Business Tax

Question 1

Two brothers had been playing together with cars since childhood. As they grew older, their interest in toy cars transferred to an interest in real cars. As they did not have much money, when the eldest turned age 17, he bought an old car and the brothers worked together to bring it into top running condition. Upon seeing the work the brothers did, over the next few years a number of the brothers’ friends asked the brothers for help with their cars. The brothers required the friends to pay for the parts needed, but performed the work without charge. After several years of informally working on cars, the brothers decide to open a car repair business together. They then execute a written partnership agreement. A couple days later, the brothers signed a lease for premises in which they opened their repair business. On the first day the business was open, the brothers fixed a car for a friend and charge the friend for their labour.

When did the partnership come into existence?

Answer 1

When the brothers opened their business.

A partnership is formed when two or more people carry on a business in common with a view of profit. The brothers started carrying on their for-profit business on the first day they opened their repair business in their rented premises.

Question 2

A partnership is formed by three brothers. One brother devotes more than 60 hours per week to the business. The other two are sleeping partners who work for different companies having no relationship to the partnership. The working partner contributed £20,000 in capital to the partnership, and the other two brothers contributed £40,000 each. During the formation of the partnership, the brothers signed a partnership agreement that addresses how they will split profits and losses. At year-end, the partnership enjoyed large profits due to high demand for the business’s product line.

How will the profits be divided?

Answer 2

In accordance with the partnership agreement.

There is no requirement for any partnership to have a partnership agreement, but to the extent that it does, it will override any statutory provisions, that is, in this case the Partnership Act 1890.

Question 3

Two friends set up a partnership to make leather wallets and belts to sell at markets. One friend already owned a sewing machine suitable for working with leather, as making leather goods was his hobby. He offered to allow the partnership to use the machine in its business, though he insisted that the machine would remain his.

Since the partnership began, the sewing machine has broken several times and the partners used partnership funds to pay for its repairs. Partnership funds were also used to pay for regular maintenance of the machine. After three years, the partner who owned the sewing machine announced that he would like to retire from the partnership and that he would like to take back the sewing machine.

Does the partner have a right to take back the sewing machine?

Answer 3

Yes, because the partner never intended the sewing machine to become partnership property.

Property will be considered partnership property if it was brought into the partnership with the intention that it would be partnership property. Here, the partner made it clear at the beginning of the partnership that he wished his sewing machine to remain his property. The fact that the partner allowed the partnership to use the sewing machine

Question 4

What happens if a partner engages in a competing business without the consent of other partners?

Answer 4

If a partner carries on a competing business without the consent of the other partners, they are obligated to account to the partnership for all profits derived from that business. This ensures the partnership is compensated for any potential conflicts of interest.

Question 5

Does the Partnership Act require a partner to work full-time in the partnership?

Answer 5

No, the Partnership Act does not mandate a partner to work full-time in the partnership. Partners can contribute to the partnership in various capacities as agreed upon in the partnership agreement.

Question 6

What rights does a partner in a general partnership have under the Partnership Act 1890?

Answer 6

Under the Partnership Act 1890 (PA), a partner in a general partnership has the right to participate in the management of the partnership. This includes being involved in decision-making and day-to-day operations, unless otherwise agreed upon by the partners.

Question 7

How can a new partner be admitted to the partnership?

Answer 7

A new partner may only be admitted with the unanimous consent of all existing partners, as outlined in the Partnership Act 1890. This ensures all partners agree to the inclusion of a new member

Question 8

What rights does a newly admitted partner have?

Answer 8

Once admitted, a new partner has the same rights and responsibilities as the other partners, including the right to participate in the management of the partnership, unless the partnership agreement specifies otherwise.

Question 9

Can existing partners limit a new partner’s right to participate in management?

Answer 9

Yes, if all partners agree to specific terms in the partnership agreement, they can limit a new partner’s management rights. However, these restrictions must be explicitly stated in the agreement

Question 10

What happens if there is no consensus among partners about admitting a new partner?

Answer 10

If there is no unanimous consent, the new partner cannot be admitted into the partnership. Admission requires agreement from all existing partners under the Partnership Act 1890.

Question 11

Are partners personally liable for partnership debts?

Answer 11

Yes, under the Partnership Act 1890, any partner is personally liable for the full amount of a partnership debt. This liability is joint and several, meaning creditors can pursue any one or more partners for the entire debt.

Question 12

What is the role of a partner as an agent of the partnership?

Answer 12

Every partner acts as an agent of the firm and the other partners for the purpose of conducting the partnership’s business. Actions taken by a partner in the ordinary course of business will generally bind the partnership and all partners.

Question 13

Under what circumstances might a partner’s actions not bind the partnership?

Answer 13

A partner’s actions will not bind the partnership if:

The partner does not have the authority to act for the firm, and
The third party either knows the partner lacks authority or does not know or believe the individual to be a partner.

Question 14

How does apparent authority affect a partnership’s liability?

Answer 14

Apparent authority occurs when a partner appears to have the authority to act on behalf of the partnership in the ordinary course of business. In such cases, even if the partner lacks actual authority, the partnership may still be liable for the partner’s actions, provided the third party had no knowledge of any limitations on the partner’s authority.

Question 15

Does purchasing paper from a regular supplier for a printshop fall under apparent authority?

Answer 15

Yes, purchasing paper from a regular supplier for a printshop constitutes carrying on regular business. If there is no indication that the supplier was aware of any limitations on the partner’s authority, the partnership would be liable for the debt under apparent authority.

Question 16

Three sportswomen formed a partnership to sell licensed sporting memorabilia. The partners agreed that partner 1 would receive 40% of any partnership profits and partners 2 and 3 would each receive 30% of such profits. After a few years, the partners agreed to dissolve the partnership. At this time the partnership had losses of £30,000.

What is partner 2’s share of the undistributed losses?

Answer 16

£9,000

Partners must contribute equally to the losses of the partnership, whether capital or otherwise, unless there is any provision in the partnership agreement that states otherwise. However, if profits are shared unequally by virtue of a provision in the partnership agreement, on dissolution any remaining losses will be paid by the partners in the proportion to which they were entitled to share profits. Partner 2 is entitled to 30% of the profits under the agreement entered into by the partners, so will only be required to contribute 30% of the losses. 30% of £30,000 is £9,000

Question 17

A partnership has three partners, one of whom would like to retire, provision for which is contained in the partnership agreement. The retiring partner wants to ensure that after his retirement, he will have no liability to the partnership for partnership debts incurred after his retirement.

How can he ensure that his liability comes to an end?

Answer 17

Give notice to existing customers of his retirement and publish notice in the London Gazette.

Where a person deals with a partnership after a change in its constitution, they are entitled to treat all apparent members of the old partnership as still being members until notice of the change has been received. Therefore, a retiring partner needs to discharge themselves from liability for future debts of the partnership by giving notice of their retirement. Actual notice should be given to existing creditors, and notice by way of an advertisement in the London Gazette is required for new customers.

Question 18

How are decisions generally made in a partnership?

Answer 18

In a partnership, decisions are typically made by a simple majority vote unless the partnership agreement specifies otherwise. This rule applies to most routine decisions.

Question 19

What types of decisions require unanimity in a partnership?

Answer 19

Decisions requiring unanimity, unless the partnership agreement states otherwise, include:

Introduction of a new partner.
Changing the nature of the partnership business.
Altering the partnership agreement.
Expelling a partner.

Question 20

Can the partners decide to buy a new shop without unanimity?

Answer 20

Yes, buying another shop within the same line of business (e.g., a second hardware shop) is considered part of the existing partnership business. Therefore, such a decision can be made by a simple majority vote.

Question 21

What happens if one partner disagrees with the decision to buy the second shop?

Answer 21

If the decision requires only a simple majority, the dissenting partner would still be bound by the decision if the majority supports it. However, any significant disagreements could potentially lead to disputes.

Question 22

What is a fiduciary duty in the context of a partnership?

Answer 22

A fiduciary duty in a partnership requires each partner to act in the best interests of the partnership, exercising their powers and making decisions that benefit the partnership as a whole rather than for personal gain.

Question 23

What happens if a partner personally profits from a partnership transaction?

Answer 23

If a partner personally profits from a transaction connected with the partnership, they must fully disclose the transaction to the other partners. If they receive consent, the partner is allowed to retain the profit. Without disclosure and consent, the partner may be required to account for the profit to the partnership.

Question 24

What are the consequences of breaching fiduciary duty in a partnership?

Answer 24

Breaching fiduciary duty can lead to:

Legal action by the partnership or other partners.
The partner being required to return any improperly obtained profits.
Possible expulsion from the partnership, depending on the terms of the partnership agreement.

Question 25

How can partners ensure compliance with their fiduciary duties?

Answer 25

Partners can comply by:

Disclosing all relevant information about transactions connected to the partnership.
Seeking approval for personal benefits derived from partnership activities.
Acting transparently and maintaining accurate records of decisions and actions.

Question 26

Can a partner retain profits from personal ventures unrelated to the partnership?

Answer 26

Yes, a partner may retain profits from personal ventures that are entirely unrelated to the partnership, provided those ventures do not conflict with or compete against the partnership’s business.

Question 27

What determines a retiring partner’s liability for partnership debts?

Answer 27

A retiring partner is liable for debts incurred while they were a partner. To avoid liability for debts incurred after they leave, they must provide proper notice of their withdrawal to both existing and potential creditors.

Question 28

How should notice of a partner’s withdrawal be given?

Answer 28

Existing creditors must be given actual notice, such as direct communication (e.g., letter or email).
Potential creditors can be informed through public notices, such as in newspapers or trade publications.

Question 29

When does a retiring partner’s liability for new debts end?

Answer 29

A retiring partner’s liability ends when notice of their withdrawal is properly given. Debts incurred before the date of notice remain the responsibility of the retiring partner.

Question 30

What is the liability of a new partner in a partnership?

Answer 30

A new partner is liable for all partnership debts incurred after they join the partnership. They are not liable for debts incurred before they became a partner unless they agree otherwise.

Question 31

What happens if a retiring partner fails to give notice of their withdrawal?

Answer 31

If a retiring partner does not give notice, they may remain liable for debts incurred by the partnership even after their departure, as creditors may reasonably believe they are still a partner.

Question 32

What is the liability of partners in a general partnership?

Answer 32

Partners in a general partnership have unlimited personal liability for the debts and obligations of the business. There is no legal distinction between the business and its members, meaning partners’ personal assets may be used to satisfy creditor debts.

Question 33

What happens if a general partnership becomes insolvent?

Answer 33

If the partnership becomes insolvent, creditors can pursue the personal assets of any or all partners to recover outstanding debts. Each partner is jointly and severally liable, meaning a creditor can target one or more partners for the full amount.

Question 34

What risks are involved in choosing a general partnership as a business structure?

Answer 34

The main risk is the lack of limited liability, exposing personal assets to business debts. Additionally, partners are responsible for each other’s business decisions, which can further increase individual liability.

Question 35

Can a partner limit their liability in a general partnership?

Answer 35

No, partners cannot limit their liability in a general partnership. To achieve limited liability, they would need to restructure the business as a limited partnership (LP), limited liability partnership (LLP), or a corporation.

Question 36

A company is considering dismissing a director. A majority shareholder contributed two-thirds of the capital used to form the company. The other two shareholders contributed the remainder of the capital. The majority shareholder is in favour of dismissing the director, but the other two shareholders support the director. The majority shareholder would like to know whether the other two shareholders can outvote him.

Unless there is an agreement to the contrary, how is the voting power of members in a limited liability company ordinarily determined?

Answer 36

On a show of hands.

Ordinarily, voting of members is determined by a show of hands with each shareholder having one vote. So the two minority shareholders would be able to outvote the majority shareholder. However, it is open to five shareholders or more, or shareholders with more than 10% of the voting rights or 10% of the paid-up capital of the company to demand a poll instead. A poll changes the voting from one vote per shareholder to one vote per share. It is therefore open to the majority shareholder to demand a poll, which would affect the outcome of the vote

Question 37

What does the model articles of association say about the payment of dividends?

Answer 37

According to the model articles of association, the payment of a dividend must be recommended by the board of directors. Once the board approves the dividend recommendation, it can then be declared by the shareholders through an ordinary resolution.

Question 38

Who has the authority to recommend the payment of a dividend?

Answer 38

The board of directors has the authority to recommend the payment of a dividend. They must assess the company’s financial position and decide whether it is appropriate to distribute profits as dividends

Question 39

How is a dividend officially declared?

Answer 39

After the board of directors recommends the dividend, it must be declared by the shareholders through an ordinary resolution. This requires a majority vote at a general meeting of the shareholders.

Question 40

A promoter is in the process of setting up a limited company. He sends the registration documents to the Registrar of Companies on 1 December, and they are received by the Registrar on 3 December. The Registrar of Companies processes the documentation and the company appears on the public searchable company records on 6 December. On 7 December the promoter receives the certificate of incorporation in the post, and the certificate is dated 5 December.

On what date was the company legally incorporated?

Answer 40

5 December.

A company is incorporated, and becomes a separate legal personality, on the date on the certificate of incorporation. Before this date the company has no existence and is unable to trade. Any contracts entered into before this date will be pre-incorporation contracts for which the promoter would be personally liable, unless they protect themselves, for example, by novating the contrac

Question 41

The board of directors of a private limited company wish to call a general meeting of the shareholders to pass a number of resolutions. One of the resolutions seeks approval to enter a three-year contract with a new director. The potential director has told the board that she will give them only two weeks to decide. Therefore, the board does not want to wait for the statutory notice period.

Is it possible for the statutory notice period to be shortened?

Answer 41

Yes, but a majority in the number of shareholders who hold at least 90% of the shares must agree to the short notice.

If a majority in the number of shareholders who hold at least 90% of the shares agree, the notice period may be shortened.

Question 42

Two friends have decided to open a game store together. After discussing matters with their solicitor, they decided that they will run the business as a limited company. They are keen to start entering into contracts for the purchase of games and for premises in which to operate their business, but they want to wait until the company legally exists so they will not be subject to personal liability on the contracts.

When does corporate existence begin?

Answer 42

On the date specified on the certificate of incorporation.

On receiving an application for registration, the Registrar of Companies will check all the documentation provided, and if all correct, will issue a certificate of incorporation. A company comes into existence on the date specified on the certificate of incorporation, which is effectively the company’s birth certificate.

Question 43

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?

Answer 43

£90,000

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.

Question 44

A director is defined by the Companies Act 2006 as: “any person occupying the position of director, by whatever name called”.

What is the name given to a director that has been properly appointed and agreed to act as such?

Answer 44

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.

Question 45

A company was incorporated several years ago with the Companies (Model Articles) Regulations 2008 (unamended) as its articles of association. It now wishes to amend its articles to include provisions for preference shares so it can issue preference shares to raise capital.

What must be filed at Companies House following the change of articles?

Answer 45

The new articles and the shareholders’ special resolution to change the articles only.

The shareholders change the articles by special resolution and all special resolutions must be filed at Companies House. There is no fee for a change of articles and no specific form which must be filed.

Question 46

How can shareholders change the articles of association?

Answer 46

Shareholders can change the articles of association by passing a special resolution. This requires approval by a majority of at least 75% of the votes cast by shareholders at a general meeting.

Question 47

What is a special resolution?

Answer 47

A special resolution is a resolution that requires a 75% majority vote from shareholders present and voting at a general meeting. It is typically used for more significant changes, such as altering the articles of association

Question 48

What is required after changing the articles of association?

Answer 48

After the change, the special resolution must be filed with Companies House to officially record the change. This ensures that the updated articles are legally recognized.

Question 49

A sole trader was made bankrupt last month. The trustee in bankruptcy has identified the following creditors:

HMRC is owed the last quarter of VAT returns amounting to £20,000.
The sole trader’s spouse lent the sole trader £10,000 three months ago.
The ordinary unsecured creditors are owed £10,000.
The trustee in bankruptcy expects his costs to amount to £3,000.
In which order will any available funds be distributed to the creditors?

Answer 49

The trustee in bankruptcy, HMRC, the ordinary creditors, the spouse

Question 50

What must a creditor prove to issue a winding-up petition against a company?

Answer 50

To issue a winding-up petition, a creditor must prove that the company is insolvent. Insolvency can be proven in one of two ways:

By serving a statutory demand that remains unpaid for 21 days for a debt of £750 or more.
By obtaining a judgment against the company and attempting to execute the judgment, but the debt is not fully satisfied.

Question 51

How can a creditor prove insolvency using a statutory demand?

Answer 51

A creditor can serve a statutory demand for a debt of £750 or more. If the debtor fails to pay the debt within 21 days of receiving the demand, the creditor can use this as evidence of insolvency when filing a winding-up petition.

Question 52

How can unsecured creditors initiate bankruptcy proceedings?

Answer 52

One or more unsecured creditors who are owed at least £5,000 in total can present a petition to the bankruptcy court to request a bankruptcy order against the debtor.

Question 53

Who receives the proceeds of a sale in a situation involving a trade supplier?

Answer 53

The trade supplier would typically receive the proceeds of the sale first, especially if there are secured interests or agreements in place regarding the payment of debts, such as in cases where goods have been sold on credit.

Question 54

What is the relevant time period for a preference in insolvency?

Answer 54

The relevant time for a preference is:

Six months before the onset of insolvency if the preference was made to an unconnected person.
Two years if the preference was made to a connected person (e.g., a relative or associate of the company).

Question 55

What is considered a preference in the context of insolvency?

Answer 55

A preference occurs when a company makes a payment or transfers an asset to a creditor in a manner that favors that creditor over other creditors, potentially reducing the assets available in the event of insolvency. If such payments or transfers occur within the relevant time frame, they can be challenged.

Question 56

A company has just appointed a new non-executive director by ordinary resolution of the members.

What internal records must be updated at the Registered Office in respect of the director’s appointment?

Answer 56

The register of directors and register of directors’ residential addresses.

Question 57

Question
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?

Answer 57

600 to Able and none to Baker.

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.

Question 58

A company has recently gone into creditor’s voluntary liquidation. Three years ago, the company entered into the following charges:

A floating charge in January, registered at Companies House 5 days later
A fixed charge dated in March which was not registered at Companies House (Fixed Charge 1)
A fixed charge in April registered at Companies House 15 days later (Fixed Charge 2)
What is the order of priority of these charges?

Answer 58

Fixed Charge 2, Floating Charge, Fixed Charge 1

Fixed charges rank ahead of floating charges and in order of creation so long as they were validly registered at Companies House within 21 days of creation. As Fixed Charge 1 was not registered, it ranks behind the Floating Charge. Thus, Fixed Charge 2 has priority over the Floating Charge and the Floating Charge has priority over Fixed Charge 1 because Fixed Charge 1 was not registered.

Question 59

A group of investors have taken a majority shareholding in a private limited company and wish to alter its name.

Under the Companies Act 2006, what type of resolution is required in this situation?

Answer 59

A special resolution.

Question 60

A director is defined by the Companies Act 2006 as: “any person occupying the position of director, by whatever name called”. It is therefore important to consider an individual’s function rather than their title, so this definition also covers shadow directors.

How could a shadow director be best described?

Answer 60

A person who is not formally appointed and registered as a director, but with whose directions or instructions the directors of the company are accustomed to act.

Question 61

A sole trader who makes leather goods wishes to set up a private company limited by shares to operate stalls at markets in a number of cities. However, the sole trader is hesitant to allow anyone else to have a say in the management of the company or to share in the profits. Therefore, the sole trader needs to know how many shareholders, directors, and officers the company must have on registration to make the registration valid.

What is the correct position for a private limited company?

Answer 61

One director and one shareholder, but there is no legal requirement for a company secretary.

Question 62

A shareholder in a private limited company believes a director has breached a duty owed to the company. Despite complaining to the board, no action has been taken against the director concerned. The shareholder is considering bringing a derivative claim against the director.

If the derivative claim is successful, who will receive any damages awarded?

Answer 62

The damages will be awarded to the company.

Question 62

The board of directors of a public limited company wish to call an annual general meeting of the shareholders. One of the items on the agenda will be a special resolution to alter the articles of association of the company.

What is the notice period they are required to give the shareholders?

Answer 62

21 clear days.

Question 62

A man starts the process to incorporate his restaurant business. Keen to get started, he orders a quantity of furniture for the restaurant from a local supplier. After the company has been incorporated, the invoice for the furniture remains unpaid, and the supplier takes the company to court for non-payment.

Is the company liable to pay the outstanding invoice?

Answer 62

No, because a company does not exist pre-incorporation, and therefore it has no capacity to enter into contracts.

Question 63

Four musicians form a limited liability company to operate a musical instrument shop. Three of the musicians invested £30,000 each in the company. The fourth musician invested £10,000 and agreed to work at the company on a daily basis. The other three musicians do not take any management role. The musician who works at the company on a daily basis dies.

What is the effect of the musician’s death on the company?

Answer 63

The company continues as though nothing happened, but new management would be required for the shop

Question 64

A company went into creditors’ voluntary liquidation last year. The liquidator is now finalising the amount available for unsecured creditors. The liquidator has realised £200,000 and has incurred costs of £30,000. The preferential creditors are owed £44,000 and the unsecured creditors are owed £600,000.

How much will an unsecured creditor who is owed £60,000 receive?

Answer 64

The unsecured creditor will receive £12,600. Unsecured creditors receive a proportion of the proceeds realised by the liquidator after the liquidator subtracts the expenses of winding up and pays the preferential debts. Here, the liquidator realised £200,000. After subtracting expenses (£30,000) and paying the preferential creditors the £44,000 owed to them, £126,000 remains to pay the unsecured creditors proportionally. The unsecured creditor here holds 10% of the total unsecured debt (that is, £60,000 of the £600,000 unsecured debt) and so is entitled to 10% of the £126,000 that remains to pay the unsecured creditors.

Question 65

A company has a single shareholder/director. Three months ago, the director realised that the company was unable to pay its debts as they fell due and arranged for the company to give its most valuable asset to another company, of which the director was also the sole shareholder and director. The company making the gift went into insolvent liquidation two months ago.

Will the gift be deemed a transaction at an undervalue?

Answer 65

Yes, because the company was insolvent when the transaction occurred.