Business Law and Practice

Question 1

in what circumstances might the courts pierce the corporate veil

Answer 1

Prest v Petrodel

when a person is under an existing legal obligation or liability or is subject to an existing legal restriction which he deliberately evades, or whose enforcement he deliberately frustrates, by interposing a company under his control

even then, the corporate veil can only be pierced so as to deprive the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality

Question 2

what is the difference between directors and shareholders?

Answer 2

directors = responsible for the day-to-day running of the company

shareholders = provide money for a share in the company

Question 2

for a company to be a public company, what must be present?

Answer 2

1. the constitution, must state that it is a
   public company;
2. the words ‘public limited company’ / plc must be included at the end of the company’s name; and
3. the company’s owners must invest a specified minimum amount of money for use by the company:

the allotted share capital of the company must be at least the ‘authorised minimum’, currently £50,000 (ss 761 and 763 CA 2006). Each allotted share must also be paid up to at least a quarter of its nominal value, plus the whole of any premium on it
(s 586 CA 2006).

Question 3

can only public companies issue shares?

Answer 3

no - private companies can also issue shares - they raise finance either from people who already know the company or specialist investors who understand the risks involved

public companies can either be listed or unlisted (unlisted still issue shares publicly)

Question 4

what is a company limited by guarantee?

Answer 4

usually used for organisations that are not
seeking to make a profit, such as a professional society

Instead of buying shares, the shareholders guarantee the company’s debts up to a specified amount, usually £1

Question 5

what is an unlimited company?

Answer 5

not very common, people who are happy to do business with unlimited liability usually = sole trader or partnership

Question 6

what is a charitable incorporated organisation?

Answer 6

provide the advantages of a corporate structure, such as reduced risk of personal liability, without the burden of dual regulation by both the Registrar of Companies and the Charity Commission

Question 7

what must overseas companies do?

Answer 7

All overseas companies that set up a branch or any other place of business in the UK
must register selected details of the establishment within one month of their opening.

Question 8

what is a joint venture

Answer 8

commercial enterprise undertaken jointly, by two or more parties

the parties retain their own identity but generally pool their resources for a specific
purpose

can be governed merely by a contract between the parties and sometimes the parties may set up a corporate structure which they will jointly control

So a joint venture is not a separate type of business medium in itself, but rather a
description of a joint commercial enterprise which could take many forms.

Question 9

why is setting up a sole tradership or partnership advantageous?

Answer 9

1. no formalities

also companies = subject to strict rules of CA 2006

Sole traders and partnerships have freedom over decision- making in their businesses, although partners may (and should) choose to enter into a partnership agreement which sets out how decisions must be made.

2. no legal or administrative costs in setting up (unless taking legal advice on partnership agreement)

Question 10

why are companies and LLPs more attractive when looking at finance?

Answer 10

they can offer an additional form of security for loans, the floating charge, which is a charge over all of the business’s assets and is not available to partnerships or sole traders

Question 11

What documentation / form is required to incorporate a company?

Answer 11

submit Companies House form IN01 + memorandum of association + (possibly)
the company’s articles of association, to Companies House with the applicable fee.

Question 12

a company is created when the certificate of incorporation is issued, what must it include?

Answer 12

• the name and registered number of the company
• the date of its incorporation
• whether it is a limited or unlimited company and, if it is limited, whether it is limited by shares or by guarantee
• whether it is a private or public company
• whether the company’s registered office is in engl/wales/sct/NI

Question 13

once incorporated, companies must be registered with HMRC for incorporation tax, how is this done and in what time frame does it need to be done?

Answer 13

Companies formed following an online application will be registered for corporation tax automatically

if the application was made by post, the applicant will have to make a separate application to HMRC, within three months of starting to do business, for the company to be registered for corporation tax.

Question 14

what are the required endings for a company name?

Answer 14

private limited company = ltd
public listed company = plc

(welsh equivalents)

Question 15

in what circumstances can a company be registered with the same name as a pre-existing registered company?

Answer 15

if the new co will be part of the existing group/company/LLP

AND

if they have written confirmation the pre-existing company doesnt object

Question 16

under the ECCTA, CH can now reject the registering of a company who’s name is what?

Answer 16

• is intended to facilitate fraud;
• is comprised of or contains a computer code; or
• is likely to give the false impression the company is connected to a foreign government or an international organisation whose members include two or more countries or territories (or their governments).

Question 17

CH directs a company to change its name.

what time frame do they have to do this and what happens if a company refuses to change its name

Answer 17

28 days - if they dont respond to a request by CH to change their name = offence

CH can choose to suppress a name or choose a new name for the company

Company Names Tribunal

Question 18

what is not permitted as a registered office address?

what action can CH take if a sufficient registered address is not being used?

Answer 18

a PO box

they can change the registered address

if the company does not have an appropriate registered address, both the company and its directors are guilty of an offence which is punishable by a fine

Question 19

what is required to change a companies registered address?

Answer 19

board resolution

company must file a AD01 with CH

Question 20

the registrar changes the companies address, for how long after this can docs still be sent to the previous address and be deemed to have been sent to the registered address?

Answer 20

14 days

Question 21

even if director’s residential address is not used as the registered address of the company and is therefore not public, who is the addresses shared with?

are there any circumstances in which they might not be shared with the above?

Answer 21

specified public authorities (SPAs) and credit reference agencies (CRAs)

directors can make an application for the address not to be shared

serious risk of violence / intimidation to the director or someone at the address e.g if the company is involved in animal testing

they will need to provide evidence of serious violence or intimidation

Question 22

when an applicant registers a company, they will need to provide a statement of capital, what is contained in it?

Answer 22

• the number of shares of each type the company has and their total nominal value – known as the company’s share capital; and
• the names and addresses of all shareholders – known as subscribers.

and what types of rights each of the shares confers on the shareholders (known as prescribed particulars) - this information must include:

• what share of dividends they receive;
• whether they can exchange (‘redeem’) their shares for money;
• whether they can vote on certain company matters; and
• how many votes their shares entitle them to.

Question 23

companies incorporated before October 2009 will have which articles of association?

before October 2009

Answer 23

Table A unless they have adopted the new Model Articles

Question 24

how does a company change amend its articles of association?

Answer 24

special resolution

must file a copy of the amended articles within 15 days of the amended articles taking effect

+

file copy of special resolution within 15 days after it is passed

Question 25

how do you know if a provision in the articles is voluntary or mandatory?

Answer 25

if it is voluntary it will say ‘subject to the
company’s articles’

Question 26

what is required in the IN01 form?

Answer 26

company name
registered office
email address
first directors - identities, dob, residential + service address
company sec - name and service address
first shareholders - names, addresses and details of their shareholding
statement of capital

Question 27

control is deemed to be significant if…

Answer 27

• holds more than 25% of the shares in the company; or
• holds more than 25% of the voting rights in the company; or
• holds the right to appoint or remove a majority of the board of directors of the company

Question 28

are there any additional requirements to incorporate a public company?

Answer 28

yes - must do the same as private listed company (IN01) + it must obtain a trading certificate (app made to CH via SH50 form) + meet allotted share capital requirements

Question 29

what should a company do to convert a private company to a public one?

Answer 29

special res passed (at the time it is passed the company must satisfied the share capital requirements)

rename to add in plc

alter articles

trading certificate not required

Question 30

what must be included in a re-registration certificate when a company wants to go from private to public?

Answer 30

the applicant must file at CH:
* the special resolution;
* an application for re- registration on Form RR01, which includes a statement of compliance;
* the fee for re- registration;
* the revised articles (s 94(2)(b) CA 2006);
* a balance sheet and a written statement from the company’s auditors, and a valuation report on any shares which have been allotted for non- cash consideration between the date of the balance sheet and the passing of the special resolution.

Question 31

what are shelf companies?

Answer 31

Many law firms, in the knowledge that their clients will often need a company forming very quickly, will have a team of people or a person who forms shelf companies for clients to use, often at short notice.

The shelf company is a company which has already been set up, usually with two directors and two shareholders, each of whom owns one ordinary £1 share,
which is formed and then left ‘on the shelf’ at the law firm until such time as a client needs a company quickly.

The directors and initial subscribers of the shelf company will be employees of the law firm.

Question 32

how does a company change its name?

Answer 32

by special resolution or by other means stipulated in the MA

submit to CH = NM01 = copy of special res + fee

Question 33

what is date is a company’s accounting reference date

Answer 33

the last day of the month in which the company was incorporated so if it was incorporated on the 6th May the accounting reference date will be 31 May

Question 34

what are the different business mediums

Answer 34

sole traders
partnerships
private limited companies
public limited companies
limited liability partnership

Question 35

explain how an LLP works

Answer 35

hybrid between general partnership and company

run by partners

taxed as partnerships are

but governed by CA 2006 and have SLP and LL

Question 36

what is a limited partnership (not LLP)

Answer 36

one general partner who’s liability is unlimited

one limited partner who’s liability is limited to the amount they initially invested into the business

but the LL is conditional as the limited partner must not:

control or manage the limited partnership
have the power to take binding decisions on behalf of the limited partnership
remove their contribution to the limited partnership so long as it is in business

must be registered with the Registrar of Companies before it starts trading

Question 37

what is included in a statement of capital?

Answer 37

the company’s share capital (number of shares issued and for what value)

+

names and addresses of all shareholders

+

prescribed particulars:
- what share of dividends the shareholder receives
- whether they can exchange (redeem) their shares for money
- whether they can vote on certain company matters
- how many votes their shares entitle them to

Question 38

what date did the CA come into force?

why is this relevant?

Answer 38

1 October 2009

companies incorporated before this date are likely to have Table A articles of association instead of MA

Question 39

when does a general partnership come into existence?

Answer 39

Under s 1 PA 1890, a partnership comes into existence when two or more persons are ‘carrying on a business in common with a view of profit’.

agreeing to work together doesn’t form the partnership - it is only when the partners start carrying out business in common with a view of profit

Question 40

what factors should be considered when determining whether two people are in a partnership?

Answer 40

in the absence of something obvious like a partnership agreement …

• Do the individuals all take part in decision- making?
• Whose names are on the title deeds of any property?
• How are profits shared?

Question 41

The PA provides a default partnership contract. This default contract will govern the relationship between the partners unless they have agreed any specific terms, which will usually override the provisions of the PA 1890.

does the contract have to be written?

Answer 41

oral agreements are valid

agreements can also be implied by conduct, where a partner has conducted themselves in a certain way over years and the other partners have not objected to it

Question 42

which provisions of the default contract created by the PA cannot be overriden?

Answer 42

The most significant examples to note are ss 1 and 2, which govern when a partnership comes into existence

ss 5– 18, which cover the relationship between the partners and third parties,
and in particular, liability for debts.

Question 43

with three exceptions, all decisions in a partnership must be taken by majority. what are the exceptions + how must those decisions be made?

Answer 43

The three exceptions are:
* changing the nature of the business (s 24 PA 1890);
* introducing a new partner (s 24 PA 1890); and
* changing the terms of the partnership agreement (s 19 PA 1890, and also the general contractual principle that contracts can only be varied with the consent of all the parties).

unanimously

Question 44

what is the difference between capital profits and income profits in partnerships

Answer 44

The initial capital of the business is the money the partners contribute to the business, and capital profits are one- off gains, such as an office building increasing in value.

Income profits are generally those profits which are recurring in nature, such as trading profit, or rent received by a partnership that owns properties.

Question 45

partners are not employees of the business. they own the business and the income profits they receive from the business are known as what?

Answer 45

drawings

The partnership agreement should set out how much each partner is allowed to ‘draw down’ in any given period, usually a month.

In the absence of agreement, as we have seen, partners are entitled to share equally in income profits

Question 46

what is the effect of the dissolution of a partnership?

Answer 46

Dissolution of a partnership can be described as the partnership ending. That does not necessarily mean that the partners will stop trading.

It just means that the contractual
relationship between those partners will come to an end.

Even if all but the outgoing partner
carry on in business together on the same terms, the original partnership is technically
dissolved.

Question 47

why is it important for sols to advise their clients to include a notice period for the termination of a partnership in the partnership agreement?

Answer 47

the default position in the PA 1890 =
is that any partner may end the partnership at any time by giving notice of their intention to do so to all of the other partners

no stipulated notice period + doesnt have to be in writing

not practical

Question 48

a partner leaving a partnership is known as a partner ___________

Answer 48

retiring (even thought it is nothing to do with the partner claiming a pension)

Question 49

Under the PA 1890, a partnership is dissolved in which circumstances?

Answer 49

• when a partner retires (although the partnership agreement can provide that the other partners carry on in business, which is explained further below) (s 26);
• on expiry of a fixed term (s 32); or [can be disapplied]
• by the death or bankruptcy of any of the partners (s 33); or [can be disapplied]
• if the partners give notice of dissolution to a partner who has (by order of the court)
  granted a charge over their share of the partnership property, for a debt owed by them alone and not the partnership as a whole (s 33) [cannot be disapplied]

Question 50

if something happens which makes it unlawful for the business of a partnership to be carried on, what happens to the partnership?

Answer 50

it is dissolved

Question 51

the partners in a general partnership can apply to the court under s 35 PA 1890 for an order that the partnership is dissolved if…

Answer 51

• a partner becomes permanently incapable of performing their part of the partnership
  contract;
• a partner’s conduct is calculated to be prejudicial to the business;
• a partner wilfully or persistently breaches the partnership agreement;
• the partnership can only be carried on at a loss; or
• the court thinks that, for other reasons, it is just and equitable to order that the partnership
  be dissolved.

Question 52

why is it important for a sol to draft the PA in such a way that if one partner leaves the partnership, the partnership doesn’t automatically dissolve?

Answer 52

under s26 PA, a partnership will dissolve if a partner retires (leaves)

all the assets must be sold (or the partnership sold as a going concern), and the outgoing partner has to receive their share

the outgoing partner can insist on the business being sold under s 39 PA 1890, so the other partners do not necessarily have the option of continuing in business and just paying the outgoing partner for their share

the sol can therefore draft the PA to allow for partial dissolution = this allows the partnership to be technically dissolved, but will continue seamlessly with one less partner

Question 53

The PA should contain provisions on whether the other partners must buy
the outgoing partner’s share, or whether they merely have the option to do so, how the partnership share of the outgoing partner should be valued, and when that should be paid…

if the PA does not address the issue of payment for an outgoing partner’s share in the partnership, what will the outgoing partner be entitled to?

Answer 53

the outgoing partner is entitled to either interest at a rate of 5% per annum on the value of their partnership share until they receive their share from the other partners

or

such sum as the court may order representing the share of profits made which is attributable to the use of
their share

Question 54

what is goodwill in relation to a partnership and what is its estimated value when a partner retires from the partnership?

Answer 54

When a business is sold as a going concern, part of the purchase price will be for
the business’s goodwill, because the business is up and running and can continue as before, retaining its clients and reputation.

Goodwill is difficult to value, but commonly, two years’ profit is taken as the value for goodwill

Question 55

when a partnership is sold, how are the proceeds of sale distributed?

Answer 55

according to s 44 PA 1890

(unless the parties have decided otherwise by agreement):

• First of all, creditors of the firm must be paid in full. If there is a shortfall, the partners must pay the balance from their private assets. They will share the losses in accordance with their partnership agreement.
• Secondly, partners who have lent money to the firm must be repaid the amount
  outstanding on the loan, including interest.
• Thirdly, partners must be paid the share of the partnership’s capital to which they are
  entitled.
• Lastly, any surplus is shared between the partners in accordance with the terms of their partnership agreement.

Question 56

what is a restraint of trade clause and in what circumstances will it / will it not be enforceable?

Answer 56

blanket description which includes non- compete clauses, nonsolicitation
clauses and non- dealing clauses.

seeks to restrict outgoing partners in their business dealings once they have left the partnership

no implied restraint from trade clause in the PA

will only be enforceable if it protects a legitimate business interest and is no wider than is reasonable to protect that
interest, in term of duration, geographical area and scope.

Question 57

Partners have certain rights and responsibilities towards each other because of the partnership relationship.

what are they?

Answer 57

Under common law, partners owe a duty of the utmost fairness and good faith towards one another.

under ss 28 to 30 PA 1890 partners:
* must be completely open with one another regarding any relevant information regarding the partnership;
* must account to the firm for any private profits they have earned without the other
partners’ consent from any transaction concerning the partnership; and
* must not compete with the firm: this is classed as carrying on any business of the same nature as and competing with that of the firm. If the partner does so without the other partners’ consent, that partner must account for and pay over to the firm all profits made by them in that competing business.

Section 24 PA 1890 also provides that the partners must:
* bear a share of any loss made by the business, in accordance with the terms of their partnership agreement; and
* indemnify fellow partners who have borne more than their share of any liability or
expense connected with the partnership.

+ any duties under the PA

Question 58

Under s 6 PA 1890, the a partnership is bound by any contract or deed entered into by partners (or employees, but here we will concentrate on partners) in the firm’s name, provided that the partner’s actions were authorised by the partners. An action may be authorised in various ways, list some.

Answer 58

1. The partners may have acted jointly in making the contract;
2. Express actual authority: the partners may have expressly given one of the partners permission to enter into a particular transaction or type of transaction, or instructed them to enter into a particular contract on behalf of the firm. the firm is bound to any contract made by the partner within that authority.
3. Implied actual authority: the partners may have impliedly accepted that one or more partners have the authority to represent the firm in a particular type of transaction. If all the partners are involved in running the business without any limitations, it will be implied that each partner has authority. Alternatively, authority may be implied by a regular course of dealing by one of the partners to which the other partners have not objected.

Question 59

looking at express actual authority in partnerships…

even if the other partners place an express or implied limitation on the partner’s authority to enter into a contract on behalf of the partnership, the firm will remain liable to third parties under s 5 PA 1890 under what circumstances?

Answer 59

1. the transaction is one which relates to business of the kind carried on by the firm;
2. the transaction is one for which a partner in such a firm would usually be expected to
   have the authority to act;

(1 & 2 = objective test of what would appear to an outsider to be the nature of the firm’s business and what authority you would expect a partner in such a firm to have)

3. the other party to the transaction did not know that the partner did not have authority to act; and
4. the other party deals with a person whom they know or believe to be a partner.

(3 & 4 = subjective test - as to the belief of the third party)

Question 60

where a partner has acted outside their authority in entering into a contract with a third party, the partnership will still be liable to third party under the contract, but what would the partner who acted outside their authority do?

Answer 60

indemnify their fellow partners for any liability or loss which they incur, because the partner has breached their agreement with their partners by acting without actual authority.

Question 61

what is a partnership’s liability for the tortious acts of one of their partners?

Answer 61

Under s 10 PA 1890, the firm is liable for any
wrongful act or omission of a partner who acts in the ordinary course of the firm’s business or with the authority of their partners.

Question 62

despite the fact that partnerships do not have limited liability, there are some circumstances in which a partner will be able to escape liability for the partnerships debts. what are they?

Answer 62

depends on when the debt was incurred

1. Each partner is jointly and severally liable with the other partners for debts incurred by the partnership while they were a partner
2. novation agreements
   - can extinguish a retiring partners debts
   - In a novation agreement, a retiring partner will be released from an existing debt, by entering into a contract with the creditor and the other partners, and possibly an incoming partner.
   - Under this contract of novation, the creditor will release the original partners from their liability under the contract and instead the firm as newly constituted will take over the liability.
   - It may be that a partner retires and no new partner joins. In this case, in order to ensure that the novation is contractually binding, either there must be consideration for the creditor’s promise to release the retiring partner from the liability or the contract must be executed as a
   deed.
   - Such agreements are rare since they reduce the number of people the creditor can sue if the partnership does not pay the debt, so the creditor will only agree to it if it benefits them in some other way.
3. after leaving the partnership
   - liable for any debts incurred during time as a partner (unless novation agreement releasing them from such)
   - not liable for debts after they had left the partnership as long as they comply with the
   requirements of s 36 PA 1890.

Question 63

what does section 36 PA relate to and what does it require

Answer 63

when a partner leaves a partnership

they wont be liable for the debts incurred after they have left the partnership only if they comply with s36 which states anyone with whom the firm has dealt before must be given actual notice of the partner in question leaving.

must be informed directly rather than via a newspaper

If notice is not given, a person dealing with the firm is entitled to treat all apparent members of the firm as still being members.

notice to the whole world must also be provided - London Gazette

NOTE - If the reason for ceasing to be a partner is death or bankruptcy (rather than retirement or expulsion), no notice of the event is required.

The estate of the deceased or bankrupt partner is not liable for partnership liabilities incurred after the death or bankruptcy.

Question 64

what is ‘holding out’ in regards to a partnership and how does it affect the partnership’s debts?

Answer 64

When a creditor of a partnership has relied on a representation that a particular person was a partner in the firm (known as ‘holding out’), they may be able to hold that person liable for the firm’s debt (s 14 PA 1890).

This would be the case even if the person had never been a partner or had retired before the contract was made.

the holding out may be in writing , oral or by

a creditor that relied on the holding out may be able to sue

Question 65

what provides the default contract for an LLP?

Answer 65

LLP Regs 2001

Question 66

explain the membership of an LLP

Answer 66

must have min of 2 members
2 designated members (can be the same people)

If at any time the number of members reduces to one, and this carries on for more than six months, that person is jointly and severally liable for any of the LLP’s debts incurred during the period from the six- month point onwards.

Question 67

how may an LLP change its name?

Answer 67

either with the consent of all members

or as is alternatively stipulated in the PA

Question 68

what must be on an LLP’s stationery

Answer 68

1. name
2. place of registration
3. registration number
4. address of the registered office

Question 69

Under the LLPA 2000, CA 2006 and Insolvency Act 1986, designated members are responsible or various administrative and legal matters, what are they?

how must they carry out these admin/legal matters?

Answer 69

• signing and filing the annual accounts with the Registrar;
• appointing, removing and remunerating the auditors;
• filing the annual confirmation statement;
• sending notices to the Registrar of Companies, for example concerning a member leaving or joining the LLP; or
• winding up the LLP.

Designated members must carry out all of their functions consistently with the core fiduciary obligation every member owes to the LLP itself.

Designated members also owe a duty of
reasonable care and skill to the LLP.

Question 70

an LLP has limited liability, but under what circumstances may a member become liable and be required to contribute to the insolvent LLP?

Answer 70

misfeasance

fraudulent trading

Question 71

where are the duties of members of an LLP found?

what fiduciary duties do members of an LLP have?

Answer 71

if not in an agreement between members/LLP, they are in the LLP Regs 2001

-duty of good faith
- duty to account for any money received on behalf of the LLP
- a duty to the other members to render true accounts and full information on matters concerning the LLP.

Question 72

Members of an LLP are agents of the LLP, under s 6 LLPA 2000. how are LLPs liable to third parties?

Answer 72

in the same ways as general partnerships

Question 73

LLPs are required to register charges with who?

Answer 73

Registrar of Companies

any creditor must be able to review the register of the LLPs charges without fee

Question 74

discuss the process of changing of membership in an LLP

Answer 74

governed by the LLP agreement

must deliver a notice to the Registrar of Companies, notifying them of the new member, within 14 days of appointment.

This can be done by filing form LL AP01 (for an individual member) or LL AP02 (for a corporate member) at Companies
House.

must include new member’s service address, res address, full name

When a member leaves an LLP, the LLP is required to file form LL TM01 (for an individual member) or LL TM02 (for a corporate member) at Companies House within 14 days.

Question 75

what are some of the default positions in an LLP agreement that can be departed from

Answer 75

• the members share the profits
• every member may take part in the management of the LLP but wont be renumerated for such
• ordinary matters = majority vote
• changing the nature of the business and changing the terms of the contract
  between the members = unanimous
• members can leave with reasonable notice
• members cannot be expelled
• membership cannot be terminated by bankruptcy

REMEMBER THIS IS THE DEFAULT AND CAN BE CHANGED IN THE LLP AGREEMENT

Question 76

from 2024/25 the default position by which most unincorporated businesses calculate their trading income for income tax purposes is the so- called _____________

why are larger more complex businesses likely to opt out?

Answer 76

’ cash basis’

taxed on the difference between money received and money paid in the accounting year

if the business wants to obtain finance, the lender is likely to want to see accounts drawn up in the traditional way before deciding to offer finance

+

certain reliefs cannot be claimed if the business uses the cash basis

Question 77

how are trading profits or losses calculated for the accounting year

Answer 77

Chargeable receipts LESS
deductible expenditure LESS
capital allowances

Question 78

deductible expenditure must be:
1. of an income nature
2. incurred ‘wholly and exclusively’ for the trade
3. not prohibited by statute e.g. for client entertainment

what is meant by the first two?

Answer 78

1. of an income nature…

If the reason for incurring the expenditure is so that the business can sell the item at a profit (eg, stock), it is income in nature.

Alternatively, if the expenditure has the quality of recurrence (for example, utility bills), again, it will be income in nature.

2. incurred ‘wholly and exclusively’ for the trade
   examples
   * salaries (as long as they are not excessive given the services that the person carries out);
   * rent on commercial premises;
   * utility bills;
   * stock;
   * contributions to an approved pension scheme for directors/ employees; and
   * interest payments on borrowings.

note - HMRC now allows some parts of expenses to be apportioned so that they are deductible

Question 79

what are capital allowances?

when do they apply

Answer 79

Capital items, such as plant and machinery, cannot in principle be deducted from chargeable receipts when calculating trading profits, because they are not income in nature. however these items are expensive + loose resale value…

To encourage businesses to invest in essential machinery to help them to grow, they are entitled to a capital allowance, which allows them to deduct a proportion of the cost of most capital items from chargeable receipts. This will ultimately result in the business paying less tax overall. The main types of capital asset for which a capital allowance is permitted are plant and machinery.

what does plant and machinery include?
plant includes whatever apparatus business people use to carry on their business

e.g. manufacturing equipment, tools,
computers and other office equipment.

Each financial year, the plant and
machinery the business owns will be valued, and 18% of its total value will be deducted from chargeable receipts (known as the writing down allowance) when calculating trading profits for that accounting period.

the reduced value of the plant and machinery = ‘written- down value’

end outcome = reducing the amount of tax you pay

Question 80

what is pooling when looking at calculating trading profit / loss

Answer 80

capital allowances - plant and machinery

pool all plant and machinery together
the WDA is calculated each year on the basis of the value of the whole pool

If an asset is sold, the proceeds of sale are deducted from the value of the whole pool, not the individual item.

This means that no balancing allowances
or charges should be needed until the whole pool is sold, often when the business stops trading

Question 81

to calculate trading profit / loss =

chargeable receipts less deductible expenditure less capital allowances

what are chargeable receipts

Answer 81

chargeable receipts = money received for the sale of goods and services. the receipts must derive from the business’s trade and be income (ie recurring) rather than
capital in nature.

Question 82

what is an annual investment allowance

Answer 82

The AIA allows businesses to deduct the whole cost of plant and machinery
purchased in that particular accounting period from chargeable receipts in addition to the WDA amount

the amount of AIA = 1m

means that the first £1 million of ‘fresh’ qualifying expenditure on plant and machinery incurred in an accounting period will be wholly deductible. Note that a group of companies will receive only one AIA for the group in each accounting period. However, the AIA can be allocated within the group as the group sees fit.

Question 83

what is the difference between AIA and full expensing when looking at tax deductions on plant and machinery?

Answer 83

[insert table at the bottom of page 149]

AIA:
for companies and unincorporated businesses
100% allowance capped at 1m
new + second hand machinery

full expensing:
companies only
100% allowance, uncapped
brand new assets only

either of these can be in addition to WDA of 18% e.g if new plant/machinery cost 1.2 mil - 100% reduction on the 1mil via full expensing and 18% WDA on the remaining 200k

Question 84

are taxpayers automatically given relief when they are trading at a loss

Answer 84

It is important to remember that the taxpayer must apply for the relief – they are not applied automatically by HMRC.

Question 85

list the various tax reliefs for unincorporated businesses?

Answer 85

1. start up loss relief (or early trade losses relief)
2. carry-across/one-year carry back
3. set off against capital gains
4. carry back of terminal trading loss
5. Carry- forward relief on incorporation of business

Question 86

how does Carry- across/ one- year carry- back relief for trading losses generally work?

Answer 86

unincorporated businesses

Trading losses in an accounting period are treated as losses of the tax year in which the accounting period ends. There are four options for this relief. The losses can be:
1. set against total income from the same tax year; or
2. set against total income from the tax year preceding the tax year of the loss.
Alternatively, they may be:
3. set against total income from the same tax year until that income is reduced to zero, with the balance of the loss being set against total income from the tax year preceding the tax year of the loss; or
4. set against total income from the tax year preceding the tax year of the loss until that
income is reduced to zero, with the balance of the loss being set against total income
from the tax year of the loss.

Question 87

how does start up loss relief (early trade losses relief) work?

Answer 87

unincorporated businesses

• loss in the first four tax years of business
• It enables the taxpayer to claim back from HMRC some of the income tax they paid in their previous business or employment in the three tax years prior to the tax year of the loss (some or all of which they may have paid at the higher rate).
• a claim for this relief must be made on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed

Question 88

how does carry-forward relief work?

Answer 88

unincorporated businesses

A taxpayer may carry forward their trading loss for a tax year and set it against subsequent profits which the trade produces in subsequent years, taking earlier years first.

Losses can be carried forward indefinitely until the loss is exhausted, so if several years go by before the trade makes a profit against which to set the losses, this is no bar to claiming the relief.

Whilst losses can be carried forward indefinitely, the taxpayer must notify HMRC of its intention to claim the relief no more than four years after the end of the tax year in which the loss was incurred.

Question 89

Under the Value Added Tax Act 1994, VAT is:

‘charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him’.

Tax is charged on the ‘value of the supply’.

explain each element

Answer 89

supply of goods and services = any transfer of the whole property

exempt supplies: supplies of residential land, postal services, education and health services

taxable person = person who makes or intends to make taxable supplies or if they are registered (if the value of their taxable supplies in the preceding 12 months exceeded £90,000)

value of the supply just means the value of the good/service without tax e.g if 400 plus VAT value supply is 400

Question 90

explain how tax is payable to HMRC

Answer 90

if registered for VAT = submit return to HMRC and pay the VAT you owe within
one month from the end of each quarter (in respect of taxable supplies made in that
quarter)

They will pay the VAT they have charged (output tax), less any VAT they have paid
in the course of their business (input tax).

If input tax exceeds output tax, the person will receive a rebate.

Question 91

Anyone making taxable supplies of more than £90,000 in any 12- month period must register and charge VAT, and those making less than this can choose to register but are not obliged to. why might someone choose to register?

Answer 91

only those registered for VAT can reclaim input tax they have paid, so sometimes
a business will voluntarily register so that they can reclaim input tax

They will have to work out whether being able to reclaim input tax is worth losing the advantage of being able to undercut VAT- registered rivals when competing for business.

i.e they can charge customers less because they dont have to add output tax but they also cant reclaim input tax for goods/services they use - which situation is better for them?

Question 92

who pays income tax?

Answer 92

1. individuals
   - employees if their earnings exceed [find]
   - sole traders based on their trading profits (calculated by chargeable receipts less deductible expenditure and capital allowances)
2. partners
   - tax due on their individual share of the partnership profits
   - The method of calculating trading profit is the same as for sole traders, but the profit will need to be apportioned between the partners in accordance with their shares in the income profits of the partnership.
   - corporate partners pay corporation tax instead of income tax
3. PRs
   - pay the deceased’s outstanding income tax + income tax chargeable during the administration of the estate
4. Trustees
   - pay income tax on income produced by the trust

Question 93

Income tax is payable on taxable income. There are various reliefs and allowances which differ depending on the type of income. What are the different types of income?

Answer 93

(a) non- savings, non- dividend income (‘NSNDI’). This is essentially all sources of income apart from income from savings and income from dividends;

(b) savings income, which is interest from various sources, such as interest on money held in a bank account;

(c) dividend income.

Question 94

how do you calculate income tax - what are the steps to follow?

Answer 94

Step 1: Calculate total income

Step 2: Deduct any allowable reliefs
The resulting sum is net income

Step 3: Deduct any personal allowances
The resulting sum is taxable income

Step 4: Separate into the three categories of income (NSNDI, savings income and dividend income) and calculate the tax on
each type of income at the applicable rate(s) (starting rate, basic rate, higher rate
and additional rate)

Step 5: Add together the amounts of tax from Step 4 to give the overall income tax liability

Question 95

Step 1 of calculating income tax = calculate total income.

To do this, it is important to be aware of what income is charged to income tax under ITTOIA 2005 and ITEPA 2003.

What are the most important types of income which are charged income tax?

Which types of income will not be charged income tax?

Answer 95

any of the below will be charged income tax on:

(a) trading income: profits of trade, profession or vocation. This applies to sole traders, trading partnerships, sole practitioners and professional partnerships;

(b) property income: rents and other receipts from land in the UK;

(c) savings and investment income: interest, annuities and dividends;

(d) employment and pensions income, including social security payments such as sick pay and maternity pay; and

(note most people’s income tax is taken off their pay packet automatically via PAYE scheme so this should be taken off the gross sum of income of which will be taxed)

NOT CHARGED INCOME TAX:
- interest on damages for personal injuries or death
- interest on savings certificates
- certain state benefits
- premium bond winnings
- income from ISAs

Question 96

which incomes may be subject to allowable reliefs and will therefore be taken off the net income which will be charged income tax?

Answer 96

interest payments on qualifying loans

this includes:
* a loan to buy a share in a partnership, or to contribute capital or make a loan to a
partnership;
* a loan to invest in a close trading company; and
* a loan to personal representatives to pay inheritance tax.

Question 97

what is a personal allowance?

how does it work

how is it calculated

Answer 97

Everybody is allowed to earn a certain amount of income each year before they start paying income tax.

the personal allowance is deducted from net income which income tax will be charged on

£12,570

it is applied in an order:
NSNDI
if anything left - savings income
then dividend income

any unused personal allowance cannot be carried forward into future years unless marriage allows it

if you earn over 100k = adjusted personal allowance is calculated:
£12,570 – (net income – £100,000) / 2 (divided by 2)

Once a taxpayer’s income reaches £125,140 = no personal allowance

Question 98

marriage allowance:

Where a person does not have enough income to use their personal allowance fully for that tax year, they can transfer _____________of their personal allowance to their spouse or civil partner.

This is not available if the recipient is a _______________ taxpayer.

Answer 98

£1,260

marriage allowance doesn’t apply where you would be transferring to a higher or additional rate taxpayer

Question 99

income tax + calculating the net income which will be charged income tax - you deduct personal allowances.

how much is a blind person’s allowance

Answer 99

£3,070

Question 100

what is the property and trading allowance

Answer 100

Where individuals are in receipt of gross property income or gross trading income below £1,000, the income will not be subject to income tax

Question 101

what is the personal saving allowance - not to be mistaken with personal allowance

Answer 101

remember the allowance is on the interest - so its the interest which gets deducted from the overall net income figure which will be charged income tax on

insert table 9.1 from page 202 of textbook

Question 102

what is the dividend allowance?

Answer 102

Unlike the personal allowance,
all taxpayers (whether basic, higher or additional rate taxpayers) are entitled to the £500 dividend allowance.

Question 103

Calculating the income payable by a partner in a partnership comprises the following steps…

Answer 103

1. The partnership’s trading profit will be calculated in the same way as trading profit for a sole trader.
   Chargeable receipts LESS deductible expenditure LESS capital allowances = trading profit/ loss
2. The trading profit is then shared between the partners in accordance with their
   agreement (or, if there is no agreement, the Partnership Act 1890).
3. any partner will then include this on their tax return

losses are also shared between the partnership - partners can each choose how they will claim any applicable reliefs for their share of the loss.