft?
Funds entered into when payments made by the company exceeds the credit balance available
What are the key features of an overdraft?
- payable on demand
- provided at a cost (maintenance fee + interest)
- more expensive (risky for the bank)
What does a term loan allow?
Allows a company to use a set amount of funds until a specified future date when the full capital amount with outstanding interest is payable
Once money is repaid, it cannot be re-borrowed
How is a term loan documented?
In a facility agreement
How long can a term loan be?
Short term = 1 to 5 years
Long term = 5 to 10 years
What is a revolving credit facility?
A sum (not a fixed amount) loaned whereby the borrower can drawn down and repay amounts up to a pre-agreed maximum
What are the advantages of a revolving credit facility?
Can re-borrow amounts already paid
Interest is only payable on the amount actually borrowed
Allows a company to borrow large amounts
What security can a director be asked to provide?
A personal guarantee
What are the consequences of a mortgage?
Transfers the legal title of an asset to the lender
Company will need lender’s pension to sell the assets
Lender has the right to take possession of the property and sell it
What is a charge over an asset?
An equitable right given to the lender, meaning the borrower is barred from dealing with the charged property without the lender’s permission
If multiple fixed charges are granted over an asset, which one takes priority?
Earlier created + registered charges take priority
What is a floating charge granted over?
A class of assets that fluctuate (e.g., stock)
What is a key advantage of a floating charge in comparison with a fixed charge?
Company can deal with the assets without the charge holder’s permission
What is crystallisation?
The process of a floating charge being converted into a fixed charge when the borrower defaults on the loan / becomes insolvent
What is a negative pledge?
A promise that another charge won’t be granted over the same asset / not to create another security to a different lender
What is a debenture?
A loan agreement between a lender and a borrower
Contains the type of security / covenants / circumstances that constitute default
What is the effect of a debenture?
It creates a fixed charge over the other assets of a business (in addition to a floating charge)
It creates a floating charge over assets that are not otherwise charged
What is the process to register a charge?
- Company / interested person sends a statement of particulars (MR01) and a certified copy of the agreement creating the charge and a fee to companies house within 21 days of creation
- CH will issue a certificate (this is conclusive evidence that the charge is properly registered)
- If the charge is over land, it must also be registered with the land registry
What happens if a charge over land is not registered at HMLR?
The buyer will take the land free of charge even if they knew the land had a charge and even if that charge appeared on Companies House
What is the effect of the failure to register a charge?
- incorrectly registered charges will be void against the liquidator
- any later correctly registered charges will take priority
However, incorrectly registered charge is still valid against the company (will crystallise)
What is a lien?
The right to physical possession of the debtor’s goods until the debt is repaid (but does not entitle creditor to sell)
What is a guarantee?
A promise by a third party that, in the event of default, they will repay the debt to the lender
How is priority of fixed charges determined?
By date of creation
How is priority of floating charges determined?
By date of creation
What are the main disadvantages of a revolving credit facility?
- sometimes commitment fee payable to keep it open, even if the facility is not used
- expensive (high fees)
- time consuming
- a lot of restrictions (usually notice periods to draw or repay)
What is the difference between equity finance and debt finance in terms of control over the company?
Equity finance
- SHs may be given voting rights (but company may avoid this by only giving preference shares).
Debt finance
- Company’s ability to manage itself independently is limited to the terms of the own agreement.
- Loan agreement may require company to make wide-ranging representations and undertakings.
What is a main disadvantage to granting preference shares?
They are expensive as they require the company to indefinitely pay a dividend in priority
What is the difference between equity finance and debt finance in terms of capital growth?
Equity finance
- Shares could go down in value / could increase in value, therefore increasing capital growth.
Debt finance
- No potential for capital growth (borrowing money does not affect capital ownership).
What is the difference between equity finance and debt finance in terms of repayment of capital?
Equity finance
- Capital is not repaid unless the company is wound up.
- Shares can later be sold to a third party by the incoming SH.
Debt finance
- Capital needs to be repaid with interest.
- May be deadlines to repay / punishments for lateness.
What is the difference between equity finance and debt finance in terms of cost?
Equity finance
- Cost of granting shares is harder to quantify.
- Increase in value of shares may dilute the control of existing SHs.
Debt finance
- Company must pay interest to the lender, in addition to the loan.
What is the difference between equity finance and debt finance in terms of regulation and procedure?
Equity finance
- Share issue requires board and SH resolutions.
- Private companies cannot offer their shares to the general public.
Debt finance
- No statutory procedure to follow.
- Lender may have strenuous procedures or criteria that borrower must abide by.
What is the difference between equity finance and debt finance in terms of level of risk?
Equity finance
- Buying shares is more risky (company may choose not to pay dividends / not have sufficient profits to do so).
- SHs may not get a return on their investment as they are last in priority of winding up.
Debt finance
- Lender can take security over assets (high priority on insolvency).
- Lender doesn’t have control over running the business.
- Loan agreement may contain certain financial targets which need to be met.
- An event of default may accelerate the loan (enforcing security).
What is the difference between equity finance and debt finance in terms of restrictions?
Equity finance
- Opposing SH may use their voting power to prevent any proposed investments.
- Company’s articles may impose restrictions.
- Existing SHs may have pre-emption rights.
Debt finance
- Directors have power to execute loan agreements.
- Articles may impose restrictions on company’s ability to raise finance.
- Other loan agreements already entered may impose restrictions on further borrowing.
What is the first year allowance?
100% first year allowance for investment into environmentally friendly products
What is the annual investment allowance?
100% deduction for expenditure on plant and machinery.
How much allowance does the annual investment allowance give?
£1 million per accounting period
Any unused amount cannot be carried forwards
What is the writing down allowance?
Applicable on expenditure in execution of the AIA/FYA
Reduces the cost of an asset carried forward
How much is writing down allowance?
Most assets = 18%
Long-life assets / integral features in a building / some cars = 6%
Can you act for a company and its directors?
No, can only act for one of the parties - if company is your client, must tell directors to seek independent legal advice
What is a dividend?
A distribution that a company makes to its shareholders from a portion of its profits after tax
Can the value of a dividend be taken away from pre-taxed profits?
Dividends are not a deductible expense (unlike salary), so any dividends will be taken out of the company after corporation tax has been paid
What are dividend paid out according to?
The number of fully paid up shares held by each SH
What is the process of declaring a dividend?
- Recommendation = directors recommend the amount of dividend in a board meeting.
- Declaration = company declares the dividend by passing an ordinary resolution.
- Payment = directors pay the dividend out to SHs, depending on different class rights of shares.
What is the difference in terms of declaring and paying out an interim dividend?
With interim dividends, there is no requirement for SH consent - directors just need to to hold a board resolution
What are the restrictions on dividends?
Directors cannot pay dividends out of capital (if company does into insolvency, creditors cannot pursue SHs as SHs have limited liability).
Directors must consider whether company has incurred any losses that have taken way from profits available.
What does it mean that dividend distributors must be made out of profits ‘available for the purpose’?
‘Available for the purpose’ = accumulated, realise profits minus accumulated realised losses.
‘Accumulated’ = can include precious year’s losses.
‘Realised’ = company has actually received the consideration in the form of cash or other assets.
Means profits cannot be estimated.
If estimated profits are used for a dividend distribution, and there is insufficient funds, what is the consequence?
If there is a shortfall, a dividend must be paid out of capital
If an unlawful dividend is paid out, what is the consequence on shareholders?
Any SH who, at the time of the distribution, knew or had reasonable grounds to believe that the distribution was unlawful, will be required to pay it to the company.
SH does not need to repay if they did not know.
If an unlawful dividend is paid out, what is the consequence on directors?
Director who authorised the transaction may be personally liable to repay the money to the company if they knew / out to have known that the distribution was unlawful.
Director is held to the standard of a reasonably competent and diligent director.
Directors who authorised are joint and severally liable.
When can directors be held liable under the insolvency act for paying a dividend?
If at the time the dividend was paid:
- Company was insolvent
- There were no reasonable grounds for believing that the dividend payment would benefit the company
- Company goes into insolvent administration within 1 year
When is a director not liable for an unlawful dividend distribution? Who else could be liable?
If a director has not acted dishonestly, the court has discretion to relieve the director.
If the distribution is out of director’s reliance on incorrect accounts prepared by the company auditor, auditor could be liable.
Apart from dividends, what can a company do their profits?
- purchase machinery / stock.
- invest in advertising.
- set aside money to meet future tax liability / increase liquidity.
- buy back shares.
What is the consequence of a company buying back shares?
Once the shares are brought back, they are cancelled (company does not receive anything tangible in return).
Total number of shares are reduced, concentrating value of shares for existing SHs (shares become higher in value).
What are the two main reasons for a share buy-back?
- Convenient way for a company to remove a SH who is also a director (who doesn’t want to resign as a director).
- Director who is also a SH may wish to retire and receive a return on their investment.
What criteria must a company meet before it can buy back shares?
- Shares must be fully paid up at the time of purchase.
- Shares must be paid for entirely by the company (no borrowing).
- Company must be buying their shares from an existing SH, not from the stock market.
If a company wants to buy back shares with cash, what formalities must be followed?
- the amount paid cannot exceed £15,000 or 5% of the company’s share capital in one year.
- the company’s articles must permit buy backs with cash.
- SHs must approve the transaction by ordinary resolution.
If a company wants to buy back shares with profits, what formalities must be followed?
- profits must be accumulated realised profits minus accumulated realises losses.
- company can instead use the proceeds of issuing new shares.
- articles must permit buy backs with profits.
- SHs must approve the transaction by ordinary resolution.
- SHs cannot cast votes by shares the company wishes to buy.
- once resolution is passed, board must approve the buy back through board resolution.
If a company wants to buy back shares with capital, what formalities must be followed?
- company’s articles must permit buy backs with capital.
- SHs must approve the use of capital by special resolution.
- SHs must approve the transaction by ordinary resolution.
- directors must make a solvency statement (company is solvent and can pay all debts and obligations).
- buy back must be advertised in the London Gazette.
What are the three main purposes of company accounts?
- To show business performance
- To establish the amount of profit available for distribution
- To indicate the type of liabilities / debts owed
What view must company accounts show?
A true and fair view of the state of affairs of the company
What is the deadline for filing company accounts for:
- Private companies
- Public companies
Private companies = within 9 months of the accounting year end
Public companies = within 6 months of the accounting year end
What’s the restriction on extending a company’s accounting year end?
Cannot be extended more than once in 5 years
But can shorten as much as you want
How is gross profit worked out?
Sales/turnover - direct cost of sales (stock)
How is final net profit or loss worked out?
Gross profit - indirect overheads (wages/electricity/rent)
What is a balance sheet?
A snapshot of the company’s financial health on the last day of its accounting period, signed by a director.
What does part 1 of a balance sheet show?
Assets moving from least liquid (building / equipment / goodwill) to most liquid (cash)
What does part 2 of the balance sheet show?
Liabilities in order of priority of payment (current liabilities = repayable within 12 months)
Lender loans come under liabilities, not capital employed
On the balance sheet, what must business assets equal to?
Business assets must equal liabilities plus SH equity
What does Part 3 of the balance sheet show?
The capital employed figure (amount owed to SHs)
What is a small company?
A company that meets at least two of the following criteria:
- Annual turnover of up to £10.2 million
- Balance sheet total of up to £5.1 million
- Average number of employees up to 50
What must small companies publish at Companies House?
- the accounting policies they adopt
- value of their assets
- value of their liabilities
- value of their debts
i.e., a balance sheet
- information about their guarantees / other financial commitments
- accompanying notes
How long must a company retain their financial records?
3 years from the date of creation
How is gross profit margin worked out, and what does it show?
Gross profit margin (%) = gross profit / sales x 100
Shows how well a business is operating (higher % = higher profitability)
How is net profit margin worked out, and what does it show?
Net profit margin (%) = net profit / sales x 100
Shows how efficiently a business is operating (in managing its costs).
Indicates profitability after taking into account any expenses.
How is return on capital employed worked out, and what does it show?
Return on capital employed (%) = net profit (before tax) / capital employed (assets minus liabilities) x 100
Capital employed = SH funds and long term loans.
Indicates how efficiently a company uses its capital to generate profits.
How is sales to capital employed worked out, and what does it show?
Asset turnover = sales / capital employed (assets minus liabilities) x 100
Indicates how efficiently a company is using its capital to generate sales
How is current ratio worked out, and what does it show?
Current ratio = current assets / current liabilities
Indicates whether a business has enough liquid assets to pay its way
How is acid test ratio worked out, and what does it show?
Acid test ratio = current assets - stock / current liabilities
Looks at whether the company has enough current assets in stock to pay off the current liabilities
How is trade debtor days worked out, and what does it show?
Trade debtor days = trade debtors (amount owed to business) / sales x 365
Shows how long businesses must wait to get paid by debtors
How is trade creditor days worked out, and what does it show?
Trade creditor days = trade creditors (amount owed to suppliers) / cost of sales x 365
Shows the number of days it rakes business to pay money to creditors
How is stock days worked out, and what does it show?
Stock days = stock / total cost of sales x 365
Shows the average number of days a business holds inventory before selling it - fewer the days, greater the liquidity
What is insolvency?
When a company does not have enough assets to discharge its liabilities
What are the two tests for insolvency?
Cash-flow test
Balance sheet test
What is the cash flow test for insolvency?
Company cannot pay its liabilities as they fall due / within a reasonable time
Even if a company can pay its present debts, if it is unlikely to be able to pay future debts, it will be cash-flow insolvent
What is the balance sheet test for insolvency?
Company’s liabilities exceeds its assets
What are the two options that a creditor has to prove a company’s insolvency?
Statutory demand
Judgement
How can a creditor use statutory demand to prove a company’s insolvency?
Creditor must show that:
- Company owes more than £750
- Company was served with a formal demand for payment by the creditor
- The debt remains unpaid for at least 21 days
How can a creditor use a judgement to prove a company’s insolvency?
Creditor must demonstrate that:
- They have obtained judgement against the company for a debt (of at least £750)
- They have attempted to execute that judgement, but the debt is still fully/partly unsatisfied
What is compulsory liquidation?
Where a creditor is owed over £750 and approaches the court for a winding up order
What are the two types of voluntary liquidation?
Members voluntary liquidation
Creditors voluntary liquidation
How can a company enter into members voluntary liquidation?
- MVL is only available to a solvent company.
- Directors must make a solvency statement (that they can pay their debts in full within 12 months of the commencement of winding up).
- SHs must pass a special resolution to wind up the company.
- Directors must take professional advice.
- Liquidator is appointed.
How can a company enter into creditors voluntary liquidation?
- Instigated by creditors putting pressure on directors.
- Directors eventually accept that company is insolvent.
- SHs pass a special resolution to wind up the company.
- Company appoints a liquidator
What is the general 5-step liquidation process?
- Proceedings are commenced
- Liquidator is appointed
- Liquidator collects and realises assets
- Liquidator distributes the assets
- Company is dissolved
What main 5 powers does a liquidator have?
- To collect / realise assets
- To investigate the company’s past transactions
- To commence litigation on behalf of the company
- To appoint agents
- To do all things necessary to facilitate the winding up of the company
What’s the order of distribution for insolvency?
- (Payment of costs for securing asset) Fixed-charge security holders
- Insolvency costs
- Preferential debts ((1) ordinary debts = employee wages for the past 4 months (max £800), (2) secondary debts = some HMRC debts)
- Floating charge holders (but keeping ring fenced sum for unsecured creditors)
- Unsecured creditors ring fenced sum
- Shareholders
What is the ring fenced sum for unsecured creditors?
50% of the first £10,000 of floating charge property
+
20% of the remaining (sum minus £10,000)
Maximum of £800,000
If funds realised from a secured asset are insufficient to satisfy the debt, what is the consequence?
The fixed-charge holder will become an unsecured creditor for the unpaid portion
What is a moratorium?
A precaution that stops enforcement action by certain creditors against the company.
Directors remain in control, and insolvency practitioner monitors the process.
When does an out-of-court moratorium come into effect?
When the documents are filed at court
When does an in-court moratorium come into effect?
When the court order is made
How long does a moratorium last?
20 business days
How long can a moratorium be extended by?
20 days without creditor consent
1 year with creditor consent (date will be specified by the court)
If a moratorium is to be extended, what must be shown?
That the insolvency practitioner states that, in their view, the moratorium will rescue the company
What are the main features during a moratorium?
Creditors are unable to enforce their debts (cannot take action against the company)
Bank loans / mortgages / employee wages must still be paid when they fall due
Suppliers cannot terminate their supply agreements with the company / landlords cannot terminate the lease
Floating charge holders cannot crystallise their charges
What firms is a moratorium not available for?
Partnerships
Companies who have been subject to insolvency proceedings within the last 12 months
What conditions must be met for a moratorium to be extended?
- All pre-moratorium debts must have been paid off
- Debts that the company incurred liability for during the moratorium must be paid
- Insolvency practitioner must make a statement that, in their view, the moratorium will rescue the company
What is administration?
An insolvency process with the aim of rescuing a company as a going concern (so that it can continue to trade later)
What are the key features of administration?
- independent administrator is appointed
- administrator takes over the management of the company (can run / manage / reorganise / sell)
- directors can no longer exercise any managerial powers
What is a main advantage of administration?
It provides the company with a moratorium whereby creditors cannot enforce their security over a company’s assets or instigate proceedings
What is the order of objectives in administration?
Objective 1 = rescue the company as a going concern
Objective 2 = achieve a better result for the creditors in event of insolvency
Objective 3 = realise the company’s assets to make a distribution
Are all objectives of administration equal?
No, objectives 2 and 3 should only be considered when the first objective is no longer reasonably practicable
What is the court route into administration?
Made on application by the company / creditors / directors if:
- court is satisfied that company is / likely to be unable to pay its debts
- administration would likely achieve a better result for creditors
Who must be notified once a court order of administration is made?
Directors must notify:
- anyone who has appointed / may appoint an administrative receiver
- any qualifying floating charge holders who may appoint a receiver
- anyone else entitled to have notice
What is out-of-court administration?
Company / directors give notice to qualifying floating charge holders of intention to enter into administration.
Floating charge holders can agree to administration (with pre-appointed administrator) or appoint their own administrator.
When can a company not use the out-of-court route to administration?
If the company is subject to a winding-up petition
What is the process that must be followed if a company is to appoint its own administrator?
- Company will call a general meeting to obtain SH’s approval (OR) of intention to appoint an administrator
- Directors will pass a board resolution of appointment
- Directors must make a statutory declaration that:
- company unable to pay its debts
- company is not in liquidation
- no previous administration in last 12 months
What is the process of administration?
- Administrator puts forward their proposals
- Proposals must be approved by the majority (in value of debt) of creditors
- Administrator is granted wide powers to do anything necessary to manage the affairs of the company
When does administration end?
Automatically after 1 year (can be extended in certain circumstances)
Can administration end early?
Yes, administrator can apply to the court to end the administration if:
- they / creditors feel purpose of administration has been achieved
- they think the company shouldn’t have entered into administration
- creditors have a meeting requiring them to apply to court
- they feel that it should be converted into a CVL
- they feel it should be converted into liquidation in the public interest
- administrator resigns
What is a company voluntary arrangement?
The process whereby company negotiates with its creditors to enter into a binding agreement to pay its debts.
What is a disadvantage of a company voluntary arrangement?
It does not allow for a statutory moratorium - creditors can still enforce their security and can instigate proceedings
When entering into a company voluntary arrangement, what are creditors usually agreeing to?
Accept only partial payment
Or
Wait longer to receive their debts
What is the procedure of a company voluntary arrangement?
- Directors take advice from an insolvency practitioner
- Directors put forward their written proposals to creditors
- Directors inform creditors of the insolvency practitioner
- Insolvency practitioner invites creditors to a meeting
- 75% or more in value of unsecured creditors must agree to the proposals
- Insolvency practitioner is appointed and becomes the supervisor (ensures proposals are being implemented)
- Directors remain in office and manage the company
- Once proposals are implemented, insolvency practitioner writes a final report given to creditors
What is a fixed-asset receivership?
Where secured creditors exercise their power to appoint a receiver (without having to apply to the court)
Receiver takes control of the charged asset and realises it to satisfy the debt.
Earlier created charges take priority (even if receiver is appointed by a later ranking creditor)
Usually leads to overall insolvency (takes away a main asset)
What must annual accounts include for a general company?
Profit and loss sheet
Balance sheet
All be signed by a director / designated member
Give a true and fair view of the company
What special powers does the Insolvency Act give to an insolvency practitioner in relation to past transactions?
Practitioner can challenge transactions entered into before liquidation.
Practitioner can recover company property.
What is a transaction at an undervalue?
The gift / sale of a company asset for significantly less money / no money than the value of the item
When is a TUV voidable?
If
- took place in the 2 years prior to insolvent administration (connected and unconnected), and
- company was insolvent at the time or became insolent as a result (presumed if transaction was with a connected person)
What are some defences for a TUV?
- made in good faith
- made for the purpose of carrying out business
- made with reasonable grounds for believe that it would benefit the company
What is a transaction at a preference?
Putting a creditor in a better position in the event of the company going into insolvent administration
When is a TAP voidable?
If:
- took place in the 6 months prior to insolvency (unconnected)
- took place in the 2 years prior to insolvency (connected)
AND
- company was insolvent at the time / become insolvent as a result (not presumed)
- company was influenced by a desire to prefer that creditor (assumed for connected)
When can a floating charge be set aside?
Where an unsecured creditor has obtained a floating charge to secure an already existing charge for no new consideration
If an existing charge is upgraded to a floating charge for no new consideration, what is the consequence?
The floating charge will be invalid
What is valid consideration for upgrading an existing charge to a floating charge?
New money is brought into the company
New goods / services are supplied to the company
Existing debts are extinguished as a result of giving the charge
When can a floating charge be voided?
If:
- transaction took place in the 1 year before insolvency (unconnected person), and
- company was insolvent at the time / became so as a result.
OR
- transaction took place within 2 years of insolvency (connected person), and
- insolvency is presumed.
What is fraudulent trading? What can be done about it?
Where the director / anyone else carried out the business of the company with an intent to defraud creditors for any fraudulent purpose.
Insolvency practitioner can make an application to the court for a declaration.
If a fraudulent trading declaration is made, what is the consequence?
The individual concerned may be personally liable to make contributions to the company’s assets
What is wrongful trading?
When the company has gone into insolvency, and the directors continue to trade when:
- at some point before winding up, they knew / ought to have known that there was no reasonable prospect of avoiding insolvent liquidation
and
- the directors did not take every step with a view to minimising loss to creditors
To avoid a finding of wrongful trading, what must be shown?
That the company’s directors have acted reasonably and responsibly before insolvency - they have put the creditors first and not worked for their own benefit.
If a wrongful trading allegation is found, what is the consequence?
Directors can be held personally liable for the company’s debts from when they knew / ought to have known that company was insolvent
What is the limitation period in which an insolvency practitioner must make a claim for wrongful trading?
6 years
What are the two types of preferential debts, and what is included in those categories?
Ordinary debts =
- contributions to pension schemes.
- wages / salaries of employees for work done in the 4 months before insolvency (max £800 each).
- unpaid holiday pay.
Secondary debts =
- HMRC debts.
- Student loans.
What is the statutory order of distribution on insolvency?
- Expenses of realising fixed-charged assets
- Fixed charge holders
- Liquidator’s general costs
- Preferential creditors (ordinary and secondary)
- Taking out ring-fenced sum for unsecured creditors
- Floating charge holders
- Unsecured creditors (ring-fenced sum)
- Interest on unsecured and preferential debts
- SHs
What is the main provision of bankruptcy?
All of the bankrupt’s assets are transferred to an insolvency practitioner (trustee in bankruptcy) who realises the assets and distributes the proceeds
What restrictions are placed on an individual when they are subject to bankruptcy?
- limits on applying for credit over £500
- disqualification from acting as a director
- cannot create / manage / promote a company
- partnerships in which they are a partner will terminate
How long does bankruptcy last?
1 year
When can a bankruptcy restriction order imposed?
Where a bankrupt refuses to acknowledge / accept responsibility for their actions.
Individuals who are deemed:
- irresponsible
- reckless
- otherwise culpable
What can be imposed instead of a bankruptcy restriction order?
A bankrupt can do operate and instead offer a bankruptcy restrictions undertaking - allows bankrupt to avoid court proceedings + still be subject to extended restrictions
How long can a BRO/BRU last?
15 years
What is an income payments order / agreement in bankruptcy?
When, on application by the TIB, a bankrupt receiving income will have to continue towards the debts of the bankruptcy for up to 3 years
What are the tests for bankruptcy?
- Debt is payable immediately and the debtor has insufficient funds to pay (regardless of whether they will be able to pay in the future).
- Debt is payable at a specific point in the future and the debtor has no reasonable prospect of being able to pay.
Who is bankruptcy initiated by?
The debtor (the individual) or their creditors
How can the debtor (individual) apply for bankruptcy?
By applying online to the adjudicator
What grounds must the debtor satisfy in order to petition for self-bankruptcy?
- adjudicator has jurisdiction to determine
- debtor is unable to pay their debts at the date of determination
- no bankruptcy petition is pending
- no bankruptcy order has been made
How can the creditor(s) apply for a debtor’s bankruptcy?
One or more individuals who are owed £5,000 or more can make a petition
What grounds must the creditor satisfy in order to petition for a debtor’s bankruptcy?
- debtor is domiciled in England and Wales
- debt is £5,000 or more
- debt is for a liquidated sum payable immediately / at a specific future date
- debtor is unable to pay / no reasonable prospect of being able to pay
- there are no outstanding applications to set aside a statutory demand
When is a debtor presumed to be unable to pay their debts?
If the debtor fails to satisfy a statutory demand served on them by the creditor
What is the test that must be satisfied for a creditor to prove a debtor’s bankruptcy?
- Debtor owes £5,000 or more
- Debtor has not paid / secured a statutory demand for the debt within 3 weeks of being served / has not applied to the court to have the statutory demand set aside
OR
- Creditor has a court judgement and has tried to enforce this against the debtor unsuccessfully
What is the general bankruptcy process?
- Creditor presents the bankruptcy petition in court
- Creditor proves the bankrupt’s inability to pay
- Bankruptcy petition is served on the debtor
- Bankruptcy order is made by the court
- Bankruptcy starts at the time/date of order and lasts until discharge/1 year
What is the role of an official receiver in bankruptcy?
This is the TIB:
- appointed after bankruptcy order is made
- advertises the order in the London Gazette
- takes control of the bankrupt’s estate
- realises the assets and distributes these to creditors
What happens to a bankrupt’s house in bankruptcy?
It automatically vests in the TIB
When must a TIB obtain a court order to sell a bankrupt’s house?
Where:
- house is in joint names
- bankrupt’s spouse has a charge over the property
- children live in the property
If spouse / children live in a bankrupt’s house, how long can the sale be delayed for?
1 year
After how long does a bankrupt’s house revert back to bankrupt?
3 years
Which assets do not vest in the TIB?
- items needed for work / tools of the trade
- everyday household items
- assets of a particular peculiar nature
- bankrupt’s income
When are transactions at an undervalue voidable in bankruptcy?
Voidable if:
- took place within 2 years of bankruptcy (unconnected persons)
+ must prove that the bankrupt was unconventional at the time - took place within 5 years of bankruptcy (connected persons) + insolvency is presumed
What are the defences for a transaction at an undervalue in bankruptcy?
There are no defences
When are transactions at a preference voidable in bankruptcy?
Voidable if:
- took place within 6 months of bankruptcy (unconnected persons)
- took place within 2 years of bankruptcy (connected persons)
+ proof that bankrupt was insolvent at the time / became so as a result
What is a defence for a transaction at a preference in bankruptcy?
Where bankrupt can show that there was no desire to prefer
What is the statutory order of distribution for bankruptcy?
- Secured creditors
- Bankruptcy costs
- Preferential debts
- Unsecured debts
- Interest on preferential and unsecured debts
Even when a bankrupt is discharged, what debts are they not released from?
- debts gained by fraud
- student loans
- court fines
- debts created after bankruptcy order is made
- money owed in relation to family proceedings
- personal injury compensation
- mortgages / secured debts
- rent arrears (if still living in the property)
What is a debt relief order?
A low-cost alternative to bankruptcy for those with limited personal assets
How long does a debt relief order last?
1 year
What is the main provision imposed during a debt relief order?
The debtor ceases to pay towards debts, and creditors cannot take action without court permission
Which debts does a debt relief order not cover?
- court fines
- family proceedings obligations
- student loans
- secured debts
- debts from fraud
- compensation from personal injury claims
What restrictions are imposed during a debt relief order?
- cannot borrow more than £500 without telling the lender
- cannot act as a director
- cannot create / manage / promote a company without court’s permission + must inform company about DRO
What is the eligibility criteria for a debt relief order?
- debtor is domiciled in England / Wales
- not applied for a DRO in the last 6 years
- be unable to pay their debts
- owe less than £30,000
- have assets of less than £2,000
- own a car less than £2,000
- have disposable income of less than £75 per month
- not be involved in another insolvency process
- not entered into a TUV/TAP in the last 3 years
What is an individual voluntary arrangement?
Where a debtor works with an insolvency practitioner to draw up proposals for creditors
What does the proposal in an individual voluntary arrangement detail?
The debts that the debtor repay and the time period over which they will be paid
What preliminary right is given in an individual voluntary arrangement?
A statement of affairs is produced + an interim order is sought
Interim order prevents proceedings from being brought against the debtor for 14 days
For an IVA to be passed, who must approve?
At least 75% or more in value of debt of unsecured creditors must agree
What is the main caveat for an IVA?
Preferential and secured creditors are not bound - they can still bring actions against the debtor
What is the procedure for an individual voluntary arrangement?
- Proposals are put to the creditors
- Nominee is appointed
- Interim order is granted
- Creditors vote on proposals
- Approval is granted
- Nominee implements the proposals
If an IVA fails, what can be done?
Nominee or creditors can petition to the court for a bankruptcy order
What is an advantage of an IVA?
Although debtor repays more of their debts than they would have under bankruptcy, they will avoid the stigma of bankruptcy
What is a standard debt respite order?
Where a debt advisor is satisfied that the debtor cannot pay, they are granted legal protection from creditor action for up to 60 days (can research and take advice about how to proceed)
Who can apply for a standard debt respite order?
Anyone
Who is a mental health crisis respite order available to?
Any individual who is receiving mental health treatment
How long does a mental health crisis respite order last?
As long as the individual’s treatment, plus 30 days
In order to qualify for a debt respite order, what criteria must be satisfied?
- debtor must owe a qualifying debt
- debtor must live in England / Wales
- must not have a DRO / IVA
- must not have already had a standard respite order in the last 12 months
What debts are excluded from protection under a debt respite order?
- secured debts
- court fines
- child maintenance orders
- debts incurred through fraud
- tax and benefit debt
What is the default position in a partnership if a partner is made bankrupt? Can this be changed?
The partnership will automatically dissolve, and the partner’s share will vest in the TIB.
Partnership agreement may stipulate that the remaining partners can purchase the bankrupt’s interest from the TIB
What is the position if a partner in an LLP becomes bankrupt?
The partnership will not automatically terminate - the TIB will usually sell the interest to the remaining partners
What is the tax year for income tax?
6th April to 5th April
What income tax must employees pay?
Income tax must be paid on renumeration received from employers, including:
- salary
- bonuses
- benefits in kind (cars / private medical insurance)
What income tax are sole traders / partners liable for?
Sole traders / partners are subject to income tax on any taxable profits they make from a profession
If profits are not withdrawn from the business, is tax payable?
Yes, tax is payable regardless of the amount of profits actually withdrawn
If there is a priority allocation of profits to a certain partner (salary / interest or capital), what is the tax consequence?
The whole amount is taxable in addition to the individual partner’s share of the partnership income
What is a partner taxed on?
Their share of the partnership income
What tax must the actual firm of a partnership pay?
Partnership firm doesn’t pay tax - only the partners have individual liability for their own tax
What income tax must shareholders pay?
Income tax on dividends received
What income tax do lenders / debenture holders pay?
Lenders who receive payments on interest on the amount of loan must pay income tax on the interest received - this is taxed as savings income (so applicable savings income allowance can be used)
What income tax do rental property owners pay?
Income tax on their rental income
What expenses can sole traders / partners deduct from their profits?
- expenses that are income related and incurred wholly and exclusively for the purpose of the trade
If an expense is incurred for a dual purpose (business and personal), can this be deducted from a company’s profits?
A deduction can be made for the business proportion - however, the wholly and exclusively test is applied very strictly
What is structure and building allowance?
If a business constructs / purchases / renovates a building after 29th October 2018, they can claim a 3% refund of the total construction / renovation cost annually (same amount deductible annually)
How is income received by trading / rental profits / dividends reported?
Through a self-assessment tax return
What are the three different types of income?
- Non-savings income = income from employment / pension income / rental income
- Bank interest
- Dividend income
What is gross income?
Income from all sources
What is net income?
Gross income minus payments of interest on certain qualifying loans
What is personal allowance for income tax?
The annual tax-free allowance - currently £12,570
What happens if an individual’s personal allowance exceeds their net income?
The excess personal allowance will be lost - it cannot be carried forward
When is a person’s personal allowance tapered?
When their income reaches over £100,000, PA is tapered by £1 for every £2 of income above
When does a person effectively lose their personal allowance?
When their income is £125,140 and above
How is an adjusted personal allowance worked out?
PA (12,570) - (net income (after deductions of interest) - £100,000) / 2
12,570 - (£120,000 - £100,000) / 2 = £2,570 (adjusted PA)
What is marriage allowance?
When part of your PA can be transferred to your spouse if:
- the couple are married / CP
- transferring spouse’s income is less than the PA
- recipient spouse is a basic rate taxpayer
What is the effect of marriage allowance?
The recipient spouse will reduce their tax liability by 20% of the current allowance (£252)
£1,260 x 20% = £252
How are tax bands utilised for income tax?
Tax is paid by fitting as much allowance within each bank before moving to the next
What is the special savings starting rate?
If taxable non-savings income (salary) is less than £17,570, then a person will be eligible for a maximum of £5,000 allowance on their savings income (interest from banks).
What is the total maximum allowance that a person can take away from their income tax liability? When is the special £5,000 allowance completely lost?
£12,570 (PA) + £5,000 (maximum savings allowance) = £17,570
Completely lost if the whole non-savings (employment) income is over £17,570
To be eligible for the special £5,000 allowance on non-savings income, how much income must a person receive?
Less than £12,570
What is dividend allowance applied to?
The first £1,000 of taxable dividend income (first £1,000 is charged at 0%)
What is the Enterprise Investment Scheme?
If a taxpayer subscribes for new shares in a qualifying company, they can deduct 30% of the value of the shares from their income tax liability
If a person is entitled to the EIS deduction, on which income can they use this relief?
- the same tax year in which the shares were purchased
- the previous tax year
OR
30% deduction can be split in any percentage between these two years
If non-savings (employment) income is above £12,570, what effect does this have on the special £5,000 savings allowance?
The amount over the £12,570 is deducted from the £5,000 allowance, and this figure is the new allowance that can be deducted from non-savings income
What is the maximum relief that can be claimed on EIS shares?
Annual relief of £1 million
Upgraded to £2 million if the company is a knowledge intensive one
Cannot create a negative income tax figure
What is overlap profits tax?
When a trader begins trading, they will likely be taxed twice on some profit in their first and second tax year
When is relief available for overlap profits?
When the trader changes their according date (to 5th April)
When the trader ceases to trade (untaxed profits are taxed and overlap is deducted)
What are trading losses?
Losses made during trade, trader can offset the loss against any income that would have been taxed
What is current year / prior year loss relief?
Losses can be set against taxpayer’s net income from current year or prior year (taxpayer can pick).
Cannot be claimed partially
What is carry forward loss?
Losses can be carried forward and set against profits of the same trade
What are opening year losses relief?
Applies to all losses sustained in the first four tax years of trading
Carries a loss back against the net income of the three previous tax years (earlier first)
What is terminal loss relief?
Available when a trader ceases trading
Allows a loss to be deducted from trading profits in the year of cessation
Loss can then be carried back to the three previous tax years (earlier first)
What is carry forward relief (incorporation of a business)?
When a sole trader / partner transfers their business to a company and receives shares in return, they can set off any unused trading losses against
dividend payments received from the shares until the loss is fully utilised
What are the anti-avoidance provisions for EIS shares relief?
If the shares are disposed of within 3 years of their issue, the tax deduction will be clawed back
Also if conditions for the EIS scheme are no longer satisfied
What are the anti-avoidance provisions when a parent gifts income to their child?
If a parent gifts income to their child (under 18 and unmarried) in excess of £100, all income is taxed as the income of the parent
What is corporation tax charged on?
Taxable profits of a company
What are taxable profits made of?
Trading profits
+
Non-trading profits (not directly connected to their usual trading income /interest)
+
Property income
+
Capital gains
Where are charitable donations by a company deductible from?
Deductible from total taxable profits
How are trade profits calculated?
Trade income less cost of sales and capital allowances (e.g., AIA)
What is capital gains tax paid on? How is this calculated?
Payable on net chargeable gains
Net chargeable gains = chargeable gains less capital losses (from the current period) and any unused capital losses (brought forward)
In utilising trading loss relief, what profits can a company’s trading loss be set against?
- set against total profits in the current accounting period.
- carried back and set against total profits in the previous 12 months (must be offset against current period first, then any leftover carried back).
- carried forward and set against total profits of a later accounting period.
Are dividends deductible for corporation tax purposes?
Dividends are not deductible for corporation tax purposes, and are not subject to national insurance
What are the main allowable deductions against trading profits for corporation tax?
- salary / bonuses paid to employees
- employer NI contributions
- company pension contributions
- rent paid for use of a building
- interest payments on a loan (loan for business purposes)
What are the special Covid-19 allowances for WDA?
All assets usually qualifying for 18% are provided relief at 130%
All assets usually qualifying for 6% are provided relief at 50% in the first year, then back to 6% for the next years
What is a close company?
A company that is resident in the UK
AND
Controlled (ownership of over 50% of shares / share capital) by
- five or fewer SHs
OR
- any number of directors who are also SHs
**includes shares and rights of associates (e.g., family)
When does a taxable benefit arise from a loan made in a close company?
Where a loan is made to a participator, a taxable benefit arises if the participator is an employee/director and no interest/less interest is charged
How much must the loan exceed to confer a taxable benefit in a close company?
Must exceed £10,000
If a taxable benefit loan is made in a close company, what are the consequences for the company making the loan?
The company must pay HMRC a penalty tax (33.75% of the loan) within 9 months and 1 day of the year end in the year it was made
If a taxable benefit loan is made in a close company, what are the consequences for the recipient of the loan?
The recipient must pay income tax on the benefit of the loan each tax year during which the loan is provided.
Tax on benefit of the loan = (loan amount x official rate of interest) = Y
Y is added to the recipient’s income and taxed at the relevant band (after minusing PA)
If a loan in a close company is made to a director’s family member (e.g., spouse of child), do the taxable consequences still apply?
If the child is a minor (under 18), the loan will be treated as if it was made to the director themselves - taxable consequences will apply.
If the loan is made to a family member (e.g., spouse, child, or parent), but it is effectively for the benefit of the director/shareholder, HMRC may still apply the taxable consequences on the basis that it is an indirect loan to a participator.
Can tax paid by the company on a close-company loan be recovered?
Yes, tax can be recovered hence the money is returned to the company / written off.
The refund will be made within 9 months and 1 day of the year end of the repayment year.
Can the recipient of the close-company loan be refunded for the tax they’ve paid on the loan?
If they repay the loan, they will be refunded the tax paid within 9 months and 1 day of the year end of the repayment year.
If the loan is written off, the recipient will not be able to get a refund on the tax paid, and will need to pay dividend tax on the written off amount.
When a loan is made in a close company, can the company deduct the loan and tax paid as an expense?
No, the loan and tax paid are not deductible as an expense
What is the anti-avoidance legislation in relation to transfer pricing adjustments?
Where goods/services are provided between group companies, prices could be charge that result in profits being made:
1. In the company with the lowest corporation tax rate, or
2. In the company with the most brought forward losses available.
HMRC will enforce an adjustment removing the tax advantage.
Open flash card for example of anti avoidance legislation for transfer pricing adjustments
Company 1 has profits of £1,000
Company 2 has losses of £1,000
Company 1 agrees to sell Company 2 an asset worth £500 for £1,000 to offset their loss.
HMRC will not allow this, and will treat the asset as being sold at its actual worth - this means Company 1 can only claim that they have offset the profits by £500, and Company 2 have offset their loss by £500.
What is the anti avoidance legislation for losses incurred prior to a change of ownership?
A company is unable to carry forward its trading losses in circumstances where there has been a change in the ownership of the company, and the new owner only acquired the company because it wants to use the losses brought forward.
Unless the acquiring owner is in the same trade, HMRC will consider that a major change in the nature/conduct of the business has happened and they will not allow the loss to be used.
When does capital gains tax liability arise?
When a chargeable person makes a chargeable disposal of a chargeable asset
Who are chargeable persons for CGT purposes?
Individuals
Companies (but they pay corporation tax on gains, not CGT)
Trustees
PRs selling assets of a deceased person
What CGT liability do UK residents have?
UK residents are chargeable to CGT on the disposal of worldwide assets.
What CGT liability do non-UK residents have?
Non-UK residents do not pay CGT, even if they dispose of a UK situated asset (except for an interest in land)
What are chargeable assets for CGT purposes?
Land
Buildings
Goodwill
Shares
Antiques
What are exempt assets for CGT purposes?
Cars
Wasting chattels (tangible property with a life up to 50 years)
Government bonds
Assets where the consideration received and the historical cost are both equal to / below £6,000
What is a chargeable disposal for CGT purposes?
Sale
Gift
Sale / gift of part
Loss / destruction (where insurance is claimed)
If a person is left assets by a deceased, will there be CGT liability?
No, a beneficiary will inherit the assets at market value (aka probate value) at the date of death
What is the no-gain no-loss principle in CGT?
The fact that spouses can transfer assets freely between themselves without incurring a charge to CGT.
The recipient spouse is taken to have received the asset at the same cost as the donor spouse.
What portion of the asset is CGT actually chargeable on?
Only the chargeable gain is taxed, not the entire consideration received
If an asset for CGT purposes is initially gifted/received by a connected person, what value is used to determine any gains?
The market value of the asset at the date of initial gift/transfer
**this is compared to the value of the most recent disposal
What expenditure can be deducted for CGT purposes?
- incidental costs of disposal (legal fees / stamp duty land tax / advertising costs)
- costs of acquisition (purchase price / legal fees / stamp duty land tax)
- expenditure which enhances the value of the asset (but enhancement must be reflected in the asset at the date of disposal)
When is CGT payable?
Generally = 31st January after the tax year in which it was made.
Disposals of land = reported and paid within 60 days of completion.
What is business asset disposal relief?
A relief available on gains made on certain business assets, which reduces the CGT liability payable
What assets are relevant for a claim for business asset disposal relief?
All/part of a trading business carried on as a sole trader / partnership for at least 2 years before disposal
Shares in a trading company where the individual owns at least 5% of the ordinary voting shares of the company and was an officer / employee of the company for 2 years before disposal
Assets owned/used by the individual’s personal trading company (5% of ordinary voting shares) or trading partnership in the 2 years before disposal
If a claim for business asset disposal relief is successful, what is the CGT consequence?
CGT is paid at just 10% on qualifying gains
CGT is still payable, just at a lower rate
Is there a limit for use of business asset disposal relief for CGT?
There is a lifetime limit of £1 million on qualifying gains
What is hold-over (gift) relief for CGT?
This relief allows an individual to give away certain types of assets without paying CGT
If there is a successful claim for hold-over (gift) relief for CGT, what is the consequence?
The chargeable gain is deferred until the recipient disposes of the asset.
When the recipient eventually disposes of the asset, they will pay CGT on their own gain and the donor’s deferred gain.
If a claim for hold-over (gift) relief for CGT is successful, how is the taxable amount worked out?
Calculating the donor’s gain (market value minus acquisition costs) and reducing the donee’s acquisition cost (market value) to arrive at the donee’s base cost
Open flash card for example of hold-over (gift) relief
A buys a ring for £10,000
After 20 years, the ring is worth £100,000. A gifts the ring to B for no consideration.
B later sells the ring for £150,000.
B is taken to have received the gift at £10,000, and will therefore need to pay CGT on both A’s and their own gain.
£150,000 (B’s gain) - £10,000 (B’s base cost) = £140,000 gain that B must pay CGT on
What assets qualify for relief under the hold-over (gift) relief for CGT?
Business assets:
- assets used for the purpose of a trade carried out by the transferor or their personal company (5% of ordinary voting shares)
- shares in an unquoted trading company
- shares in the transferor’s personal company (5% of ordinary voting shares)
- assets that qualify for agricultural property relief for IHT purposes
What is replacement of business assets (rollover) relief?
Relief that enables a sole trader / partner to defer a gain on the disposal if the proceeds of their sale are reinvested in other qualifying assets
To be eligible for replacement of business assets (rollover) relief, what timeframes must be complied with?
The reinvestment must be made within 1 year before or 3 years after the asset is sold
Once a successful claim has been made for replacement of business assets (rollover) relief, when is CGT payable?
CGT is deferred until the new asset acquired is disposed of
What is incorporation relief for CGT?
Applies when an individual transfers their business / partnership interest as a going concern (intending to operate as the same kind of business) to a company
If incorporation relief for CGT is successful, what is the consequence?
The gain made is deferred by reducing the cost of the shares being received as consideration for the interest being transferred to the company
Value of the shares received will be equivalent to the market value of the assets transferred
If incorporation relief for CGT is successful, when will tax be paid?
When the share acquired in consideration for the sole-trade / partnership interest are disposed of
If your capital losses exceed your capital gains in a given tax year, what can be done?
The excess losses can be carried forward to future tax years and offset against future capital gains
How is the relevant tax amount for holdover relief worked out?
Capital gain when shares disposed of =
sale price of shares
-
base cost of shares (base cost of assets when they were initially purchased for use in the soletrade / partnership)
What is private residence relief for CGT?
This exempts a charge to CGT arising on a property which an individual has used as their home
How long will a taxpayer be deemed to have been living in their property before disposal?
For the last 9 months of ownership (as long as they have lived in it as their home at some point)
If a taxpayer has been living abroad, will they be eligible for private residence relief?
If a taxpayer has been living abroad by reason of their employment (for any amount of time), then moves back in to their home, they will be eligible for the relief
If a taxpayer was absent from their property due to working elsewhere, will they be eligible for private residence relief?
If a taxpayer was absent from the property due to working elsewhere (for a maximum of 4 years), then moves back in, they will be eligible for the relief
If a taxpayer has been absent from their home, can they be eligible for the private residence relief?
If a taxpayer was absent for any period up to 3 years, then moves back into their home, they will be eligible
Can the allowable periods of absence for private residence relief be used cumulatively?
Yes.
Taxpayer can be absent due to working elsewhere for 4 years, then moves back into the property, then is absent for a further 2 years, then sells the property, taxpayer will be eligible for relief for initial absence due to working elsewhere, then will all have automatic eligibility for the last 9 months. Taxpayer will only need to pay CGT on the 1 year and 3 months of absence.
What is enterprise investment scheme relief for CGT?
The fact that an individual can defer payment of CGT on any chargeable gain by investing in shares in a qualifying unquoting trading company (1 year prior or 3 years after the gain is made).
If applicable, the gain will be chargeable when the shares are eventually sold.
What is the annual exempt amount for CGT?
For individuals = £3,000
For trustees = £1,500
**if AEA is not used, it cannot be carried forward.
What is the TAARs anti-avoidance rule for CGT?
If a CGT loss has been made, this cannot be offset against any CGT gain if the loss occurred as a result of ‘arrangements’ that weee made with their main purpose to secure a tax advantage
What is VAT charged on?
Any supply of goods / services made in the UK if the supply is made by a taxable person while carrying on business.
VAT is charged on the value of the supply
What are exempt supplies for VAT?
Supply of residential land
Insurance
Financial services
Education
Health services
Postal services
What are zero-rated supplies for VAT?
Food
Newspaper
Water / sewage services
Transport
Residential construction
these supplies still count towards taxable supplies made, but are charged at 0%
What assets are reduced rate for VAT?
Domestic fuel
Installation of energy-saving materials
Child car seats
What is output tax?
VAT charged by a business to a consumer
What is input tax?
VAT paid by a business to a supplier
How is VAT payable worked out?
Output tax (VAT charged by business) - input tax (VAT paid by business) = VAT payable
When must a business compulsorily register for VAT?
- If their value of taxable supplies in the previous 12 months exceeds the VAT registration threshold (£90,000)
- If, at any time, there are reasonable grounds for believing that the value of taxable supplies to be made in the next 30 days will exceed the VAT registration threshold
Can a company voluntarily register for VAT?
Yes, even if they do not meet the VAT threshold.
They can recover VAT paid on their own purchases.
However, they must charge their customers VAT.
When can a business deregister for VAT?
Can de-register for VAT if the annual taxable turnover falls below the de-registration threshold (£88,000)
When must a business deregister for VAT?
A business is obliged to register is they stop trading / stop supplying goods that are subject to VAT
Within what timeframe must VAT registration be cancelled?
Within 30 days
If somebody who opts to charge VAT wants to change their mind, within what timeframe must they notify HMTC?
They must notify HMRC within 6 months of exercising their option to tax
If the option to tax has been put in practice, however, can it be revoked?
Yes, it can be revoked after 20 years with the consent of HMRC
When must VAT be accounted for?
Within 1 month and 7 days after the end of each VAT quarter
What is the tax point for goods?
When the goods are removed / when the goods are made available for the person
What is the tax point for services?
When the services are performed
How can the tax point be varied?
If the supplier issues the tax invoice / receives payment before the usual date, the tax point is brought forward to this earlier date
If a VAT invoice is issued up to 14 days after the tax point, the invoice date becomes the new tax point
If an item has been used for both personal and business purposes, can VAT be reclaimed?
Only for the business portion
What items can VAT not be reclaimed for?
Purchase of a car
Business entertaining
What must a VAT invoice include?
VAT number
Tax point
Value of the supply
Rate of VAT charged
If using the standard rate of VAT, how is the VAT inclusive amount (amount including VAT) worked out?
Take the VAT exclusive figure and times it by 20%, and add this to the VAT exclusive figure
If using the standard rate of VAT, how is the VAT exclusive amount (amount excluding VAT) worked out?
Take the VAT inclusive figure (including VAT) and divide it by 6
If using the reduced rate of VAT, how is the VAT inclusive amount (amount including VAT) worked out?
Take the VAT exclusive figure, and times it by 5%.
Add this amount onto the VAT exclusive figure.
If using the reduced rate of VAT, how is the VAT exclusive amount (amount excluding VAT) worked out?
Take the VAT inclusive figure (including VAT) and divide it by 21.
Minus this amount from the VAT inclusive figure.
What is the consequence of failing to register for VAT when required?
HMRC will impose a penalty of the percentage of VAT due from when the business should have registered
What is the consequence of under-declaring VAT?
A penalty can be charged (a percentage of the VAT due)
What is the consequence of VAT evading?
Penalty of the evasion amount can be imposed.
Unlimited fine / imprisonment
