Business Law and Practice - FLK1 Flashcards
1
Q
What are the characteristics of a sole trader?
A
Someone who runs an unincorporated business on their own as a self-employed person
Personally liable for all of the debts of the business.
Unlimited liability
2
Q
What are the characteristics of a partnership?
A
Exists when two or more people run and own a business together.
An unincorporated business.
Partners have a common view of making profit, and will divide the profits or losses of the business between them.
Partnerships are not separate legal entities, and have unlimited liability.
If a partnership becomes insolvent, each partner is jointly and severally liable for all the debts of the partnership.
3
Q
What are the characteristics of a limited partnership?
A
Must be at least one general partner who has unlimited liability for the debts.
Permitted to have a limited partner whose liability is limited to the amount they initially invested in the business.
The partner cannot control or manage the LP or have the power to make binding decision on behalf of the business, or remove their contribution to the LP.
4
Q
What are the characteristics of a company?
A
Private companies limited by shares:
- separate legal personality
- shareholders have limited liability
- will be liable only to the extent of any amount unpaid on their shares
- decision-making is to the directors/shareholders
- Directors make decisions at board meetings
- Shareholders make decisions at general meetings
- can offer shares to member of the company or a targeted person only not the public
- subject to less regulation than public
Public companies limited by shares:
- plc must be at the end of the company’s name
- company owners must invest a specified amount of money for use by the company - the authorised minimum, which is currently 50,000.
- can make money by offering shares to the public
- can apply to join the stock market
- more regulation
5
Q
What are the characteristics of a limited liability partnership?
A
A LLP is formed under the LLPA 2000
Has a separate legal personality distinct from its owners.
Has limited liability protection for debts.
Run with the informality of a partnership, partners are taxed as if the business were a partnership.
Formed by two or more members carrying on a lawful business with a view of profit.
Can be registered the same day.
Individual members of an LLP must register with HMRC as self-employed.
6
Q
What type of business is best?
A
Liability
- LLP
Formalities
- Least: sole trader and partnerships
- Company and LLP are more time-consuming and costly
- LLP offers more freedom in decision-making
Publicity of information
- Sole traders and partnerships must disclose identities, and address for service of documents.
- Companies and LLPs reveal specific and financial information to the public at large.
Cost
- least: sole traders and partnerships
- Companies and LLPs require a charge and will cost more to run
Finance
- Companies and LLPs can offer an additional form of security for loans, the floating charge, which is a charge over all of the business’s assets.
- Not available to partnerships or sole traders.
7
Q
How does one incorporate a new company?
A
- Companies House form IN01 and submit it along with 2. memorandum of association, and
- the company’s articles of association, and
- pay the applicable fee.
8
Q
What is the rule for the required ending for company names?
A
Private companies: Limited or Ltd
Public companies: plc or public limited company
9
Q
What is a companies registered office?
A
Companies need to have a registered office and need to insert the address of the office on the IN01.
This is publicly available and cannot be private.
A board resolution is required to change a companies registered office.
10
Q
What is the rule for first directors?
A
Applicant will need to decide who the company’s director or directors will be and include their name and date of birth on the IN01.
every company must have at least one director, and public companies must have two or more.
their service and residential addresses must be inserted on the IN01 form.
11
Q
What is the rule for first shareholders?
A
The company’s first shareholders are subscribers and their names, addresses, and details of their shareholdings need to be entered on the IN01.
12
Q
What is the rule for statement of capital?
A
The applicant must provide information about the shares on the IN01.
13
Q
What is the company’s constitution?
A
- Memorandum of association
- Articles of association
- Certificate of incorporation
- Current statement of capital
- Copies of any court orders and legislation
- Shareholders’ resolutions affecting the constitution
- Certain agreements involving shareholders.
14
Q
What are the rules on amending the articles?
A
Shareholders can amend the articles by special resolution.
Must be filed at Companies House within 15 days.
15
Q
What are the three options to submitting the company’s proposed articles?
A
- Adopt model articles as they are
- Adopt model articles with some amendments
- Supply entirely bespoke articles
16
Q
What are the percentages of control that are deemed to be significant?
A
- hold more than 25% of the shares
- holds more than 25% of the voting rights
- hold the right to appoint or remove a majority of the board of directors.
17
Q
How to convert from a private to a public company?
A
Apply for re-registration at the companies house
- special resolution
- form RR01 and statement of compliance
- fee
- revised articles
- a balance sheet and written statement from the company’s auditors
- 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.
18
Q
What are shelf companies?
A
A company which has already been set up, usually with two directors and two shareholders.
Created and left on the shelf at the law firm until a client needs a company quickly.
19
Q
How can a company change its name?
A
Through special resolution of the shareholders and file form NM01 at the Companies House, and pay the applicable fee.
20
Q
If a member has a shareholding of 100% what are their shareholder’s rights?
A
Pass all resolutions
21
Q
If a member has a shareholding of 75% what are their shareholder’s rights?
A
Pass or block a special resolution
22
Q
If a member has a shareholding of over 50% what are their shareholder’s rights?
A
Pass an ordinary resolution
23
Q
If a member has a shareholding of 50% what are their shareholder’s rights?
A
Block an ordinary resoltuion
24
Q
If a member has a shareholding of over 25% what are their shareholder’s rights?
A
Block a special resolution
25
If a member has a shareholding of 10% what are their shareholder’s rights?
Demand a poll vote
26
If a member has a shareholding of 5% what are their shareholder’s rights?
Circulate a written resolution
Requisition a general meeting
Circulate a written statement
27
What can any shareholder have the right to do?
- Vote (if they hold voting shares)
- Receive notice of general meetings
- Send a proxy to general meetings
- Receive a dividend (if declared)
- Receive a share certificate
- Have their name on the register of members
- Receive a copy of the company's accounts
- Inspect minutes and registers
- Ask the court for a general meeting
- Restrain a breach of directors' duties
- Bring an unfair prejudice petition
- Bring winding-up proceedings
- Instigate a derivative action
28
What are the types of directors?
executive and non-executive
29
What are executive directors?
Appointed to the board of directors and also have an employment contract.
30
What are non-executive directors?
Appointed to the board and will be registered at Companies House as directors of the company, but will not have a service agreements with the company.
31
How can directors appoint a director to chair board meetings?
A chairperson is appointed by passing a board resolution.
32
What are de facto directors?
A person who acts as a director although they have never been appointed.
33
What is a shadow director?
A person in accordance with whose directions or instructions the directors of the company are accustomed to act, but who has not been formally appointed as a director.
34
What is the quorum for directors' meetings?
Under the model articles, it's two.
In companies with only one director, the director can still validly take company decisions because the model articles allows them to make decision without calling a board meeting.
35
What is an alternative director?
Someone appointed instead of the director to attend a board meeting. Not provisioned by the model articles, so a company must put a special article into its articles of association to allow its directors to send an alternative on their behalf.
36
How can a director be appointed?
By the board or by ordinary resolution of the shareholders.
37
How can a director be removed?
Shareholders can remove a director by ordinary resolution passed at a general meeting.
38
What is the special notice required for removal of a director?
Special notice is required for a resolution to remove a director. Ordinary resolution is not effective unless notice of the intention to pass it has been given to the company at least 28 days before the general meeting at which the resolution is proposed.
39
What are director's duties?
Duty to:
- act within powers
- promote the success of the company
- exercise independent judgment
- exercise reasonable care, skill and diligence
- avoid conflicts of interest
- not accept benefits from third parties
- declare interest in a proposed transaction or arrangement
40
What is ratification of breach?
Shareholders can ratify a breach of potential breach of a director's duty by ordinary reolsution.
41
What are the rules on giving loans to directors?
A company may not make a loan to a director of the company or its holding company unless the transaction has been approved by the company's shareholders by ordinary resolution.
Exceptions to the ordinary resolution requirement:
- spending on company business
- spending on defending civil or criminal proceedings in relation to the company or an associated company
- spending on defending regulatory proceedings or defending himself or herself in an investigation.
- minor and business transactions below 10,000.
42
What is a derivative claim?
Any member has the right to bring a derivative claim on behalf of the company against directors and third parties who have breached their duties
43
When can a derivate claim be brought?
In respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty, or breach of trust by a director of the company.
44
Who is the remedy of a derivative claim granted to?
The company not the shareholder bringing the claim.
45
What is an unfair prejudice claim?
any shareholder can bring an unfair prejudice claim on the ground that the running of the company has unfairly prejudiced them
It is a personal action brought by the shareholder against the company
46
What is just and equitable winding up?
It is possible but rare for a minority shareholder to apply to bring a petition to the court the company to be wound up because it is just and equitable to do so.
47
What is the most common remedy that the court will order in a claim for unfair prejudice?
An order that the other shareholders or the company buy the claimant shareholders' shares from them.
48
What is the allotment of shares?
An allotment of shares is a contract between the company and a new/existing shareholder under which the company agrees to issue new shares in return for the purchaser paying the subscription price.
49
What is the transfer of shares?
A transfer is a contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is not a party to the contract on a transfer of shares with the exception of a sale of treasury shares).
50
What is the buyback of shares?
Buyback is where the company buys back some of its own shares from one or more shareholders. Buyback is like the reverse of an allotment.
Instead of new shares being created, the company 'reabsorbs' some of it shares so that the total number of shares in the company decreases. The shares that the company has bought back are cancelled.
51
What are pre-emption rights?
Rights of first refusal over shares which are being allotted.
52
Are there any constitutional restrictions on allotment?
For companies incorporated before 1 October 2009, check whether they have updated their articles since that date. If not, the shareholders will need to pass an ordinary resolution to remove the authorised share capital clause.
For all companies, check the company's articles for a limit on the number of shares the company can have. If there is such a limit, change the articles by special resolution.
53
Do directors have authority to allot shares?
Private companies incorporated under the CA 2006 with one class of shares have authority to allot shares without shareholder approval; all that is needed is a board resolution.
Plcs and private companies with more than one class of share may have authority to allot in their articles. If there is no authority in the company's articles, the shareholders will need to pass an ordinary resolution to allot shares.
54
Are there any pre-emptions rights for the allotment of shares?
Pre-emption rights which differ from those set out in the CA 2006, are sometimes contained in the company's articles, so these should be checked first, and removed by special resolution if necessary.
If the pre-emption rights under s561 apply, because the company's articles have not changed the position, they can be disapplied by special resolution.
Where the company is disapplying pre-emption rights under s571 CA 2006, the directors must make a written statement justifying the disapplication of pre-emption rights.
55
What is the method for transferring shares?
A transfer of shares is made by way of a stock transfer form, which has to be signed by the transferor and submitted, with the share certificate, to the new shareholder.
56
What are the principles of the maintenance of share capital?
- Dividends cannot be paid out of capital, just out of distributable profits; and
- The company must not generally purchase its own shares.
57
When is the transmission of shares automatic?
It's an automatic process in the event of death of or bankruptcy of a shareholder.
58
What are dividends?
Shareholders will often receive dividends. A company can pay a dividend if it has profits available for the purpose.
If, in particular year financial year, the company has not made any profit, it can use profits from previous years to pay a dividend if it wishes.
It is the directors who decide whether or not to recommend that a dividend be paid and how much it should be.
The shareholders must then pass an ordinary resolution in order for this to be approved.
59
What is debt finance?
Debt finance is required by businesses, either to help them to purchase items necessary to start trading, to enable them to expand or to help them through temporary cash flow difficulties.
60
What are the two main types of debt finance?
Loan facilities and Debt securities
61
What is a loan?
A loan is where a business borrow money from a bank or another lender, such as its owner (for a sole trader or partnership) or its directors or shareholders (for a company).
62
What are debt securities to investors?
These are IOUs which are issues by the company to the investor in return for a cash payment, an have to be repaid by the company at an agreed future date.
63
What is a key method of protection for the lender?
If company is unable to repay the loan, a lender can take security over the assets of the borrowing company.
64
What is an overdraft?
An overdraft facility is a contract between the business and its bank which allows the business to go overdrawn on its current account.
Advantage: flexible source of finance and relatively few formalities are required to arrange it
Disadvantage: repayment may be demanded at any time by the bank and can be expensive and banks charge high interest rates.
65
What is a term loan?
A loan of money for a fixed period of time, repayable on a certain date. The lender cannot demand early repayment unless the borrows is in breach of the agreement. Interest is paid at regular intervals throughout the period.
Advantage: greater certainty as the borrower has greater control because the bank can only request payment under the terms of the contract.
Disadvantage: Time and expense in negotiating and agreeing all the legal documentation for such a loan and once repaid the money cannot then be re-borrowed by the business.
66
What are debt securities?
Another type of debt finance. They are a means by which the company receives money from external sources. In return for finance provided by an investor, the company issues a security acknowledging the investor's rights.
e.g. a bond.
67
What is a debenture?
Used to describe a loan agreement in writing between a borrower and a lender that is registered at the Companies House. It gives the lender security over the borrower's assets. Sets out the details of the security provided.
Only companies and LLPs can enter into debentures, sole traders and general partnerships cannot.
68
What are representations?
Statements of fact as to legal and commercial matters made on signing of the loan agreement and repeated periodically during the life of the loan.
69
What are undertakings?
Promises to do or not to something, or to procure that something is done or not done.
70
What is an event of default?
Breaching representations or undertakings gives the bank contractual remedies where the breach constitutes an Event of Default.
This clause gives the bank the power to call in its money early if the borrower shows signs of becoming an enhanced credit risk.
71
What are charges as a type of security?
They do not transfer legal ownership from the charger to the chargee and does not give the chargee the right to immediate possession of the property.
It gives the lender rights over the asset should the borrower fail to repay the money borrowed.
72
What is a fixed charge?
May be taken over property such as machinery and shares owned by the company/LLP in other companies.
The chargor must create a separate fixed charge over each asset.
73
What is a floating charge?
It secures a group of assets, such as stock, which is constantly changing. It is possible to create more than one floating charge over the same group of assets.
advantage: it allows it to deal with thee secured assets on a day-to-day basis and allows the chargor to maximise the amount that it is able to borrow. Also, can be taken over the whole of a company/LLP.
disadvantage: the company could sell existing stock and not replace it, meaning that the lender does not have a charge over anything. Also, if the company becomes insolvent, other creditors may claim money from the proceeds of sale of the assets covered by the floating charge.
74
What is a mortgage?
Highest form of security. A mortgage, with the exception of land, involved the transfer of legal ownership from the mortgagor (company/LLP) to the mortgagee (the lender); right to possession is exercised only if money is not repaid.
75
What are other forms of security?
Personal guarantees
A pledge
A lien
Retention of title
76
What is the time limit for registration of charges?
Within 21 days beginning with the day after the day on which the charge is created.
77
What is the effect of failing to register charges?
Charge is void and the debt become immediately payable.
78
What is crystallisation of a floating charge?
It stops floating and fixes to the assets in the relevant class which are owned by the security provider at the time of crystallisation.
Will usually occur when the borrower has breached certain significant terms of the loan agreement.
79
What is dissolution in a partnership?
Automatic dissolution
Partnership ends, all assets must be sold, and the outgoing partner has to receive their share and can insist on the business being sold.
Partial dissolution
Partnerships agreement states that in the even that a partner leaves, the remaining partners will continue seamlessly with one less partner.
80
What are partner' responsibilities under the PA 1890?
- Must be completely open with each other regarding any information relating to the partnership.
- Must account to the firm for any private profits they have earned without consent from any transaction concerning the partnership.
- Must not compete with the firm
- Share any losses made by the business
- Indemnify fellow partners who have borne more than their share of any liability or expense connected with the partnership.
81
What are the rules of insolvency in a partnership?
An insolvent partnership can be wound up as un unregistered company or may use the rescue procedures available to company, such as voluntary agreement with creditors or an administration order of the court.
82
What is the main advantage and disadvantage of an LLP?
advantage: members have limited liability
disadvantage: administrative and accounting requirements
83
What is the annual investment allowance?
Allows businesses to deduct the whole costs of plant and machinery purchased in that particular accounting period from chargeable receipts.
AIA = 1,000,000 until 31st March 2023
84
How are trading profits calculated?
chargeable receipts LESS deductible expenditure LESS capital allowances (including AIA) = trading profits/loss
85
What are chargeable receipts?
Money received for the sale of goods and services
86
What is deductible expenditure?
Must be of an income nature (e.g. stock), and incurred 'wholly and exclusively' for the trade.
87
What are capital allowances?
Capital allowances allowed businesses to deduct a proportion of the costs of most capital items from chargeable gains.
88
What is pooling?
All plant and machinery is generally pooled, and the writing down allowance is calculated each year on the basis of the value of the whole pool.
89
What is the relief for a trading loss of an unincorporated business?
1. Start-up loss relief / early trade losses relief
2. Carry-across/one-year carry-back relief
3. Set-off against capital gains
4. Carry-forward relief
90
What is start-up loss relief / early trade losses relief?
Available when the taxpayer suffers a loss in any of the first four tax years of the new business.
The loss can be carried back and set against the taxpayer's total income in the three tax years immediately prior to the tax year of the loss.
Loss must be set against earlier years before later years. Claim 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.
91
What is carry-across/one-year carry-back relief?
Trading losses in an accounting period are treated as losses of the tax year in which the accounting period ends.
Losses can be:
1. set against total income from the same tax year
2. set against total income from the tax year preceding the tax year of loss
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
4. set against total income from the tax year preceding the tax year of 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.
92
What is set-off against capital gains relief?
Allows the taxpayer to set trading losses against chargeable capital gains and income in the same tax year, and applies when a taxpayer has claimed carry-across relief but not all of the loss have been absorbed.
Must be claimed on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed.
93
What is carry-forward relief?
A taxpayer may carry forward their trading loss for a tax year and set it against subsequent profits which the trade produced 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.
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.
94
How many reliefs can a taxpayer use?
All of them in relation to the same loss until the loss is wiped out.
95
What is value added tax?
VAT is charged every time a business supplies goods and services.
Current rate is 20%.
96
What supplies are exempt from VAT?
supplies of residential land, postal services, education and health services.
97
Who is obliged to register VAT?
Anyone making taxable supplied of more than 85,000 in any 12-month period must register and charge VAT.
98
How can a business reclaim input tax?
If they register VAT
99
What are the options for an insolvent company?
Liquidation, administration, or a company voluntary agreement (CVA).
100
What is liquidation?
When a business tops trading, its assets are sold, and the company ceases to exist.
101
What are the three types of liquidation?
1. Compulsory liquidation
2. Creditors voluntary liquidation (CVL)
3. Members voluntary liquidation (MVL)
102
What is compulsory liquidation?
Commenced by a third party (creditor) presenting a winding up petition at court and commences insolvency proceedings.
103
What is creditors voluntary liquidation?
Initiated by the company but directors are usually pressured by directors to go into CVL.
104
What is members voluntary liquidation?
Only available if the company is solvent, and if, during an MVL, the liquidator realises that the company is insolvent, they must convert the MVL to CVL.
Used for when directors want to retire or cease trading.
105
What are preferences in insolvency?
Where the company puts the other person in a better position, in the event that the company went into insolvent liquidation or administration, than they would have been in otherwise.
A liquidator or administrator can challenge a transaction where the company, at the relevant time, has given a preference to someone else.
106
What are transactions at an undervalue?
An undervalue is where the company makes a gift to the other person, or enters into a transaction and receives consideration which is significantly lower in value than the consideration provided by the company.
107
What is fixed-asset recievership?
Fixed charge receivers are appointed by the holders of a fixed charge pursuant to the terms of the security documentation.
They are appointed to enforce the security and recover the debt that is owing to their appointer, often a bank.
A fixed charge receiver become the receiver and manager only of the property charges and is only entitled to deal with that property and not any other
property of the company.
A fixed charge receiver cannot be appointed while a pre-insolvency moratorium subsists or if the company is in administration.
108
What is administration?
Administration is a collective procedure for the benefit of the creditors as a whole, Administrators are insolvency practitioners who may be appointed by the court but are more likely to be appointed using the out of court procedure by either the company/directors or a QFCH.
The administrator performs their duties in accordance with the statutory objectives.
Once the administrator is appointed, the directors are unable to exercise any of their powers without the consent of the administrator. The administrator has wide powers to manage the company and may also bring actions against directors.
The appointment of an administrator gives rise to a moratorium, protecting the company from hostile actions by creditors.
109
What is fraudulent trading?
Claims for fraudulent trading may be brought by a liquidator or an administrator.
The claim can be brought against any person who is knowingly party to the carrying on of any business of the company with intent to defraud creditors or for any fraudulent purpose, including directors and banks.
Actual dishonesty must be proven on a subjective basis.
A person found to be liable can be ordered to make such contribution to the company’s assets as the court thinks proper. There is no punitive element to the remedy however – the contribution should only reflect and compensate for the loss caused to the creditors.
The court is likely also to make a disqualification order under s 10 CDDA 1986 where a director has been found liable for fraudulent trading.
There is also a criminal claim for fraudulent trading under s 993 CA 2006. The remedies for this are up to 10 years' imprisonment or fines.
110
What is wrongful trading?
Claims for wrongful trading may be brought by a liquidator under s 214 IA 1986 or an administrator under s 246ZB IA 1986.
The claim can be brought against any person who was at the relevant time a director.
The court must be satisfied that at some time before the commencement of the winding up or insolvent administration, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation (or insolvent administration).
A director may be able to escape liability if they can satisfy the court that, after they first knew or ought to have concluded that there was no reasonable prospect of the company avoiding an insolvent administration or liquidation, they took "every step with a view to minimising the potential loss to the company’s creditors" (s 214(3) / 246ZB(3).
The court applies the reasonably diligent person test under s 214(4) / 246ZB(4).
A person found to be liable under s 214 / 246ZB can be ordered to make such contribution to the company’s assets as the court thinks proper and may also be disqualified under s 10 CDDA 1986.
111
What is the difference between fraudulent and wrongful trading?
In practice, a very high standard of proof is required for a successful claim in fraudulent trading, which is likely to be extremely difficult for a liquidator or an administrator to establish.
It is for this reason that claims for fraudulent trading are rare and claims for wrongful trading are more often brought against directors.
112
When can floating charges be avoided?
For the floating charge to be invalid:
1. The floating charge must have been created within the ‘relevant time’. The relevant time is 12 months preceding the onset of insolvency, ie the commencement of administration or liquidation.
The relevant time is extended to 2 years in the case of a floating charge granted to a connected person
2. Unless the floating charge was granted to a ‘connected person’ or an ‘associate’ (in which case there is no insolvency requirement), it must be proved that the company was insolvent (on either a cash-flow or balance sheet basis) at the time of the floating charge’s creation or became insolvent in consequence of the transaction under which the charge was created.
113
What are the liquidators powers to avoid certain transaction and maximise the amount of assets available for distribution to creditors?
* Disclaim onerous property
* Apply to court to set aside a transaction at an undervalue
* Apply to court to set aside a preference
* Apply to court to set aside, or vary the terms of, an extortionate credit transaction
* Claim that a floating charge created for no new, or inadequate, consideration is invalid
* Apply to court to set aside a transaction that will defraud creditors
114
What is an IVA?
Individual voluntary agreements
It is a contractual arrangement under which a debtor comes to an arrangement with their creditors eg to settle their debts by paying a proportion of the debts. It is a flexible procedure that can be tailored to a debtor’s circumstances. It usually requires the debtor to make funds available to their creditors out of their income or assets, or a combination of both.
115
What is bankruptcy?
A bankruptcy petition is usually brought by a creditor but may also be made by the debtor.
116
What is the order of priority of payment in bankruptcy?
The bankruptcy order of priority differs from the order of priority in corporate insolvencies and is as follows:
1. secured creditors (but limited to the value of the security itself and ranking with ordinary unsecured creditors for any excess amount owing);
2. expenses of the bankruptcy;
3. specially preferred creditors (training/apprenticeship fees);
4. preferential creditors (similar to those on corporate winding up);
5. ordinary unsecured creditors;
6. statutory interest;
7. debts of a spouse (must be provable but they are postponed to other creditors); and
8. finally, any surplus is payable to the bankrupt.
117
What is the income tax calculation?
In order to calculate an individual’s income tax liability correctly, the following formula should be followed:
Step 1 Calculate Total Income
Step 2 Deduct available tax reliefs (interest on qualifying loans and pension contributions) = Net Income
Step 3 Deduct Personal Allowance**(**reduced by £1 for every £2 of net income above £100,000) = Taxable Income
Step 4 Split the Taxable Income into non-savings, savings and dividend income NB. Taxable Income less (savings income and dividend income) = non-savings income
Step 5 Calculate any personal savings allowance that is available (ie looking at the Taxable Income figure to see which income tax band it ends in)
Step 6 Apply relevant tax rates
Step 7 Add together the amounts of tax calculated at step 6 = Total tax liability
118
What is the income tax calculation?
In order to calculate an individual’s income tax liability correctly, the following formula should be followed:
Step 1 Calculate Total Income
Step 2 Deduct available tax reliefs (interest on qualifying loans and pension contributions) = Net Income
Step 3 Deduct Personal Allowance**(**reduced by £1 for every £2 of net income above £100,000) = Taxable Income
Step 4 Split the Taxable Income into non-savings, savings and dividend income NB. Taxable Income less (savings income and dividend income) = non-savings income
Step 5 Calculate any personal savings allowance that is available (ie looking at the Taxable Income figure to see which income tax band it ends in)
Step 6 Apply relevant tax rates
Step 7 Add together the amounts of tax calculated at step 6 = Total tax liability
119
What is income tax?
Income tax is charged at different tax rates. The rate to be applied will depend upon (i) the type of income and (ii) which band the income falls into (basic, higher or additional rate bands).
Individuals pay income tax on their salaries via the PAYE.
Any tax deducted at source (such as PAYE) has effectively already been paid and must be deducted from the tax liability before payment of the tax is made to HMRC.
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What is the annual personal allowance and personal savings allowance for income tax?
Each individual is entitled to an annual Personal Allowance. The personal allowance is reduced by £1 for every £2 of net income above £100,000. If Net Income is £125,140 or above, none of the PA is available.
Some individuals have the benefit of the Personal Savings Allowance. For basic rate taxpayers, the first £1,000 of savings income is taxed at the savings nil rate and for higher rate taxpayers, the first £500 is taxed at the savings nil rate of 0% (in each case after the starting rate for savings has been applied, if applicable).
The first £2,000 of dividend income for all taxpayers is taxed at the dividend nil rate of
0%.
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What is Capital Gains Tax?
The idea behind Capital Gains Tax (‘CGT’) is to tax the profit that a person might make from disposing of a capital asset which has appreciated (increased) in value during their period of ownership.
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How is CGT charged?
CGT is charged where there is:
* a Chargeable Disposal
* of a Chargeable Asset
* by a Chargeable Person
* which gives rise to a Chargeable Gain.
CGT is charged on all gains made in the relevant tax year (i.e. 6 April to 5 April).
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What is a chargeable disposal?
Chargeable Disposal
The two main instances of disposal are as follows:
1. the sale of an asset; and
2. the gift of an asset during the tax payer’s lifetime.
There is no chargeable disposal on death. The personal representatives of the deceased’s estate are deemed to acquire the estate at its then market value. This is commonly known as ‘a free uplift on death’.
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What is a chargeable asset?
All forms of property are included in the definition of asset unless they are specifically excluded.
The main types of asset excluded from CGT are:
1. Principal private residence (‘PPR’)
2. Motor cars for private use
3. Certain investments, such as government securities, National Savings certificates, shares and securities held in Individual Savings Accounts (ISAs) and life assurance policies
4. UK sterling and any foreign currency held for your own or your family’s personal use.
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What is a chargeable gain?
A gain needs to have been made when disposing of the asset and in calculating the chargeable gain, the starting point is always the consideration received (or deemed to have been received).
Disposals to charities and between spouses are treated as made on a no gain/no loss basis. Gains made by charities are exempt provided that the gain is applied for charitable purposes.
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What is the calculation of a chargeable gain?
Sale proceeds (or market value)
Less disposal expenditure
= Net sale proceeds
Less initial expenditure
Less subsequent expenditure = Chargeable gain
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What are the three types of allowable expenditure?
Initial Expenditure
1. The cost price of the asset (the ‘base cost’); and
2. The incidental costs of acquisition (eg surveyors’ fees/lawyers’ fees).
Subsequent expenditure
1. Subsequent expenditure on the asset which enhances its value; and
2. Expenditure incurred in establishing, preserving or defending title to the asset.
Disposal expenditure
Incidental costs of disposal (eg agents’ commission).
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What is the annual exemption for individuals?
Every individual is entitled to an annual exemption.
The annual exemption for the tax year 2022/23 is £12,300.
This means that all individuals are entitled to make up to £12,300 of gains tax free in this tax year.
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What is the CGT calculation?
Sale proceeds/market value: A
Less disposal expenditure: (B)
= Net Sale Proceeds: C
Less initial expenditure: (D)
Less subsequent expenditure: (E)
= Total Chargeable Gain: F
Less carried forward or carried-across losses: (G)
Less annual exemption: (12,300)
= Taxable Chargeable Gain: H
Apply CGT to the Taxable Chargeable Gain (H) at the appropriate rate (10% or 20%)
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What are the reliefs available to mitigate CGT liability?
Business Asset Disposal Relief
Lifetime Allowance
Investors’ Relief (‘IR’)
Replacement of business assets relief (‘Rollover Relief’)
Gift of business assets relief (‘Hold-over relief’)
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What is Business Asset Disposal Relief?
Business Asset Disposal Relief reduces the higher rate of CGT from 20% to 10% for gains arising on qualifying disposals.
Business Asset Disposal Relief gives each individual a lifetime allowance, which is now set at £1 million.
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What is Investors’ Relief (‘IR’)?
IR was introduced to give a benefit to investors in unlisted trading companies who hold their shares for at least three years.
IR reduces the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares, subject to a lifetime limit of £10 million.
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What is Rollover Relief?
a. To avoid having to pay CGT each time certain business assets are sold and replaced, a taxpayer can elect to postpone the CGT liability it realises on the sale of such an asset by ‘rolling over’ the gain into the replacement asset.
b. This applies to land and buildings, fixed plant and machinery and goodwill. The new asset need not necessarily be of the same type as the old one. It merely needs to be within the list of qualifying assets.
c. The effect of the relief is that any gain arising from a disposal of a qualifying asset is carried forward and ‘rolled’ into the cost of a qualifying replacement asset. The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over.
d. Therefore, tax is postponed until the replacement asset is sold and no new qualifying replacement asset is purchased.
e. It is possible to roll over gains indefinitely provided sufficient qualifying assets are bought within the time limits.
f. The annual exemption cannot be used to reduce the gain rolled over.
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What is Hold-over relief?
a. Where an individual gives away a business asset, the donor (the person making the gift) and donee (the person receiving the gift) can claim hold-over relief. As a transfer at an undervalue or gift, the market value rule will apply. The donor will have no liability to CGT but the donee’s acquisition cost for CGT purposes is reduced by the amount of the donor’s deemed gain.
b. In effect the CGT liability is postponed until the donee ultimately disposes of the asset (although further hold-over relief can be claimed if the donee then gives away the asset).
c. As in the case of roll-over relief, the whole chargeable gain must be held over if a claim for hold-over relief is made. The donor cannot use his annual exemption to reduce the gain held over.
d. Hold-over relief may also be claimed where an asset is sold at undervalue but the hold-over relief will only be available on the gift element, ie the difference between the price paid and the market value.
e. Business assets on which hold-over relief may be claimed include goodwill, assets used in the business and shares in a trading company not quoted on a stock market.
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What is the three kinds of transfer IHT trigger events that affect inheritance tax and the business relief exemption?
* Potentially exempt transfers (‘PET’) – made by a person during their life
* Lifetime Chargeable transfers (‘LCT’) – made by a person during their life
* Death
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What is a PET?
A PET is a transfer of value made by a person during their lifetime (inter vivos) to another individual, eg a parent who gives their child a £10,000 contribution towards a deposit on a flat.
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What is an LCT?
All inter vivos transfers of value made by a person into a trust on or after 22 March 2006 will give rise to an LCT.
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How is death an IHT trigger event?
When a person dies there is a deemed transfer of all the assets that they own at the date of their death. It is this deemed transfer that gives rise to the IHT charge on death.
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What are the rates for IHT?
The rates of IHT are set annually by the budget for the tax year which runs from 6 April one year - 5 April the following year. For tax year 2022-2023 the rates are:
* £0 - £325,000 = 0% (the nil rate band (‘NRB’)) (NB. the NRB may be higher or lower in certain situations)
* Above the NRB - 40% (death rate); or - 20% (lifetime rate - always 1/2 death rate - applied to LCTs)
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What is the cumulative total?
Cumulative total = the total chargeable value of all the chargeable transfers made in the previous 7 years.
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What are the exemptions and reliefs that apply to IHT?
* Gifts to certain individuals or other entities are exempt from IHT. This means that they can be made completely free from IHT and do not use up the NRB.
* Gifts of particular assets benefit from reliefs. This means that, where the conditions of the relief are met, the amount of IHT payable is reduced (sometimes by 100%).
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What are the exemptions and reliefs that apply to both lifetime transfers and the death estate?
* Spouse exemption - Political party exemption
* Charity exemption - Exemptions for gifts for national purposes or to heritage
maintenance funds
* Business property relief - Exemption for gifts to EBTs (100% for unquoted company or 50% in a quoted company but only if shareholder had control)
* Agricultural property relief - Exemption for gifts to housing associations
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What is the calculation for IHT on lifetime transfers?
In order to calculate the IHT due on a failed PET or LCT the following formula should be used:
Step A – Calculate cumulative total
Step B – Identify value transferred
Step C – Apply exemptions and reliefs
Step D – Apply NRB and calculate tax Step E - Apply taper relief
Step F –Give credit for tax paid in lifetime
Note that Steps E and F only apply when the IHT is being calculated after death.
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What is the calculation for IHT on death estate?
n order to calculate the IHT due when someone dies it is necessary to follow this 7 step process:
Step 1 - Calculate cumulative total
Step 2 - Identify assets included in the taxable estate
Step 3 - Value the taxable estate
Step 4 - Deduct debts/expenses
Step 5 - Apply exemptions & reliefs (BPR fits into IHT calculation here Step 6 - Apply RNRB
Step 7 - Apply basic NRB and calculate tax
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What is the time limit for notifying HMRC if the value of taxable supples has passed the VAT threshold?
within 30 days of the end of that month and will be registered from the beginning of the second month
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Why would a person register voluntarily to the HMRC for VAT?
Voluntary registration means that input VAT can be recovered (which is helpful to a business in reducing costs). However, it also means that the business will have to charge output VAT on supplies of goods and services to its customers (which may make the business less attractive to customers than its unregistered competitors).
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What is output and input tax?
Output tax
The VAT chargeable by a business when making a supply of goods or services is called ‘output’ tax. The VAT relates to the ‘output’ of the business.
Input tax
The VAT paid by a person on goods or services supplied to the person is called ‘input’ tax. The VAT relates to goods and services ‘bought in’ by the person.
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What does a VAT registered business do with input and output tax?
A VAT registered business offsets input tax it has suffered (on goods and services it has purchased) against output tax it has charged customers or clients (on its own supplies) and only accounts for the difference to HMRC.
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What is corporation tax?
Corporation Tax is payable on:
* all income profits and
* chargeable gains
* of a body corporate
* that arise in its accounting period.
The sum of a company’s profits and gains is known as ‘TTP’ (taxable total profits chargeable to corporation tax).
Companies are assessed to corporation tax by reference to the financial year (1 April – 31 March). Note that because a company can choose its accounting period, it is often different to the financial year, which is the same for all companies.
The amount of TTP will determine the amount of corporation tax payable.
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What is the rate of corporation tax?
The rate of corporation tax for the tax year 2022/2023 was a flat rate of 19%. As of 1 April 2023, the main rate will increase to 25% for companies with profits greater than £250,000.
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What is the Calculation of TTP ?
Chargeable gains:
Sale proceeds [Allowable Expenditure] [Indexation Allowance] [Capital/Trading Losses] = Chargeable Gain
Income profits:
Income receipts [Deductible Expenditure] [Capital Allowances] [Trading Losses]
= Income Profits
Chargeable gain + Income Profits→TTP
