Business Law and Practice Flashcards
When can dividends be declared and paid under model articles?
The model articles of association provide that the payment of a dividend must be recommended by the board of directors before it can be declared by the shareholders by an ordinary resolution.
Is it possible for the statutory notice period to hold a GM to be shortened?
Yes, but a majority in the number of shareholders who hold at least 90% of the shares must agree to the short notice.
A company issued 1,000 £1 ordinary shares and 2,000 £100 shares with a 5% noncumulative preference. The company approves distribution of a £100,000 dividend.
What is the maximum amount that may be distributed to the ordinary shareholders?
£90k
If a company has preference shares, the preference must be paid before any dividend may be distributed to the ordinary shareholders. Here, the company has 2,000 £100 shares with a 5% preference. That means that each of the 2,000 preference shares is entitled to receive 5% of £100 before the company may make a distribution to the ordinary shareholders. So, the first £10,000 (£5 x 2,000 shares) must be distributed to the preference share owners, which leaves £90,000 that may be distributed to the ordinary shareholders.
What is a de jure director?
A de jure director is a director properly appointed by law, having complied with all the necessary formalities required by the Companies Act 2006.
How can a company’s name be changed?
SR (75% or more in favour) of shareholders
What are the director/member requirements for a private limited company?
A private limited company is required by law to have a minimum of one director and one shareholder, but there is no legal requirement for a company secretary.
What is the statutory notice period required to be given to shareholders to call an annual general meeting?
The statutory notice period required to be given to shareholders to call an annual general meeting is 21 clear days, whether the resolutions to be considered are ordinary or special resolutions.
What is required for registration of a company?
On first registration, a memorandum of association is required to be filed. It contains a statement of the initial subscribers’ intent to form a company and that they agree to become members. Also required is the proposed name of the company, the location of the registered office, details of the company’s business activity and SIC (Standard Industrial Classification) code, whether the company will be limited by shares or guarantee, whether the company is private or public, a statement of share capital and initial shareholdings, a statement of the proposed directors (and company secretary, if applicable), details of persons with significant control (PSCs), a statement of compliance with the terms of the Companies Act 2006, and payment of the relevant fee.
Who has the power to allot more shares of a company?
The board of directors per Model Articles (provided unamended).
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A company was incorporated several years ago and has adopted the Companies (Model Articles) Regulations 2008 (unamended) for private companies limited by shares as its articles of association. It now wishes to raise capital by issuing more shares.
Currently, the company has only two shareholders: Shareholder Able holds 600 ordinary shares, and Shareholder Baker holds 300 preference shares. No resolution has been passed to disapply pre-emption rights. The company wants to issue another 600 £1 ordinary shares at a £99 premium.
How many shares must be offered to each shareholder?
(D) Able must be offered all 600 shares. When a company allots ordinary shares after the initial allotment, existing ordinary shareholders have a right to purchase a portion of the shares to maintain their proportional ownership if the shares are to be issued for cash. This is called the preemption right. Here, the company is seeking to issue 600 new shares at £100 per share (£1 plus a £99 premium). Since Able is the only ordinary shareholder and Able holds 100% of the issued ordinary shares, Able must be offered 100% of the shares to be allotted. As Baker does not hold any ordinary shares, Baker would not have any pre-emption rights in the shares to be allotted. (A), (B), and (C) are incorrect because they offer a pre-emption right to Baker. (E) is incorrect because the fact that the company has more than one class of stock does not negate the pre-emption right of ordinary shareholders.
How can express actual authority arise?
ONLY MAJORITY REQUIRED NOT CONSENT OF ALL - Express actual authority can arise from an agreement of a majority of the partners. Express actual authority is the authority the partners expressly agree a partner has. Such authority can be granted in the partnership agreement or by any other agreement of the partners. Since most partnership decisions can be made by a majority vote, express actual authority may be granted by a vote of the majority.
What is required when forming a limited partnership?
Must make filing at Companies House
On 1 January 2021, Isaac sold a freehold property for £400,000 that he had acquired for £180,000. In the previous year, on 1 June 2020, Isaac bought a freehold property for £360,000. Both properties were used for trading purposes. Isaac is a higher rate taxpayer.
What is Isaac’s capital gain tax liability for tax year 2020/21?
£5,540
Due to a qualifying business asset being purchased within the requisite time period (1 January 2020 to 31 December 2024), replacement of business asset relief is available. As the sale proceeds have not been fully reinvested, some of the gain cannot be deferred (£400,000 − £360,000 = £40,000). After deducting the annual exemption (£40,000 − £12,300 = £27,700), CGT will be payable at 20% as Isaac is a HRTP. Entrepreneur’s relief is not available on the disposal of an asset in isolation.
when does personal allowance get tapered?
Income over £100k
A VAT-registered engineer agreed to do some work for a client on a flat fee scheme. The client paid the engineer the orally agreed amount on 10 April, and the engineer sent an invoice to the client on 15 April.
The engineer commenced working on 1 June and concluded his work on 31 August.
What is the tax point for VAT purposes?
10th April
In cases where the payment is made and the invoice is issued before the good or service is supplied, the tax point is the earlier of the payment or invoice date which, here, is 10 April
A mechanic operating as a sole trader has approached his solicitor seeking advice as to how much he will be required to pay when his first payment on account falls due for 2023/24. His income tax payable for 2022/23 was £48,000 and for 2023/24 £56,500.
What amount should the solicitor tell the client?
£24,000. Payments on account are always calculated using 50% of the prior year’s income tax payable figure. So, for 2023/24, the payments on account will be calculated using 50% of 2022/23 income tax payable. 50% of £48,000 = £24,000.
£26,250. The electrician has total income of £105,000 (trade profits plus dividend income). From that amount, qualifying loan interest relief will be given for the £3,500 interest paid on the loan taken out to pay the IHT liability. This leaves the electrician with net income of £101,500. This is above the £100,000 threshold, so the £12,500 personal allowance needs to be tapered £1 for every £2 of income above £100,000. So, the personal allowance will be reduced by £750 to £11,750. The personal allowance will be deducted from the non-savings income (trade profits - interest on the qualifying loan), leaving £69,750 taxable. The first £37,500 will be at the basic rate of 20%, the remainder at the higher rate of 40%. £2,000 of the dividends are covered by the dividend allowance, leaving the remaining £18,000 to be taxed at the higher rate for dividends of 32.5%.
A sole trader has incurred the following expenses in a year in which the annual investment allowance was £200,000:
- Motor expenses costing £450 for her car that she uses 70% for business
- £4,000 electricity and gas used by the business
- Legal fees of £850 in respect of the acquisition of the business premises
- £1,500 for the acquisition of a laptop to be used within the business
What amount can be deducted when calculating the sole trader’s taxable trading income?
£5,815. Only the business proportion of revenue expenses are allowable, so only 70% of the motor expenses can be deducted. The electricity and gas expense is wholly related to the running of the business and, therefore, deductible in full. The legal fees for the acquisition of the premises and the cost of the laptop are one off capital expenses and are not deductible as revenue expenses. However, the £1,500 laptop expense can be deducted under the annual investment allowance (as it falls within the deduction for plant and machinery). Therefore, the amount which can be deducted is (£450 x 70%) + £4,000 + £1,500= £5,815.
During the 2022/23 financial year, a UK technology start-up company had revenues of £800,000. Salaries and wages added up to £300,000. Interest on business loans was a further £10,000. The company also purchased some IT equipment for £100,000. The annual investment allowance for 2022 is £200,000.
What is the company’s taxable profit?
£390,000. As a general rule, all costs are allowed to reduce corporate income unless an exception applies. No exception applies to salaries and wages or interest on a business loan. Therefore, the £300,000 in salaries and wages is fully deductible, as is the £10,000 in business interest. Generally, business plant and machinery costs are deductible at the rate of 6% or 18% per year. However, the £200,000 annual investment allowance may be taken to offset the cost of qualifying assets (that is, long-term assets used by the company to provide a good or service, such as the £100,000 IT equipment here). Thus, the full £100,000 purchase price of the equipment is deductible and not just £18,000. (A) is incorrect because the wages and salaries expense are fully deductible too.
A company director received a salary of £90,000. She was also awarded a discretionary bonus of £30,000, which she received on 1 January 2022. The director also received £10,000 interest from cash deposits with a building society and £25,000 in dividends.
For tax year 2021/22, the personal allowance was £12,570. The basic rate applied to income up to £37,700, the higher rate applied to income from £37,701 to £150,000, and the additional rate applied to amounts above £150,000.
What is the tax due on the director’s interest?
£4,000. The director is an additional rate taxpayer as her total taxable income is in excess of £150,000 (£90,000 salary + £30,000 bonus + £10,000 + £25,000 dividends = £155,000). She is not entitled to a personal allowance, as that phases out £1 for every £2 for taxpayers with income in excess of £100,000. Her nonsavings, nondividend income is taxed first (£90,000 salary + £30,000 bonus). Next, interest is taxable. Additional rate taxpayers are not entitled to any personal savings allowance, so the £10,000 will be taxed within the band into which it falls. Here, the full £10,000 falls within the higher rate band since it’s on top of the £120,000 nonsavings, nondividend income we already took into account and does not exceed the additional rate band threshold (£150,000 for the tax year involved in the question). So it will be taxed at 40%. (£10,000 x 0.40 = £4,000). Remember, even if someone is an additional rate tax payer, they only pay additional rate on any income that goes into the additional rate band, not on all income they have made. Dividends will be taxed after that. The question does not ask about tax on the dividends, but the part still within the higher rate band will be taxed at the dividend higher rate and the part exceeding this band will be taxed at the dividend additional rate.
A woman purchased a house in London as her principal private residence on 1 April 2011. The woman lived in the house until 1 April 2017, when she went to work in Scotland for her employer. She returned to London on 1 June 2021. However, on her return, the woman went to live with her daughter and the house remained empty until it was sold on 31 August 2023.
How many months of ownership are exempt from capital gains tax under principal private residence relief?
- The woman actually lived in the house for six years, April 2011 until April 2017, which is 72 months. The last nine months of ownership will always be exempt provided that the taxpayer occupied the property as their home at some time. The woman does not qualify for the absence due to working elsewhere counting as occupation for up to four years nor for the absence for any reason counting for up to three years, as she did not reoccupy the home when she returned from Scotland.
On 1 January 2023, a woman sold a freehold property for £400,000 that she had acquired for £180,000. In the previous year, on 1 June 2022, the woman had bought a freehold property for £360,000. Both properties were used for trading purposes.
The woman is a higher rate taxpayer and so pays capital gains tax at 20%. The annual exempt amount for the tax year was £12,300.
What is the woman’s capital gain tax liability for tax year 2022/23?
£5,540. Replacement business asset relief (also known as roll-over relief) applies here. When a person disposes of qualifying business assets (such as land, buildings, and plant and machinery) and reinvests the proceeds in other qualifying business assets within one year before or three years after the sale, relief from the gain is available to the extent the proceeds were reinvested. Here, the woman had realised a £220,000 gain on 1 January 2023 from the sale of her trading property. But she had purchased other trading property on 1 June 2022, which is within the year before the sale. However, as the sale proceeds have not been fully reinvested, some of the gain cannot be deferred: £400,000 – £360,000 = £40,000. After deducting the annual exemption (£40,000 - £12,300 = £27,700), CGT will be payable at 20% (£27,700 x 20% = £5,540). Note that business asset disposal relief is not available on a disposal of an asset in isolation. The gain that can be deferred, £180,000 (£220,000 – £40,000), will be deducted from the cost of the replacement asset going forward.
A company has an accounting period that ends 31 December. The company has taxable total profits of £260,000 for the year ended 31 December 2023, comprising trade profits of £200,000 and a capital gain of £60,000 from the sale of a piece of equipment. The applicable corporation tax rate is 25%.
What is the corporation tax payable by the company for the year ended 31 December?
£65,000. The applicable corporation tax rate is 25%. Companies pay corporation tax on their total profits, including chargeable gains. Companies do not pay capital gains tax on their gains and do not get a deduction for the annual exemption. So, £260,000 x 25% = £65,000.
A company has an accounting period that ends 31 March. It has a corporation tax liability of £45,000 for the year ended 31 March 2023.
When is the corporation tax due for the accounting period ended 31 March 2023?
By 1 January 2024. Companies which are not large (generally, companies with profits of less than £1.5 million) must pay their corporation tax nine months and one day from the end of the accounting period.
