FLK1 Business Flashcards
What are cumulative preference shares?
If profits are sufficient to call dividends, the preference shareholder has to be paid any missed dividends from previous years as well as any from the current financial year.
This right ranks before the payment of dividends to ordinary shareholders in the current financial year.
What is a transaction at an undervalue?
Corporate insolvency
This is where the company makes a gift to another person or enters into a transaction and receives consideration which is significantly lower in value than market value.
A liquidator/administrator can challenge any transaction which the company has entered into at an undervalue at the relevant time.
What decisions does the board have to make with regards to the allotment of shares?
The board will decide the price and how many shares it wishes to allot, usually having taken the advice of the company’s accountant or banker.
Solicitors advise on the procedure needed to allot shares.
What are the main types of security for LLPs and companies?
Usually mortgages, fixed and floating charges.
What are book debts? Can they be charged, if so, how?
These are debts owed to the company. They are an asset and can be charged.
Floating charge over the book debts:
As book debts vary over time, they are suitable for a floating charge. If the charge holder allows the company/LLP to use the proceeds from the book debts for its business purposes then this would indicate a floating charge.
Fixed charge over book debts:
Book debts can also be secured by a fixed charge where the charge holder had control over both the debts and the proceeds once they were paid.
This could arise where the charge holder allowed the company/LLP to collect the book debts but then the company/LLP had to pay over the money to the charge holder to settle part of the debt owed to the charge holder.
What is calculated at Step 4 of a corporation tax calculation?
Steps 1 to 3 establish the company’s taxable profit for the accounting period. At Step 4, the appropriate tax rate is applied to taxable profit, to calculate tax payable.
The corporation tax financial year runs from 1 April to 31 March. If the company’s accounting period – its financial year – is different from the corporation tax financial year, and the corporation tax rate changes from one corporation tax year to the next, the company will have to pay tax at one rate on a proportion of its profits and at the new rate on the rest of its profits for the financial year.
Why operate as a general partnership?
a)No setting up formalities
As soon as two people start running a business together they are likely to be a partnership even if they are not aware of this.
b) No administration formalities
Do not have to adhere to extensive administrative and accounting requirements and make this information public
c) Less time and money spent on legal and accounting
This is because they do not need to file public accounts. Partners can concentrate on their trade rather than spending time and money on legal and administrative matters.
d) Tax advantages
This depends on the business of the partnership and the partners’ individual circumstances.
In a CVA, 75% or more in value of the company’s creditors and
50% or more of non-connected creditors must approve a CVA proposal.
Who decides whether the creditors are connected or not?
The chair of the CVA meeting, usually the Insolvency Practitioner.
Before borrowing money, what should the directors do?
a) Check constitution
Private company incorporated under CA 2006 = there will be no restrictions on borrowing.
Company formed before 1 October 2009 and not updated articles = need to check there are no restrictions.
Restriction in articles = if there are any restrictions on borrowing money in the company’s articles or memorandum, the shareholders will need to pass a special resolution to change the articles to remove the restrictions.
This also applies to the memorandum as it will be treated as part of the constitution.
b) Check whether directors have authority to act on behalf of the company
Company with MA = the authority will come from MA 3.
Company with amended or bespoke articles = the articles need to be checked for restrictions or conditions.
Partnerships and debt finance:
Need to check the partnership agreement before borrowing.
If there is a provision, this can only be changed by unanimous consent.
What is the director’s duty to exercise independent judgement?
Self-explanatory. This is not infringed by the director acting in accordance with an agreement entered into by the company that restricts future exercise of discretion by its directors or in a way that is authorised by the company’s constitution.
The duty always comes first.
In terms of post-decision requirements, what must be filed at companies house?
a) Correct forms
b) Copies of all special resolutions
c) Some ordinary resolutions must be filed
What are charges?
This form of security does not transfer the legal ownership from the chargor to the charge holder and does not given them the right to immediate possession.
A charge gives the lender rights over the asset should the borrower fail to repay the money borrowed.
There are two types: floating charge and fixed charge.
How many directors does a private company need to have?
1
What additional requirements need to be met for a buyback out of capital?
Additional to requirements for share buyback out of distributable profit
Statement of solvency
Auditors report
Special resolution
Copy of the directors’ statement of solvency and auditors’ report must be available to members at GM/with WR
Notice in London Gazette
Notice in national newspaper
Filing copy of directors’ statement and auditors’ report at CH
Directors’ statement and auditors’ report kept available for inspection
Board meeting
Payment out of capital
What is the director’s duty not to accept benefits from third parties?
A director of a company must not accept a benefit from a third party conferred on them by reason of them either being a director or doing/not doing anything as a director.
There is no breach if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
Normal corporate hospitality is not caught by this duty as long as, viewed objectively, it cannot be reasonably regarded as likely to give rise to a conflict of interest.
How can a CVA be used in relation to a moratorium?
The CVA does not affect the rights of secured and preferential creditors, unless they agree to it. Small companies used to be entitled to a moratorium of 28 days after filing the CVA proposal at court but this is no longer the case. However, companies could use the moratorium created by CIGA 2020 as well as entering into the CVA, and the moratorium would give the company the breathing space it needed to give the company the chance to enter into the CVA.
What is the order of distribution of assets in administration?
- Fixed charges holders
These are paid first. They will receive the amount they are owed when the asset subject of the fixed charge was sold.
Any surplus is paid to the liquidator.
What happens if there is a shortfall once the asset has been sold?
If there is a shortfall instead, the fixed charge holder can join the pool of unsecured creditors and try and obtain some kind of contribution towards the outstanding debt.
- Unsecured creditors
Admin:
The liquidator will send a standard form to unsecured creditors. They fill this in outlining the debts that are owed to them to prove their debt.
The liquidator then approves or rejects the creditor’s debts.
If the claim is under the sum of £1,000 these claims are admitted automatically.
Once the liquidator has told the company’s assets and collected as much money as they can and paid the holders of valid fixed charges, they will make the payments in the following order.
Order of distribution:
a) Expenses of the winding up (fees payable to the liquidator and their professional advisors)
b) Preferential debts which rank and abate equally
c) Money which is the subject of a floating charge in order or priority
d) Unsecured creditors who rank and abate equally.
e) Remaining money is distributed to shareholders
What are preferential creditors?
The most common preferential debt are the wages/salaries of employees for work carried out in the four months immediately preceding the date of the winding up order.
There is a maximum of £800 per employee.
Employees’ accrued holiday pay is a preferential debt.
HMRC is a preferential creditor in relation to PAYE and VAT but only these.
What is an auditor’s liability?
They do not owe a duty of care to either the shareholders or to potential new shareholders when conducting their annual audit.
For liability there has to be proximity between the relevant parties.
Auditors can be sued for negligence by the company.
When can a wrongful trading claim be brought?
Such claims can only be brought when a company is in insolvent liquidation or insolvent administration.
As a remedy, the court may order the director to make a contribution to the company’s assets, increasing the amount of money available to pay creditors.
What checks on the company does the lender need to make before agreeing to a loan?
Inspecting the articles of the company, searching the company’s records at Companies House and requesting copies of relevant board resolutions.
The lender should also search the company records at CH to see if any charges have been registered against it already and ensure that there is sufficient value in that property to provide adequate security for the proposed loan.
From the register the lender can find out:
a) Date of creation of any existing charge
b) The amount secured
c) Which property is subject of the charge
d) Who holds that charge
If the charge is over land, the lender should also conduct a search at LR to check the company’s title to the land and to see if any pre-existing charges have been registered.
The lender should conduct a winding up search at the Companies Court to check that no insolvency proceedings have been commenced against the company.
Under PA 1890, the firm is bound by any contract or deed entered into by partners in the firm’s name, provided that the partner’s actions were authorised by the partners.
How may an action may be authorised?
a) The partners may have acted jointly in making the contract
b) Express actual authority
c) Implied actual authority - if all partners are involved in the running of the business without limitations, it will be implied that each partner has authority e.g. to sell the firm’s products in the ordinary course of business. Or authority may be implied by a regular course of dealing by one of the partners to which the other partners have not objected.
In public companies, what number of people are required to call a general meeting on short notice?
A majority of number of company’s shareholders who between them hold 95% or more of the company’s voting shares must consent.
What is the default position under statute regarding a member leaving an LLP and what filing requirements are there?
Members can leave the LLP by giving reasonable notice to the other members.
Members cannot be expelled so if they wish there to be a right of expulsion, this needs to be included in the LLP e.g. for bankruptcy.
Filing:
LLP must notify Companies House on form LL TM01 within 14 days of the member leaving.
What should be included in a PA regarding work input?
Under PA 1890, partners may take part in the management of business but they are not required to do so.
The partnership agreement should set out each of the partner’s working hours or state that they must work full-time for the business so that it is clear what is required of each partner.
A common clause in a partnership agreement is that a partner must devote the whole of their time and attention to the business and partners must not engage in any other business whilst they are partner.
Non compete clauses are common although in the absence of an express agreement, one will be implied by default under PA 1890.
The agreement should set out holiday entitlement, sickness and maternity and paternity provisions. These matters are not provided for in PA 1890.
How does voting work on a show of hands work in general meetings?
On show of hands and each shareholder has one vote.
Shareholders are not prevented from counting in the quorum or voting if they have a personal interest in the matter.
However, there are two key shareholder resolutions where the votes of a shareholder with a personal interest in the matter are not counted.
What are the formalities after redemption of a loan?
When a loan secured by a registered charge is repaid by the borrower to the lender, a person who originally had an interest in the registration of the charge may complete sign and send form MR04 to the Registrar of Companies at Companies House.
This will be done to ensure the company file is up to date.
The Registrar will include a statement of satisfaction on the company’s file.
If any entries were made against the land at the Land Registry, these should be removed.
Which two things must company officers do after company decisions have been made either by board resolution or shareholder resolution?
Filing at companies house
Internal administration
What is an advantage of administration?
The main advantage of the administration is that while the administration is underway, there is a statutory moratorium.
This means that it is not possible for anyone to commence or continue with legal action against the company, enforce a judgment or issue a winding up petition without the administrator’s consent.
This gives the administrator time and space to investigate the company, assess its viability and maximise the amount of money available to creditors.
What is the deadline for filing accounts for newly incorporated companies?
They have the option of filing accounts and reports three months after the end of the company’s first accounting reference period instead.
Is a trading certificate required when converting from a private company to a public company?
A trading certificate is not required. Only need new certificate of incorporation.
Comparing debt and equity finance, what are the restrictions on sale of shares and sale of debenture?
Equity finance
The transfer of shares is governed by the company’s articles and a private company usually restricts the shareholder’s freedom to sell their shares.
Debt finance
If a lender wishes to realise its capital earlier than the repayment date agreed, it may sell its debenture to a third party.
No restriction in the articles will affect its right to sell.
Can a director of a company be a company secretary?
Yes
What are the steps in calculation of corporation tax?
Step 1: Calculate income profits
Step 2: Calculate chargeable gains:
Stage 1: Identify a chargeable disposal
Stage 2: Calculate the gain (or loss)
Stage 3: Apply reliefs
Step 3: Calculate total profits and apply any available reliefs against total profits
Step 4: Calculate the tax
What must be sent to companies house when a director resigns or is removed?
They must complete form TM01 (as an individual) or TM02 (company) within 14 days of resignation.
Look out for a clause in the TM01 that gives the company power of attorney to complete the TM01 on the director’s behalf.
In private companies, what number of people are required to call a general meeting on short notice?
A majority of number of company’s shareholders who between them hold 90% or more of the company’s voting shares must consent.
What are novation contracts?
A novation contract is used when a retiring partner wants to be released from an existing debt. The creditor will release the original partners from liability under the contract and the firm is as newly constituted takes over liability.
This is advantageous for an outgoing partner but disadvantageous for an incoming partner.
If a partner retires and no new partner joins, in order to ensure that the novation is contractually binding, there must be consideration for the creditor’s promise to release the retiring partner from the liability or the contract must be executed as a deed.
The creditor would likely not agree to this as it decreases the number of people the creditor can sue. This is not a common solution so should not be overstated and are almost only used for ongoing liabilities such as loans and not used for one-off debts.
How is the process of creditors’ voluntary liquidation initiated?
The process is initiated by the company, through discussion and agreement between the company’s directors and shareholders and the creditors then take over at an early stage.
Technically voluntary but the directors will feel pressured to enter into a CVL by the creditors.
And they will be aware of potential personal claims for misfeasance and fraudulent/wrongful trading if they continue to trade and the company goes into liquidation.
What is the quorum for a GM?
Two (subject to articles).
What factors should be considered when choosing a business medium?
Liability
Tax
Formalities
Publicity of information
Cost
Status
Finance
Who is a person with significant control?
If they hold more than 25% of the shares in the company.
If they hold more than 25% of voting rights in the company.
If they hold the right to appoint or remove a majority of the board of directors of the company.
What needs to be considered/changed by directors after buying a shelf company?
Chairperson (decide whether to have one, if so by board resolution)
Bank account (who can spend the money and how much in one go, need to complete a bank mandate to outline these decisions)
Company seal* (not mandatory but can be good idea)
Changing company name/business name
Accounting reference date
Auditor (if required to file annual accounts)
Service contracts
Tax registrations (HMRC automatically informed and sends introductory pack to company)
Corporation tax form to HMRC in introductory pack
PAYE and NI (directors need to register the company with HMRC to arrange for the deduction of income tax from salaries under the PAYE scheme and for payment of NI by the employees - online via gov website)
VAT
Insurance
Shareholders agreement
What are the requirements that must be met for a partner to escape liability for debts that have been incurred after they leave the partnership?
a) Anyone who has dealt with the firm before must be given actual notice of the partner in question leaving. This means they must be informed directly. If notice is not given, the person is entitled to treat all apparent members of the firm as still being members.
b) Notice placed in London Gazette (relevant newspaper for NI or Scotland rather than England and Wales) to notify anyone who has not had dealings with the firm before the partner in question left of their retirement.
If the reason for ceasing to be a partner is due to death or bankruptcy rather than retirement or expulsion, no notice is required.
The estate of the deceased or bankrupt partner is not liable for partnership liabilities incurred after the death or bankruptcy.
What is income?
Money will be regarded as income if there is an element of recurrence, for example, a salary received every month, or interest received on a bank account.
When are final accounts prepared?
The final accounts are prepared once a year, at the end of the business’s accounting period.
Is there a time limit for bringing a claim for defrauding creditors?
No
How is a restructuring plan implemented?
Two court are held hearings.
First hearing:
The creditors can make representations.
Second hearing:
The court will decide whether to sanction the proposed plan.
Creditor and shareholder meetings
These are held in between the two hearings.
The creditors and shareholders are divided into classes and each class will be deemed to have approved the plan if 75% by value of that class vote in favour.
What is meant by apparent authority?
This is where the director acts without the company’s prior consent whether express or implied but this still binds the company.
The company is estopped from denying the director’s authority.
It is based on a representation by the company to the third party, by words or conduct, that the director is acting with the company’s authority.
It is not the director’s actions that are significant it is the company’s omission to correct the impression.
What are non-cumulative preference shares?
If a dividend payment is missed, the shareholder loses the right to that year’s dividend and does not have the right to receive it in the future.
What is a partners’ liability for partnership debts if the debt was incurred after leaving the partnership?
The partner remains liable for the debts incurred whilst they were partner once they leave the partnership.
They will escape liability for debts that have been incurred after they leave as long as they comply with certain requirements.
Which court does a creditor bring a bankruptcy petition to? What else must the creditor arrange?
The creditor must usually present the petition at the debtor’s local county court hearing centre as long as it has jurisdiction in bankruptcy matters.
The creditor must also arrange for personal service of the petition by engaging an agent who will hand the petition to the debtor and provide a witness statement confirming that they have done so.
If the debtor is avoiding the agent, the creditor can seek to obtain a court order for substituted service which means that another method of service will be deemed sufficient service.
What are the exceptions to the doctrine of maintenance of share capital?
A company can buy back its own shares as long as the correct procedure is followed
A company can buy back its own shares under a court order following a successful unfair prejudice claim
A company can return capital to shareholders after payment of company debts in a winding up
What requirements are there for the name of an LLP?
The LLP must have LLP in its name or Welsh equivalents.
Similar restrictions to the names of companies.
The LLP must have its name on the outside of its place of business and its stationary must state its name, place of registration and registration number and address of registered office.
What types of credit facility are there?
Secured or unsecured. Bilateral or syndicated.
How is a compulsory liquidation commenced?
Creditors will usually prove a debtor’s insolvency by issuing a statutory demand and if the statutory demand remains unpaid after three weeks, issuing a winding up petition against the company.
They do not have access to detailed financial up to date information as public accounts only need to be filed once a year so this is the only way they can prove insolvency other than direct correspondence with the debtor.
Alternatively, they can obtain a judgment against the company as the test of whether a company is insolvent is the inability to pay debts as and when they fall due. If they cannot satisfy the judgment they will be insolvent.
What is rollover relief?
This relief enables sole traders and partners to sell certain assets (‘qualifying business assets’) without paying CGT, provided the proceeds of sale are invested in other qualifying business assets.
The seller will have to pay tax eventually, but the charge to CGT is postponed until the seller disposes of the new asset(s).
- Which assets are qualifying business assets?
- Land
- Buildings and
- Goodwill.
The asset must be used in the trade of the business rather than being held as an investment.
Fixed plant and machinery are qualifying business assets, but their sale usually results in a loss because they are wasting assets.
- Which assets are not qualifying business assets?
There is no definition of ‘fixed’, but if the asset is moveable, it is unlikely to be classed as fixed. Company shares are not qualifying assets.
- When does the relief apply?
The relief applies when a qualifying asset is disposed of, and the asset is owned by:
a) a sole trader, who uses the asset in their trade;
b) a partnership, which uses the asset in its trade;
c) an individual partner, where the partnership uses the asset in the partnership trade; or
d) an individual shareholder, where the asset is used in the trade of the company in which the shareholder owns shares. For this to apply, the company must be their ‘personal company’, meaning that the shareholder must own at least 5 per cent of the voting shares in the company.
- Do they have to be the same type of asset?
Provided that both the asset disposed of and the asset acquired fall within the definition of qualifying assets, they do not have to be the same type of asset. For example, it is possible to sell qualifying goodwill, and rollover the gain into the purchase of qualifying buildings.
- What is the time limit for acquiring the replacement asset?
The taxpayer must acquire the replacement asset within one year before or three years after the disposal of the original asset, unless HMRC allows the taxpayer an extended time period to claim.
- How is the relief applied?
The taxpayer must claim the relief within four years from the end of the tax year in which they acquire the replacement asset (or, if later, within four years from the end of the tax year in which the original asset is sold).
The gain is notionally deducted from the acquisition cost of the replacement asset, which gives a lower acquisition cost to use in CGT calculations when the asset is disposed of in the future.
This means that a later disposal of the replacement asset is likely to produce a gain that includes both the rolled- over gain and any gain on the replacement asset itself.
- Disadvantage of rollover relief
Note that the annual exemption cannot be used before the gain is rolled over, so the taxpayer loses the benefit of the annual exemption if they apply for rollover relief.
How can a chair person be appointed?
Can be appointed by an board resolution of the directors.
How can rollover relief be applied in a group company to convey a tax advantage?
When a company is in a group for chargeable gains purposes and it disposes of a chargeable asset outside the group, it can roll over its gain into qualifying assets that it acquires (provided it satisfies the criteria for rollover relief).
As an alternative, it can roll over its gain into qualifying assets acquired by another company in the same group.
Group relief under chargeable gains provisions are subject to certain anti- avoidance provisions. These are designed to stop companies using the rules to their benefit when they join or leave a group.
What are the liquidator’s powers?
a) Carrying on the company’s business
b) Commencing and defending litigation on the company’s behalf
c) Investigating the company’s past transactions
d) Investigating the directors’ conduct
e) Collecting and distributing the company’s assets
f) Doing all that is necessary to facilitate the winding up of the company
g) Selling company assets and distributing money to the company’s creditors
h) Preserving and increasing assets
What is administration?
This is the process whereby an administrator is appointed to run the company and make whatever changes are necessary to improve its financial performance.
Alternatively, the administrator will aim to get the company into a position where it can be sold as a going concern.
Can a partnership offer a security for a loan by way of a floating charge?
No
What is capital gains tax?
Capital gains tax (‘CGT’) is payable on chargeable gains made by a chargeable person on the disposal of chargeable assets in a tax year, which runs from 6 April one year until 5 April the following year.
What is carry forward relief?
CGT Tax
A taxpayer may carry forward their trading loss for a tax year and set it against subsequent profits which the trade produces in subsequent years, taking earlier years first.
Losses can be carried forward indefinitely until the loss is exhausted so if several years go by before the trade makes a profit against which to set the losses, this is no bar to claiming the relief.
Whilst the losses can be carried forward indefinitely, the tax payer 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.
What are the disadvantages of an unfair prejudice claim?
- Expensive and time consuming.
- Claimant will have to gather evidence and some will be difficult to obtain.
- The court will need a lot of evidence before it decides that the claimant has been unfairly prejudiced.
- The parties may need an expert report.
What needs to be considered when allotting shares?
a) Are there any constitutional restrictions on allotment?
b) Do the directors have authority to allot shares?
c) Are there any pre-emption rights?
What happens if the Registrar of Companies has all the information/documents necessary to incorporate a company?
If the Registrar of Companies is satisfied that the requirements have been met they will incorporate the company and issue a certificate of incorporation. The companies comes into existence upon the certificate of incorporation being issued.
How is the income payable by a partner in a partnership assessed?
Calculating the income payable by a partner in a partnership comprises the following steps:
- The partnership’s trading profit will be calculated in the same way as trading profit for a sole trader.
Chargeable receipts LESS deductible expenditure LESS capital allowances = trading profit/ loss
- The trading profit is then shared between the partners in accordance with their agreement (or, if there is no agreement, the Partnership Act 1890).
There are two elements to this: the agreement may well set out what will be paid first, for example salaries, interest on capital, and finally any remaining profit. The agreement should also set out each partner’s percentage share of the profits.
- Each partner will include this figure on their tax return and will be assessed in the ordinary way for income tax, taking account of any applicable reliefs and allowances.
If the partnership makes a trading loss instead, the losses will again be shared between the partners in accordance with their agreement, and the partners can each choose how they will
claim any applicable reliefs for their share of the loss.
What are the consequences of a share buyback for the shareholders?
A buyback will result in the reduction of profits available for declaring dividends or of capital available for creditors in the event that a company cannot pay its debts.
If the company is wound up there is less money available for the shareholders once the creditors have been paid.
What is classed as a small company?
A small company is a company with a balance sheet of not more than £5.1 million, a turnover of not more than 0.2 million and no more than 50 employees in a particular financial year.
What happens if an unauthorised loan is made to a director?
If the company makes a payment in breach of the requirement to obtain ordinary resolution, the money is held by the recipient on trust for the company.
Any director who authorises the payment is jointly and severally liable to indemnify the company that made the payment for any loss resulting from it.
What does MA 26 do?
This gives the board discretion to refuse to register the transfer of shares. So if a company has MA 26 every transfer must be approved by the board before the transferee can be entered on the register of members and therefore become a shareholder.
What resolution is required to change the articles of association?
Special resolution of the shareholders
Who can request for a company to circulate a written resolution?
A shareholder/shareholders who have 5% or more voting rights in the company can require the company to circulate a written resolution.
The company’s articles can reduce this to below than 5% but cannot increase it to more than 5%.
What is share capital?
This is the money provided by shareholders in consideration for shares.
It is a long-standing principle of company law that the share capital cannot be reduced because it is the fund that the creditors look to when they need to pay debts owed to them.
Paid up share capital cannot be reduced and the shareholders liability with regard to any capital that they have not paid on their shares cannot be reduced.
What must the certificate of incorporation state?
- The name and registered number of the company.
- The date of its incorporation.
- Whether it is limited or unlimited and if it is limited whether it is limited by shares or by guarantee.
- Whether it is a private or a public company.
- Whether the company’s registered office is situated in England and Wales, Scotland or NI.
Why are there particular provisions for close companies and groups of companies?
Provisions exist within tax legislation to make sure that there is no significant advantage or disadvantage, from a tax point of view, to trading as a company rather than as a sole trader or partnership - some of those provisions relate to close companies and to groups of companies.
What are the requirements of a moratorium?
The company must be unable to pay its debts or be likely to become unable to pay its debts.
A moratorium is not possible if the company has already entered into a moratorium during the previous 12 months.
How long does a moratorium last?
20 business days beginning with the business day after the moratorium comes into force i.e. date of filing the documents at court or the court order.
It can be extended for a further 20 business days by filing certain documents at court.
The moratorium can be extended by the directors for a period of up to one year if the creditors who are not going to get paid as a result of the moratorium consent to this.
What is a chargeable person?
The following are chargeable persons:
* individuals (whether in a personal capacity or as a sole trader);
* personal representatives (‘PRs’), when they dispose of the assets of the deceased person;
* partners, when the partners dispose of a chargeable asset. Each partner is charged separately for their proportion of the gain; and
* trustees, on the disposal of a chargeable asset from a trust fund.
What is the tax liability of a general partnership?
a) VAT
b) National Insurance
c) Income or corporation depending on whether the partnership is an individual or a company
Are private companies required to have a company secretary?
Not required to have a company secretary.
What are the requirements for a limited partnership?
Must be at least one general partner who has unlimited liability for the partnership debts.
Permitted to have a limited partner whose liability to the amount they initially invested in the business.
Must be registered with the Registrar of Companies, who also act as the Registrar of LPs before they start trading.
What is a standard breathing space?
This is a type of debt respite scheme.
A standard breathing space is available to any client with problem debt, and it gives them legal protection from creditor action for up to 60 days (a moratorium).
The protection includes pausing most enforcement action and contact from creditors and freezing most interest and charges on their debts.
How are company secretaries removed?
They can resign or be removed by board resolution.
In some cases there may be a written contract between the company and the company secretary which sets out the consequences of removal from office and include compensation for breach of contract.
What administration requirements are there following the allotment of shares?
- The company needs to prepare minutes of every board meeting and every general meeting.
- Copies of resolutions to be sent to CH within 15 days
- Company forms to be sent to CH
- Entries in company’s own register
- Preparation and allocation of share certificates
In personal insolvency, what are the alternatives to bankruptcy?
a) Individual voluntary agreement
b) Negotiation with creditors
c) Debt relief orders (DRO)
d) Debt respite schemes
What is start-up relief/early trade losses relief?
Available when a startup 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.
This relief is useful for anyone who starts a new business but before that had an income from a previous business or employment.
It enables the taxpayer to claim back from HMRC some of the income tax they paid in their previous business or employment in the three tax years prior to the tax year of the loss.
The loss must be set against earlier years than later years.
The claim for the relief must be made on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed.
Subject to a cap of £50,000 or 25% of the taxpayer’s income in the tax year in which the relief is claimed. But only applies to income from sources other than the trade which produced the loss.
Which factors count in the director’s favour when they may be disqualified from office?
a) Employing qualified financial staff
b) Taking professional advice
c) A personal financial investment in the company
What happens if a partner of a general partnership cannot pay back their debts to a third party?
The third party can enforce the debt in the usual way by e.g. obtaining a charge over their property and applying for an order of sale over those properties in order to satisfy the outstanding debt.
The third party may seize assets belonging to the partner.
What must notice of a GM set out?
- The time, date and place of the meeting
- The general nature of the business to be dealt with at the meeting
- If a special resolution is proposed, the exact wording of the special resolution
- Each shareholders right to appoint a proxy to attend on their behalf
What is actual authority?
Arises where the director has consent from the other directors to act in a certain way e.g. to spend money.
How is VAT tax paid to HMRC?
- VAT is paid to HMRC quarterly. The tax return needs to be submitted within one month of the end of the quarter.
- Only the difference of input vs output is paid to HMRC.
- If input tax exceeds output tax the person will receive a rebate.
- HMRC may allow or require a taxpayer to make monthly returns in certain circumstances.
What rebuttable presumption is made in relation to a transaction at an undervalue (personal insolvency)?
Transaction with a close connection
If the transaction was with an associate aka close relative or business associate that was more than two years prior to the bankruptcy petition, then there is a rebuttable presumption that the bankrupt was insolvent.
What forms need to be sent to CH with regard to appointment of a director?
Form AP01 (individual director) and AP02 (corporate directors) used to notify CH of the appointment of a director and must be filed within 14 days of the appointment.
What number of directors must a private company have?
All companies must have one director.
What are the corporation tax rates?
The applicable corporation tax rate will depend on the company’s taxable profits:
- Profits up to £50,000
Subject to the standard small profits rate of 19%.
- Profits of more than £250,000
Subject to the main rate of 25% (on all of their taxable profits)
- Taxable profits above £50,000 but not exceeding £250,000
Subject to the marginal rate, meaning that the corporation tax rate is tapered so that companies in this bracket are charged at an overall corporation tax rate of between 19% and 25%.
Shareholders pay tax on dividends but there are other possible income tax implications.
What other possible income tax implications are there?
- Loan to a participator in a close company
When a ‘close company’ makes a loan to a shareholder, there may be income tax consequences for the shareholder if the close company writes off the loan.
- Share buyback
When a shareholder sells their shares back to the company in which they are held, their profit will be the difference between the sale price and the issue price of the shares. This will probably be charged to income tax in the same way as a dividend. However, sometimes the shareholder will pay CGT instead on their profit.
- Income tax relief for shareholders
Tax legislation includes two income tax reliefs for shareholders.
The first is relevant when an individual borrows money to purchase ordinary shares in a close company that carries on a trade, or to lend money to a close company that carries on a trade.
The second is income tax relief under the Enterprise Investment Scheme (EIS). It allows the individual to deduct from their income tax liability for the year a sum equal to 30% of the amount they have invested in the ordinary shares of qualifying unquoted companies.
The individual can subscribe up to £2 million per tax year in the ordinary shares of qualifying unquoted companies.
During the two years before and three years after the share purchase, the taxpayer must not be ‘connected with’ the company, meaning that the combined shareholdings of the taxpayer and their associates (including spouse and close family) must not exceed 30%.
Who approves long term service contracts?
This must be approved by the shareholders by ordinary resolution.
Which companies are exempt from statutory audit requirements?
Small companies.
Dormant companies (companies that do not trade).
How can business owners use a profit and loss account?
Business owners can use the profit and loss account to assess how profitable the business is.
There are two ways of increasing profits: reducing expenses or increasing income.
Businesses can increase income by selling more, perhaps because they are creating different or better products or marketing them better, or by increasing their prices.
Businesses can decrease expenses by, for example, buying cheaper stock or raw materials, reducing the number of employees, or renting cheaper premises.
How is a director appointed post-incorporation?
They will be appointed in accordance with company’s articles.
Under MA, the directors can be appointed either by the board or by ordinary resolution of the shareholders.
Board resolution is fastest but if the board is already circulating a written resolution or calling a GM on other matters it may make sense to also allow this.
What are the consequences for failing to file a confirmation statement?
It is a criminal offence to fail to file a confirmation statement or to file it late.
What is a long term service contract?
If the company has the power to terminate the contract within the two years it is not a guaranteed term of two years. It is the guaranteed term that requires the authorisation not require authorisation.
I.e. ten year service contract with a notice period of one year does not need authorisation by ordinary resolution.
I.e. a three-year fixed-term service contract with no provision for early termination does need authorisation by OR.
Who can bring a claim for fraudulent trading?
A liquidator or administrator.
What should be included in a PA regarding drawings and salaries?
The partnership agreement should set out how much each partner is allowed to drawn down in any given period, usually a month.
In the absence of such an agreement, they are entitled to share equally in income profits.
In some partnerships, the partners also receive a salary to reflect the work they do for the business whilst other partners may not receive a salary but share in any surplus profit.
When is insolvency presumed for a transaction at an undervalue?
Where the transaction was with a person connected with the company but this can be rebutted.
What is an auditor’s report?
The report must state whether in the auditor’s option the accounts have been prepared property and give a true and fair view of the company.
They must ensure that the shareholders whose money is invested are not defrauded or misled by the directors.
If the auditors report is qualified in any way, this is a warning to the shareholders that there may have been some unethical practices.
What are the exceptions to requirement for ordinary resolution for a loan to directors?
Expenditure on company business up to £50,000 in total
Expenditure on defending civil or criminal proceedings in relation to the company
Expenditure defending himself or herself in an investigation by a regulatory authority
Minor and business transactions as long as the transactions and any other relevant
transaction or arrangement does not exceed £10,000
What are the disadvantages of a credit facility?
The time and expense in negotiating and agreeing all the legal documentation for the loan and the high fees that are charged.
What reliefs should be considered in Step 3 of a CGT calculation?
Rollover relief
Rollover relief on incorporation of a business
Holdover relief on gifts
Business asset disposal relief
Private residence relief
When can members’ voluntary liquidation be used?
If the company is solvent.
What is the director’s duty to avoid conflicts of interest?
Directors have a duty to avoid a situations in which they have or can have a direct of indirect interest that conflicts or may possibly conflict with the interests of the company.
The duty to avoid a conflict applies in particular to the exploitation of any property, information or opportunity.
It does not matter whether the company could take advantage of the property, information or opportunity.
It must relate to a contract in which the company is not involved.
How long is an individual bankrupt for?
One year or possibly longer after which they are discharged.
This means that the bankrupt will be free of almost all their debt, even though the bankrupt has not paid all of their debts in full.
When does the declaration of interest in existing transaction or arrangement - s 182
this section not apply?
It does not apply if the director has already declared the interest under s 177 (duty to declare interest in a proposed transaction or arrangement).
What can be added into a company’s articles to protect a director from removal from office?
This gives someone who is both a shareholder and director greater voting rights as a shareholder if the resolution in question is a resolution to remove that person as a director.
When does the director’s duty to avoid conflicts of interest not apply?
It does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company.
When is a preference presumed?
If a preference is given to a person who is connected to the company, the desire to prefer is presumed but this can be rebutted.
What is the deadline for filing a confirmation statement?
14 days from the company’s confirmation date which is the anniversary of its incorporation.
Who pays income tax?
Individuals, partners, personal representatives and trustees may have to pay income tax. Charities are generally exempt, and companies instead pay corporation tax.
What set-off against capital gains relief?
Allows the tax payer to set their trading losses against chargeable gains in the same tax year and applies when a tax payer has claimed carry across relief but not of the loss has been absorbed.
The claim for the relief must be made on or before the first anniversary of 31 January following the end of the tax year in which the loss is assessed.
How is trading profit calculated?
Chargeable receipts LESS deductible expenditure LESS capital allowance = trading profit/loss
Which creditors are bound by then IVA?
Every ordinary, unsecured creditor who is entitled to attend and vote is bound by the decision, even if they did not actually attend the meeting. The IVA is not binding on preferential or secured creditors unless they specifically agree to it.
What test will the court apply for unfair prejudice claim?
Court will apply an objective test. Whether the hypothetical bystander would believe the act or omission to be unfair.
It is more difficult to succeed in this claim if the conduct about which the claimant is complaining is in accordance with the company’s articles of association.
How is an LLP incorporated?
Formed by filing LL IN01 at CH along with applicable fee.
Similar form to IN01 from for filing a company.
There is no requirement for an LLP to file an LLP agreement.
Companies house will then issue a certificate of registration.
What is a moratorium?
It protects the company from actions by creditors relating to pre-moratorium debts but it must pay debts incurred during the moratorium in full.
During the moratorium the directors remain in control of the company but a qualified insolvency practitioner oversees the moratorium and can terminate it in certain circumstances.
What is the test for the every step defence for wrongful trading?
The test examines the facts that a director ought to have known or ascertained, the conclusions that they ought to have reached an the steps which they ought to have taken.
The standard expected of a director is that of a reasonably diligent person having both:
a) The general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company (OBJECTIVE)
b) The general knowledge, skill and experience that that director has (SUBJECTIVE).
What is the liability of members of an LLP?
Members may be liable for misfeasance, fraudulent and wrongful trading and may have to contribute to the assets of the insolvent LLP.
A member of an LLP could also be disqualified from being a director or a member of a LLP.
What are shareholders agreements?
This binds all shareholders who are party to the agreement and provides a remedy if one of its terms are breached.
What is the effect of liquidation?
The directors lose their powers (and in a compulsory liquidation their appointments are terminated). The liquidator takes over the running of the company.
What is classed as a micro-entity?
A micro-entity is a company with a balance sheet total of not more than £632,000 and no more than 10 employees in a particular financial year.
What must be included in the written resolution?
How to signify the agreement
The deadline for returning the written resolution I.e. the lapse date
Following a s 303 request, when should the directors call the general meeting?
Directors must call it within 21 days of request.
What needs to be filed at Companies House in order to re-register a private company as a public company?
Special resolution
Application for re-registration on Form RR01 including a statement of compliance
Fee for re-registration
Revised articles
A balance sheet and a written statement from company’s auditors and a valuation report on any shares that have been allotted for non-cash consideration between the date of then balance sheet and the passing of the special resolution
What is a confirmation statement?
Every company must file a confirmation statement on form CS01. The purpose of the confirmation statement is to make sure that the information held at CH is correct and up to date.
What can secured creditors do if they are not getting paid back their debt?
Secured creditors may be able to appoint a receiver to take possession of the property which is the subject of the charge and deal with it for the benefit if the charge holder. This will usually involve selling the property.
Once the property is sold, the receiver usually has no interest in the property.
Normally the trigger for going into receivership is that the company has breached the charge holder’s loan agreement e.g. by defaulting on repayments.
The charging document itself will state when a receiver can be appointed and the company does not need to be insolvent.
What are the initial considerations for the lender when a company borrows money?
The lender needs to make sure:
a) There are no restrictions on the company granting security and
b) The directors have authority to act,
c) The people it’s dealing with have been properly appointed as directors of the company.
Can a breach of requirement to authorise a loan to directors be affirmed?
The transaction can be affirmed within a reasonable time by the company or its holding company if it is the holding company that has failed to obtain the ordinary resolution.
To do so, the shareholders have to pass an ordinary resolution. This means that the transaction would no longer be voidable and the directors are no longer liable in relation to the initial failure to obtain ordinary resolution.
What happens if the DRO is accepted?
During the time that the debtor is subject to the DRO, the same restrictions apply to them as to a bankrupt.
As with bankruptcy, these restrictions may last up to 15 years if the debtor is dishonest or culpable, and this extra period is obtained by the Official Receiver applying for a Debt Relief Restrictions Order against the debtor.
What are the exceptions for the requirement for an ordinary resolution to authorise a substantial property transaction?
If the SPT is between the a wholly owned subsidiary and its holding company
A transaction between a company and a person in his character as a member of a company (as opposed to acting in their personal capacity)
A transaction between a wholly owned subsidiary of a company
A transaction between two wholly owned subsidiaries of the same holding company
What is the personal allowance for 2024/2025?
ersonal allowance of £12,570
Everybody is allowed to earn a certain amount of income each year before they start paying income tax. This sum is known as the personal allowance, and it is deducted from net income to obtain the taxpayer’s taxable income.
The personal allowance for 2024/25 is £12,570. It can be set against income of any kind but is applied in a certain order:
1. firstly, against NSNDI
2. if there is surplus, against savings income
3. any remaining surplus is applied against dividend income
This is relevant for step 3 of the income tax calculation.
What are consolidated accounts?
Parent companies must normally produce a consolidated profit and loss account and balance sheet showing the group’s profits or losses, assets and liabilities.
This requirement reflects the commercial reality that the group is a single unit and it enables shareholders to assess the performance of their company within the context of the whole group.
Each individual company in the group still has to prepare its own final accounts in addition to the parent company preparing the consolidated accounts.
Why should a Partnership Agreement set out clauses that are in the PA 1890?
There are some clauses that should be included in a PA. Sometimes a PA will just repeat what the PA 1890 says but this should be included anyway because the it is useful to have partners have a complete document setting out all their rights and obligations rather than having to look at both.
What is the procedure for a breach under GAAR?
- HMRC notice
If HMRC finds that a taxpayer is in breach of the GAAR, it will notify the taxpayer of why it considers that a tax advantage has arisen to the taxpayer from tax arrangements that are abusive, and set out the tax adjustments (or ‘counteraction’) that the officer considers ought to be taken.
The adjustments must be ‘just and reasonable’, and can be made either by the taxpayer or HMRC.
- Taxpayer written representations
If counteraction is proposed by HMRC, the taxpayer is permitted to make written representations in their defence, and the matter will then be referred to the GAAR advisory panel (‘Panel’), who will issue their opinion by way of a notice to the taxpayer and HMRC.
HMRC will then, provided that they still agree with the Panel’s opinion, give the taxpayer a written notice setting out whether the tax advantage arising from the arrangements is to be counteracted under the GAAR, the adjustments required and the steps that the taxpayer must make to give effect to the adjustment.
- Consequences
Anyone who enables an abusive tax arrangement may be required to pay a penalty. An enabler is any person who, in the course of their business, enables the abusive tax arrangements that are defeated.
This can include individuals, companies or partnerships. Individual employees cannot be enablers because they are not acting in the course of their business. Instead, the firm or company employing them will possibly be liable to a penalty. There is a right of appeal to a tax tribunal. The penalty is equal to the value of the financial or other benefit received by the enabler in return for what the enabler did to facilitate the arrangements.
How can a director protect themselves from being liable under the director’s duty to avoid conflicts of interest?
A board resolution authorising the breach or potential breach is enough to protect the director in question from a claim for breach of duty under this section.
When analysing business accounts, what generally needs to be taken into consideration?
- Profitability
The profit and loss account shows whether the business has made a profit.
This does not mean, however, that the business has cash in the bank or can pay its debts. To understand this, consider how the profit and loss account is compiled. It will show how much the business has sold or how much it has charged for services, and this will be part of the calculation of profit. But the business may not have received payment. Looking at the balance sheet may reveal a high figure for debtors and no cash in the bank. Alternatively, perhaps the business has made a large profit but used the cash received to buy expensive equipment, so there is no cash in the bank.
Profitability, then, does not mean that the business can pay its debts (although, of course, a profitable business is still more likely to be able to pay its debts than an unprofitable one).
- Can a business pay its debts?
The balance sheet shows whether a business can pay its debts.
Liquidity is the availability of liquid assets to a business.
A liquid asset is an asset that can easily be converted into cash in a short amount of time. In the context of a balance sheet, this means current assets.
An extremely valuable factory and office premises are of no use to a business if it needs cash within the next fortnight: it cannot sell a factory and office premises in two weeks, so owning these valuable assets will not help it to pay its debts as they fall due.
Businesses can only feasibly use current assets to meet their liabilities. Therefore, it is important that the business does not run short of current assets. If a company is unable to pay its debts as they fall due, or if its liabilities exceed its assets, a company will be deemed to be insolvent.
What needs to be included in VAT tax invoices?
A person making a taxable supply to a taxable person must provide a tax invoice, an invoice showing information such as the VAT number, the value of supply and the rate of tax charged.
The person charging VAT must have tax invoices for all of the input tax they are reclaiming.
When analysing business accounts, what needs to be considered in terms of the wider context?
Some steps you can take when analysing accounts to help you to understand the wider context, including:
- Checking the date of the balance sheet. Is it up to date, and therefore showing an up- to- date financial position? Has it been distorted by a recent seasonal boost in sales, resulting, for example, in a high cash balance and lots of debtors?
- Look at the business’s accounts from previous years. This will help to show whether the business is growing and becoming more profitable, or in decline.
- Check how valuations have been carried out, and how recently. Freehold premises almost always increase in value over time, and if they have not been valued recently, the business may well be worth more than it appears. Fixed assets, such as machinery, can be valued in different ways, so you need to check how this was done and think about whether this is an accurate reflection of value. Finally, it is really important, in a trading business, to check how closing stock is valued. Closing stock is the stock remaining at the end of the financial year. Stock may appear on the balance sheet at cost price, but on closer investigation the stock is obsolete or damaged, so will never realise this amount if it were sold.
- Analyse the debtors figure. Debtors are classed as assets, because when they pay the outstanding debt to the business, the business will have more cash. However, sometimes debtors do not pay.
- Is there a bank overdraft? This is classed as a current liability, because it is repayable on demand. It will reduce the current assets figure and make it look as if the business may have difficulty paying its debts in the short- term. However, in reality banks will not demand repayment of an overdraft unless the business is in financial difficulties, so a large overdraft may not be a problem.
- Look for exceptional items, which may distort the accounts for that year. For example, perhaps the business has made a major investment in machinery, which will increase profits in the long run, but which has not happened yet.
What is a debt respite scheme?
This can give someone in problem debt the right to legal protection from creditor action.
There are two types of breathing space: a standard breathing space and a mental health crisis breathing space.
What are the duties of the administrator?
They must perform their duties in the interests of the company’s creditors as a whole.
Their primary objective must be to rescue the company as a going concern.
If this is not practicable, they must try to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up.
If this is not practicable, they must realise the property to pay one or more secured or preferential creditors.
Which reliefs cannot be used in conjunction with rollover relief on the replacement of qualifying assets?
The annual exemption cannot be first applied to any gains which are to be rolled over or held over under these reliefs.
Rollover relief on the replacement of qualifying assets cannot generally be used in conjunction with hold- over relief (because there is usually no gift) or rollover relief on incorporation (because shares are not qualifying business assets).
In terms of post-decision requirements, what must be filed at companies house?
a) Register of members updated
b) Register of directors updated
c) Board minutes
d) General meeting minutes
Where must the buyback of shares by share capital be shown in order to alert potential creditors who want to oppose the buyback?
Within seven days of the SR being passed, the company must put a notice in the London Gazette stating that the shareholders have approved payment out of capital in order that the company can buy back its own shares.
It must specify the amount of capital used, the date of the SR and where the director’s statement and auditor’s report are available for inspection.
It must also state that any creditor of the company can apply within five weeks from the buyback being passed to overturn the decision.
All of these above also needs to be posted in a national newspaper.
In bankruptcy proceedings, what happens to the debtor’s home if they own it?
If the bankrupt is a homeowner, their interest in the home passes to the trustee.
Is there a time limit for bringing a claim for transaction defrauding creditors (personal insolvency)?
No
Under the PA 1890, when will the partnership dissolve automatically?
a) When a partner retires
b) On expiry of a fixed term
c) By death or bankruptcy by any of the partners
d) If the partners give notice of dissolution to a partner who has by order of court granted a charge over their share of the partnership property for debt owed by them alone and not the partnership as a whole
e) Unlawful acts that make it unlawful for business of firm to be carried on
Dissolution of partnership on expiry of fixed term, death/bankruptcy of partners and notice + charge of share can be disapplied in the PA.
Dissolution for unlawful acts cannot be disapplied.
What are the general rules for taxation of partnerships?
Unlike companies, partnerships are not separate legal entities. This means that any tax liability arising from the partnership business is not payable by the partnership but rather by the individual partners, who will pay income tax and/ or capital gains tax.
Obviously, not all of the income or capital gains made by the business are attributable to one partner; the partners will share capital and profits between them.
It is necessary to apportion the profits between the partners. The rules for doing so will be different depending on whether the partnership consists of individuals only or individuals and one or more corporate partners, because companies pay corporation tax rather than income and capital gains tax.
Partners who are individuals may have to pay income tax on trading profits and other income, capital gains tax on capital profits, and inheritance tax.
What impact does share buyback have on CGT?
Usually, when a shareholder sells their shares back to a company, there will be a charge to income tax for the shareholder rather than CGT. The profit represented by the difference between the consideration the shareholder receives and the issue price of the shares will be taxed as a dividend. However, the shareholder’s profit sometimes attracts CGT instead.
- Conditions for attracting CGT instead if income tax
Capital gains tax will be relevant when certain conditions are satisfied:
a. the buyer must be a trading company and its shares must not be listed on a recognised stock exchange (AIM is not a recognised stock exchange for the purposes of this test); and
b. the purpose of the buyback must either be to raise cash to pay inheritance tax or be for the benefit of the company’s trade (perhaps where there is a rift between shareholders and the company will function more effectively if one of the shareholders sells their shares back to the company); and
c. the seller must have owned the shares they are selling back to the company for at least five years; and
d. the seller must either be selling all of their shares or substantially reducing their percentage shareholding (by at least 25%) to a maximum of 30% of the issued share capital of the company.
If it is difficult to decide whether these conditions are met, the taxpayer can apply to HMRC for advance clearance of their proposed tax treatment of the buyback.
- Tax benefits
Whether paying income tax or CGT would result in a lower tax liability will depend on the taxpayer’s circumstances and how much income they earn. If the taxpayer pays CGT, the availability of reliefs such as business asset disposal relief may significantly reduce their liability to CGT.
If the taxpayer is a basic rate income taxpayer, then they are likely to benefit from the ordinary income tax rate for dividends (8.75%) and the dividend allowance.
It is sometime possible to structure the buyback so that the taxpayer obtains the most favourable tax treatment.
What is a key limitation for a general partnership?
Partners do not enjoy limited liability for debts
How is the taxable income divided into the separate forms of income?
To find out how much taxable income is comprised of NSNDI and how much of savings and
dividend income, the savings and dividend income are deducted from the taxable income
figure arrived at in Step 3:
Taxable income less savings and dividend income = taxable NSNDI
The tax payable on NSNDI can then be calculated.
The order of taxation is:
1. NSNDI
2. Savings
3. Dividend
This is step 4 of working out income tax.
When should the payment for buyback of shares be made out of the share capital?
The payment out of capital must be made no earlier than five weeks after the date of the special resolution to approve the buyback out of capital and no later than seven weeks after the date of the special resolution so the board has a two week window to enter into the contract.
What information needs to be filled out on an IN01 form?
Articles
Company name
Registered office
First directors
Director’s residential and service addresses
Company secretary
First shareholders
Statement of capital
People with significant control
What is the notice period for a GM?
14 clear days (day notice is received and day of the GM are not counted).
In relation to income tax, what if the taxpayer’s income exceeds £100,000?
Where the taxpayer’s income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of income above the £100,000 limit. So a taxpayer earning a net income of £102,000 will benefit from a personal allowance of £11,570 – this is £1,000 less than those earning £100,000, because every £2,000 earned over £100,000 results in a reduction of £1,000 to the personal allowance.
Once a taxpayer’s income reaches £125,140, they will not have a personal allowance because their personal allowance will have been reduced to zero by this point.
What is a substantial property transaction?
A substantial property transaction is where a director, in their personal capacity or someone connected with a director buys from or sells to the company a non-cash asset of substantial value.
What is classed as substantial in the context of a substantial property transaction?
a) It will automatically be classed as substantial if its value is one £100,000.
b) It will also be classed as substantial if it is worth more than £5,000 AND more than 10% of the company’s net asset value.
The company’s net asset value can be ascertained by looking at the company’s balance sheet.
It just needs to pass one of the two tests.
How are company reserves printed on a company balance sheet?
The main feature of a company balance sheet which differs from an unincorporated business is in the ‘Capital Employed’ section, which is often called the ‘Capital and Reserves’ section in company accounts.
- Reserves
The reserves part of a balance sheet shows what the company ‘owes’ to its shareholders – the money shown would be paid to shareholders (after payment of any outstanding debts of the company) if the company were wound up.
There are different types of reserve, the main difference being between revenue reserves and capital reserves.
1.1. Revenue reserves
Most reserves are revenue reserves, which can in theory be distributed to the shareholders, for example through the payment of a dividend, even if the company decides not to do so. Capital reserves cannot be distributed to shareholders.
The profit and loss reserve is the most significant revenue reserve. It consists of the company’s profits, after tax and after payment of any dividends the company has decided to pay.
If the company makes a profit every year, and there is still some left after payment of tax and dividends, it will be added to the profit and loss reserve. This means that over time, the figure in the profit and loss reserve will increase unless it is spent.
It is common for the different reserves to be ‘labelled’ in the accounts, to show why the profits have been retained rather than paid to shareholders by way of dividend. An example of a label is the ‘debenture redemption reserve’, shown in the balance sheet extract above, which will indicate that some of the profits have been retained to repay a debenture in the future.
It is important to remember that this is just a label – the money is still retained profit, but the label tells anyone looking at the accounts how much the company is planning to use to repay the debenture.
1.2. Capital reserves
Capital reserves are not available for distribution to shareholders because they are part of the long- term capital of the company.
An example of a capital reserve is the share premium account. When shares are issued at a premium, the company must record the surplus over the nominal value of the shares on the share premium account. The surplus is part of the capital of the company.
Does the company need to keep a register of the director’s residential addresses?
This is for individual directors only.
It is not open for inspection.
Can be kept on the central register at CH instead.
Does an LLP need to have a registered office?
An LLP must have a registered office which is its address for service of official documents and the registered office address must appear on its stationary.
When do pre-emption rights not apply?
They do not apply in relation to the allotment of bonus shares, if the consideration for the allotment is wholly or partly non-cash or if the shares are to be held under, allotted or transferred in an employee share scheme.
Comparing debt and equity finance, what is the relative risk of investment?
Equity finance
From a buyers perspective, shares in a company can be riskier than lending to a company.
If the company is in financial difficulties, the company will not declare a dividend as it can only do this if it has distributable profits and even then the payment of dividends is usually discretionary.
The shareholder will also risk losing the capital value of the shares if the company goes insolvent.
Debt finance
As interest payments are a contractual liability of the company, the lender will be paid before the shareholder.
Furthermore, the loan may be secured over the company’s property and there may be personal guarantees from the directors.
How can shareholders remove a director?
The shareholders can remove a director by ordinary resolution passed at a GM.
Special notice is required before the GM to remove a director.
What kind of consent is needed to authorise a substantial property transaction?
If the director wants to enter into an SPT, the shareholders have to give consent by way of ordinary resolution.
If the person in question is also director of the company’s holding company or a person connected with such a director, the transaction or arrangement must also be approved by ordinary resolution of the shareholders of the parent company.
Which grounds for partnership dissolution canNOT be disapplied by the PA?
Dissolution for unlawful acts cannot be disapplied.
How are partnerships taxed (some partners are companies)?
They would pay corporation tax on their share of the profits.
What is a partners’ liability for partnership debts if the debt was incurred before leaving the partnership?
Each partner is jointly and severally liable with the other partners for debts incurred by the partnership when they were a partner. A claimant can sue any or all of the parters and collect the total damages awarded by any of and all of them, leaving the defendants to seek a contribution from any of the other partners.
Whilst this seems risky, in practice the partnership will likely have a professional indemnity insurance for any professional negligence claims. However this obviously only applies to professional occupations, a manufacturing company would be in severe difficulty.
Does a company have to be registered with HMRC for corporation tax?
Yes, the company must be registered with HMRC for corporation tax. If companies are registered online, they will be registered for corporation tax automatically.
If the application was made by post or through a formation agent or using third party software, the applicant has to make a separate application to HMRC within three months of starting to do business.
When can there not be considered to be a breach of director’s duty to avoid conflicts of interest?
There is no breach if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.
The duty has not been infringed if it has been authorised by the directors.
When does income tax have to be paid?
There are different tax returns for different types of income and they are issued soon after 5 April each year.
a. Online
Taxpayers are encouraged by HMRC to file an online tax return. The online tax return and any payment must be filed by 31 January following the tax year to which the return relates.
b. Paper
If the taxpayer wishes to file a paper return, the submission date is earlier: no later than 31 October.
The taxpayer must make two payments on account towards the income tax due for any tax year, and a final balancing payment to meet any tax still outstanding.
The payment dates are:
- first payment on account: by 31 January in the tax year in question;
- second payment on account: by 31 July after the end of the tax year; and
- any balancing payment (calculated once the tax year is over) is due on the next 31 January.
- How much are the payments on account?
The first and second payments should each be approximately on half of the taxpayer’s tax liability, based on the previous year’s accounts. However, the payments are reduced to give credit for any tax deducted at source.
The taxpayer does not have to make a payment on account if the amount remaining after giving credit for tax deducted at source is below a certain limit.
This is important, because it means that the following people are not required to make payments on account:
- most employees;
- pensioners
- others who receive most of their income after deduction at source; or
- those who have relatively small tax liabilities.
Taxpayers can claim a reduced payment on account or cancellation of the payment on account if they have grounds for believing that if they make payments on account based on the previous year’s accounts, this will result in an overpayment of tax in the current tax year.
- What happens if tax is not paid?
HMRC charges interest on any tax unpaid at the due date for payment. This applies to both payments on account and balancing payments.
There are also fixed penalties – fines – for late or non-payment.
2.1. Records
Taxpayers must maintain adequate records to support the information in their tax return, and there is a penalty for default.
HMRC has the power to carry out audits and make enquiries to check whether the tax return is accurate. Taxpayers can appeal against assessments to the First- Tier Tribunal (Tax).
What is a term loan?
A business borrows a fixed amount of money for a specific period at the end of which it must all be repaid.
They also pay interest at regular intervals.
The contract for a term loan may be called a loan agreement, a credit agreement or a facility agreement.
What is carry forward relief on incorporation of a business?
If a taxpayer incorporates their business by transferring it to a company wholly or mainly in return for shares, any trading losses which have not been relieved can be carried forward and set against any income they receive from the company such as their salary or dividends.
To be classed as wholly or mainly in return for shares, 80% or more of the consideration for the business transferred must be shares in the company.
The taxpayer can set the losses against more than one form of income until the loss is fully absorbed e.g. salary/dividends.
They can set the loss against an order of income type as they choose so its down to them to consider their own financial situation and choose the order that has be biggest tax advantage.
There is no cap on the amount that can be relieved under this provision.
Whilst the losses can be carried forward indefinitely, the tax payer 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.
What is the income tax relief on borrowings?
If an individual borrows money to buy a share in a partnership or to lend money to a partnership, they can deduct the interest they pay on this borrowing from total income.
This loan is a ‘qualifying loan’. This encourages individuals to invest in businesses.
There is a cap on the amount of tax relief, of the greater of £50,000 or 25% of the taxpayer’s total income less allowable pension contributions in the tax year where the relief is claimed.
However, the cap only relates to income from sources other than the trade which produced the loss, so its effect is limited.
What is a chairperson’s additional purpose in a public company?
The chair of the board acts as a figurehead in dealings with shareholders and anyone outside of the company.
What happens if an eligible member signifies their agreement after the lapse date?
If an eligible member signifies their agreement after the lapse date, their agreement will not be counted.
What is a close company?
a) A close company is a company either:
controlled by five or fewer participators; or
b) controlled by participators (any number of them) who are directors or shadow directors.
- What is a participator?
A participator is a person who owns shares in the company, or has the right to acquire shares in the company.
To ascertain whether the participators ‘control’ the company, the test is whether the participators own more than half of the shares in the company or have more than half of the voting power in the company, or have the right to acquire more than half of the shares in the company.
When a close company loans money to a participator or their associate (broadly, ‘associate’ means a close relative or business partner), the company must pay to HMRC an amount of money equivalent to 33.75% of the loan. The payment is akin to a deposit: payment will be refunded to the company if and when the participator/ associate repays the loan or if the loan is written off.
- When is the tax not payable?
a) the loan is made in the ordinary course of a money- lending business, for example, a bank loan by a bank to a shareholder; or
b) if the loan (added to any other such loan made to the same person) is no more than £15,000 and the borrower works full- time for the company and owns no more than 5% of the company’s ordinary shares.
- When will the borrower have to pay tax on the debt?
The borrower does not have to pay any tax in relation to the loan, unless the company writes off the debt.
- What is the effect of this provision?
The reason for these provisions is to prevent tax avoidance. If these provisions did not exist, directors or shareholders could borrow money from the company, instead of receiving it as taxable income or dividend, and arrange for the company not to enforce the obligation to repay for many years, if at all.
The loan would then be almost akin to a salary, but tax- free. Shareholders of a close company who take out a loan to purchase shares in the company or to lend money to the close company may be able to claim income tax relief on the interest payable on the loan.
When must the buyer pay stamp duty on shares after a share transfer?
If the sale price of the shares is over £1000. This is recorded on the stock transfer form.
No stamp duty is payable when the shares are a gift.
What assets can be secured?
Most property.
a) Land (freehold/leasehold and fixtures/fittings)
b) Tangible property (machinery, computers and stock)
c) Intangible property (money in bank account, debts owed, shares owned, intellectual property rights)
What is the advantage of a CVA for creditors?
They are likely to be paid more in a CVA than they would if the company went into liquidation or administration
When assessing the second stage of a derivative claim, when must the court refuse permission to continue?
Court will not allow an individual who is not promoting the success of the company to continue the claim.
Where the cause of action arises from an act or omission that has not yet occurred but which has already been authorised by the company.
When the act or omission has already occurred and was authorised before it occurred or has been ratified by the company since it occurred.
What are the consequences for failing to obtain a shareholder resolution for a long term service contract?
The guaranteed term element of the service contract is void, although the rest of the contract would be enforceable.
The service contract would be capable of being terminated on reasonable notice.
What is the effect of shareholders ratifying a director’s breach of duty?
The director escapes liability to the company for breach of duty.
What is a claim in misfeasance?
This is breach of any fiduciary or other duty by the directors.
During the course of winding up, the directors may be ordered to contribute to the company’s assets by way of compensation in respect of the misfeasance.
They may also be ordered to repay, restore or account for any money or property or any part of it that has been misapplied in breach of duty.
How do CVAs compare to administration?
It is cheap, easy to undertake and is available to liquidators, administrators and the company itself.
Who approves the proposals of a CVA?
a) 75% or more in value of the company’s creditors and
b) 50% or more of non-connected creditors
What are the advantages of a security of a loan for a lender?
If the lender fails to repay the loan as agreed, then the lender can seize the secured assets, sell them and pay itself out of the proceeds of sale.
What are the consequences of not maintaining share capital?
Dividends cannot be paid out of capital, only out of distributable profits
The company must not generally purchase its own shares
What is the director’s duty to declare interest in a proposed transaction or arrangement?
There must be a transaction or agreement with the company for this duty to be breached.
A director must declare the nature and extent of any interest they are directly or indirectly interested in.
When is an IVA sought?
Before or during bankruptcy.
What is the CGT tax rate for trustees and PRs?
Gains made by trustees and PRs are all taxed at 20%, or, for residential property, 28%.
After the buyback of shares out of share capital has been authorised, what needs to be filed at the CH?
Filing copy of directors’ statement and auditors’ report at CH
This should be done before or at the same time as it places the notices in the London Gazette and the newspaper.
Which reliefs cannot be used in conjunction with holdover relief?
The annual exemption cannot be first applied to any gains which are to be held over under these reliefs.
Business asset disposal relief cannot apply to any gains which are to be held over on the gift of business assets.
When is CGT payable?
Generally it is payable on or before 31 January following the end of the tax year, or 30 days from the making of an assessment, if later.
However, a taxpayer is required to submit a provisional calculation of any gains made from the sale of a residential property and pay any tax due within 30 days following completion of the sale.
Which companies have to file annual accounts?
Every company, apart from small companies and micro-companies, have to file director’s reports and accounts.
What form needs to be sent to CH to register an individual on the PSC register for the first time?
Form PSC01
Who can be a company secretary of a private company?
They do not need to have any specific qualifications and the role they are expected to fulfil will vary from company to company.
Large companies may have a full-time company secretary who may run an administrative department.
In smaller companies the company secretary may also be a director and will be the person responsible for ensuring that the company keeps up to date with its filings at Companies House.
What are the key shareholder special resolutions?
To change the name of the company
To amend the company’s articles of association
To disapply pre- emption rights
To approve the re- registration of a private company as a public company
To approve a payment out of capital
Which individuals may be liable for breach of substantial property transaction?
Any director of the company (or of its holding company) with whom the company entered into the arrangement
Person connected to the director of the company/holding company that entered into the arrangement and the director themselves,
Any other director who authorised the arrangement/transaction
If the charge was granted without the company giving fresh consideration in exchange for granting security at the ‘relevant time’ before the onset of insolvency.
When is the ‘onset of insolvency’?
Liquidation (CVL):
The date the company formally entered into liquidation.
Administration:
The date that the company files a notice of intention to appoint an administrator or the date it actually goes into administration if that is earlier.
Floating charge given to someone unconnected to the company:
The company must have been insolvent at the time the floating charge was given or become insolvent as a result.
Floating charge given to someone connected to the company:
It is not necessary to show that the company was insolvent when the charge was granted or that it became insolvent as a result.
What needs to be considered at Step 4 of a CGT calculation?
Gains and losses from all sources must be added together, and the annual exemption of £3,000 is deducted at this stage.
The annual exemption is the capital gain every CGT payer can make every year without being taxed on it.
Any unused part of the exemption cannot be carried forward to the following tax year.
Can a director count in the quorum to authorise a conflict of interest?
The director in question will not count in the quorum for the vote to authorise the infringement and if they vote their vote will not be counted even if MA 14 has been excluded.
With regards to sole traders and partnerships claiming trading loss relief, what happens if they have claimed all of the relief in that provision?
If they have claimed all the relief they can in that provision and there are still some unabsorbed losses, the taxpayer can claim relief for the balance of the loss under another provision if they are eligible.
Sometimes that loss is set against total income and sometimes it is set against a particular component of the income. Some of the reliefs are also subject to a cap for that tax year.
The partners will decide individually which reliefs they want to claim in relation to their share of the partnership’s losses. It is an individual decision.
The taxpayer must apply to the relief, they are not automatically applied by HMRC.
How can a shareholder agreement protect directors from removal from office?
There may also be a provision in the shareholder agreement obliging them to vote against the removal of their fellow shareholders from their office of director.
If a shareholder who was party to such an agreement does so, the former director/shareholder will have a claim in breach of contract of the shareholder’s agreement.
Why is it important to identify a person with ore than 25% but not more than 50% of the company’s shares/voting rights?
They can block special resolutions on their own as they have more than 25% of voting rights.
What trading loss reliefs can partnerships and sole traders claim?
Start-up relief/early trade losses relief
Carry-across/one year carry-back relief for trading losses generally
Set-off against capital gains
Carry forward relief
Carry back of terminal trading loss
Carry forward relief on incorporation of a business
How is a private company converted to a public company?
Must pass a special resolution to re-register the company and to alter the company’s name so it is suitable for a public company and altering article to they have a suitable form for a private company.
Avoidance of certain floating charges
What is the relevant time during which a floating charge made without fresh consideration may be avoided?
a) The charge was created in favour of a person who is connected with the company, during the two years ending with the onset of insolvency or
b) The charge was created in favour of any other person, during the 12 months prior to the onset of insolvency
When a partner leaves a partnership does that mean that they have have stopped working or claimed a pension?
No, just that they have left the partnership.
What are the options for the insolvent person?
a) Talk to creditors to come to an agreement regarding the payment of debt
b) Apply for their own bankruptcy to show that they are trying to take control of the situation
c) Apply for an individual involuntary arrangement
d) Apply for a debt relief order
e) Apply for debt respite scheme
What is the defence for transactions at an undervalue claim?
If the transaction was entered into in good faith for the purpose of carrying on the business and where the transaction was entered into there were reasonable grounds for believing that it would benefit the company.
Who is not allowed to vote in the CVA proposal?
The secured creditors unless they vote in relation to an unsecured debt.
In which events will a floating charge crystallise?
a) The chargor goes into receivership
b) The chargor goes into liquidation
c) The chargor ceases to trade
d) Any other event occurs which is specified in the charge document
The above makes it less likely that the chargor will not be able to repay the outstanding borrowings.
What must be made available to members during a GM or WR for the authorisation of a buyback of capital?
If the special resolution was proposed by WR, the statement and the report must be sent to the members along with the WR.
If by GM, a copy of the statement and report must be available for inspection at the meeting.
If this is not required with, the special resolution is ineffective.
Is a partnership a separate legal entity?
A partnership is not a separate legal entity. The partnership does not own any of the assets, they are owned by the partners.
How is administration commenced through the court route?
This is by court order following application to court and a court hearing.
The court will only make an administration order if it is satisfied that the company is likely to become unable to pay its debts and the administration order is reasonably likely to achieve one of the three purposes of the administration.
As soon as reasonably practicable after applying for the administration, the applicant must notify any person who has appointed or is entitled to appoint an administrative receiver of the company and any qualifying floating charge holder who is entitled to appoint an administrator.
What are the advantages of a term loan?
There is greater certainty than an overdraft which is repayable on demand and the borrower has greater control because the bank can only request repayment under the terms of the contract.
What is the minimum and maximum notice period for a s 303 request?
Minimum notice period is 14 clear days but maximum notice period is 28 days.
What happens if there is late or inaccurate delivery of the required charge documents to CH?
If the 21 day period for delivery of the required documents to CH is missed (weekends and bank holidays are included in the 21 days) or if the content of the form is incorrect, the charge is void against a third party.
Declaration of interest under s 177 v MA 14
When a company has misapplied MA 14, the obligation to declare an interest under s 177 remains. It cannot be disapplied by the company as it is a statutory provision.
How is CH notified of the movement of company statutory records from the SAIL address to company registered office?
Form AD04
How is CGT calculated (overview)?
Step 1: Identify the disposal (sale or gift) of a chargeable asset (part disposals are apportioned)
Step 2: Calculate the gain – deduct costs of disposal, initial and subsequent expenditure and incidental costs of disposal
Step 3: Consider reliefs. The main ones are:
* Relief on replacement of business assets (‘rollover’ relief)
* Rollover relief on incorporation of a business
* Hold- over relief on gifts
* Business asset disposal relief
Step 4: Aggregate gains/ losses and deduct the annual exemption (deduct the annual exemption from the gains which would be subject to the highest rate of tax). Capital losses carried over from the previous year can be deducted here.
Step 5: Apply the correct rate of tax:
* Standard rate of 10% for basic rate taxpayers and 20% for any gains above the basic
rate threshold;
* Residential property rate – apply a surcharge of 8%, meaning that the rates are
18% for basic rate taxpayers and 28% for any gains above the basic rate threshold; or
* Business asset disposal relief rate of 10%, whatever the taxpayer’s income.
What is the self-assessment of income tax?
Self- assessment is a system HMRC uses to collect income tax.
Anyone who receives any income from which the tax has not been deducted at source (eg rental income) must complete a tax return, declaring all their income for the tax year.
Any income tax which has been deducted at source should be included on the tax return and the taxpayer’s tax liability will be reduced by the amount of income tax that has already been paid.
Unfortunately for HMRC, the self- assessment method carries the risk that the taxpayer will spend the income received before HMRC has been paid, and there will not be enough left to pay HMRC.
When can a debt relief order not be used?
a) Debtor has total unsecured liabilities exceeding £30,000
b) Has total gross assets exceeding £2,000
c) Has a car worth £2,000 or more unless it has been adapted because the debtor has a disability
d) Has disposable income in excess of £75 per month after deducting normal household expenditure
e) Has been subject to a DRO in the preceding six years
f) Is subject to another formal insolvency procedure or
g) Owns their own home
What are examples of VAT exempt supplies?
a) Supplies of residential land
b) Postal services
c) Education and health services
A person who makes exempt supplies cannot register and will not be able to reclaim any VAT.
Who cannot become a director?
Cannot take office if they are disqualified from doing so.
The person will cease to be a director if a bankruptcy order has been made against them.
A doctor gives a written opinion stating that they have become physically or mentally incapable of acting as a director and may remain so for more than three months.
Dependant on specific facts, what forms may need to be sent to CH and when following allotment of shares?
Return of allotment and statement of capital (Form SH01) within one month of allotment
Possible forms for new persons of significant control or a percentage change of PSC (either update or removal)
What is an executive director?
Those who have been appointed to the board of directors and also have an employment contract with the company.
What number of directors must a public company have?
A public company must have at least two directors.
What does the balance sheet show?
The balance sheet shows the worth or value of the business by listing its assets and liabilities on the last day of the accounting period.
It must be headed with the date of preparation.
It is often described as a snapshot of the business, because it shows how much the business is worth on the day of preparation, and this could change the very next day. For example, a balance sheet showing as one of the business’s assets a debtor who owes £100,000 will not be worth as much as it seems if the very next day it becomes clear that the debtor is insolvent and there is no money left to pay its debts.
The calculation which the balance sheet essentially shows is:
Assets – Liabilities = Net worth of the business
The balance sheet does not just show assets in one section and liabilities in the other.
It has two sections, one showing the value of the assets less liabilities owed to third parties and the other showing the amount owed to the proprietor as capital.
These two amounts will be the same. It might help you to think of the top half as showing you where the money is – tied up in fixed assets, used to buy stock, in the business’s bank account, for example – and the bottom half as showing you where the money came from – the owner’s initial capital contribution and profits earned since trading began, for example:
Employment of capital = where the money is now
Capital employed = where the money originally came from
As with the profit and loss account, the balance sheet calculation (Assets – Liabilities = Net
Worth) is shown vertically.
Assets and liabilities are also sub- divided:
a) Assets
Assets are split into fixed assets and current assets.
Fixed assets are used in the business to enable it to run effectively. Examples are business premises and machinery.
Current assets are short- term assets. Examples are stock, debts and cash.
b) Liabilities
Liabilities are divided into current and long- term liabilities.
Current liabilities are liabilities which are repayable in 12 months or less from the date of the balance sheet, for example, a bank overdraft or an invoice owed to a supplier.
Long- term liabilities are liabilities which are repayable more than 12 months from the date of the balance sheet. The most obvious example is a bank loan.
Assets appear on the balance sheet in increasing order of liquidity, that is, how easy it should
be to turn the business’s assets into cash, to meet its short- term liabilities. So fixed assets are at the top with current assets underneath. This means that any premises will always be at the very top of the balance sheet, at the top of fixed assets, and cash will always be at the bottom of current assets.
c) Net current assets
Net current assets is a key figure for a business. It shows the difference between current assets and current liabilities and it is an important figure because it shows the business’s liquidity.
d) Net assets
Net assets is another key figure, and is calculated by subtracting short- term and long- term liabilities from fixed and current assets.
This figure will always be equal to the amount owing to the business owner as capital at the end of the year.
e) Capital employed
The ‘Capital Employed’ section shows the value of the business to the owner. It consists of the balance on the capital account (which represents the amount put into the business by the owner(s)), and also the net profit from the profit and loss account (which represents the money the business has made over the year).
Sometimes the business owner(s) will have withdrawn money over the year, and this will be shown on the drawings account.
The balance on the drawings account is deducted from the other figures in the Capital Employed section.
Understanding the balance sheet is crucial for a business owner, because it enables them to
analyse the health of the business. If the business’s liabilities exceed its assets, it is clearly in financial difficulty.
Even if it has a high assets figure, it may have little cash to pay invoices, and may risk insolvency proceedings if it cannot pay a creditor.
Why would a company want to exclude MA 14?
The MA states that a director cannot vote in a board resolution if they have a personal interest in the matter and small companies may be hindered by this so they prefer to exclude the MA and submit their own articles when they incorporate the company or subsequent to the incorporation through a special resolution of the shareholders.
What is the relevant time for a preference?
a) If the preference was given to a person who is connected with the company during the two years ending with the onset of insolvency.
b) If the preference was given to any other person during the six months ending with the onset of insolvency.
What does an auditor do?
They are an accountant who’s main duty is to prepare a report on the company’s annual accounts to be sent to shareholders.
What is the avoidance of extortionate credit transactions (personal insolvency)?
This is an action a trustee can take to preserve and increase the bankrupt’s assets?
If the bankrupt has obtained any credit in the three years prior to the bankruptcy order and the terms of the credit are extortionate, the trustee can apply to set aside or vary the terms of the credit.
Extortionate means that the terms require grossly exorbitant payments or have grossly contravened fair dealing.
Is CGT charged on death?
There is no charge to CGT on death, because there is deemed to be no disposal of assets and the deceased’s personal representatives are deemed to acquire the deceased’s assets at their market value at the date of death.
What is the most common ground on which the petitioner will seek compulsory liquidation?
That the company has not been able to pay its debts by establishing one of the grounds for insolvency.
What is VAT?
Charged on any supply of goods and services made in the Unite Kingdom where it is a taxable supply made by a taxable person in the course of any business carried on by them.
Tax is charged on the value of the supply.
Supply of goods and services:
Any transfer of a whole property in goods is a supply of goods and this will include tangible goods such as interest in land or a supply of electricity.
Anything which is not a good is likely to be a service.
Taxable person:
A taxable person is a person who makes or intends to make taxable supples and who is required to be registered under VAT statute.
A person must be registered if the value of their taxable supplies in the preceding 12 months exceeded £90,000.
Course of business:
A business includes any trade, profession or vocation.
A supply in the course of business includes the disposal of a business or any of its assets.
Value of supply:
VAT is charged on the value of the supply of goods and services.
This is what the goods or services would cost if VAT were not charged.
A price is deemed to be VAT inclusive unless stated otherwise.
What is an alternative director?
They can be appointed if an director cannot attend a board meeting. They will vote in accordance with the wishes of the director who cannot attend.
There is no provision for this in the MA, a special article needs to be inserted.
What is the process of members voluntary liquidation?
Directors make statutory declaration of solvency
Members pass special resolution to liquidate the company and ordinary resolution to appoint liquidator. Directors powers cease.
Petition advertised in the Gazette.
Once the formalities of the meeting are concluded, the appointment will be published in the Gazette and the Registrar notified.
Liquidator investigates and reports to the creditors.
Creditors may appoint alternative liquidator if the majority are in favour and a resolution is passed to that effect.
Liquidator collections in assets and realises if necessary and then distributes in the statutory order.
Final accounts sent to creditors and members.
Final return filed with Registrar of Companies.
Company dissolved after three months.
What is the effect of a breach of authorisation for a substantial property transaction?
The transaction is voidable AND certain individuals may be ordered to account to the company for any gain that have made and to indemnify the company for any loss or damage resulting from the arrangement or the transaction.
What is the solution to a director not being able to act in a quorum on a vote concerning their own personal interests?
Change the company’s articles permanently by special resolution to allow the directors to vote even where they have a personal interest in the matter in question or just to allow them to vote when the subject under discussion is their service contract.
Or the shareholders could temporarily suspend the operation of the MA by ordinary resolution.
How is net income calculated?
This is step 2 of the calculation.
Total income less allowable reliefs = net income
Allowable reliefs are deducted from total income to give a figure for net income. The most significant example is interest payments on qualifying loans.
Most interest payments, for example, bank overdrafts and credit card interest, must be paid out of taxed income. But in certain cases, tax relief may be available for interest paid on money which the taxpayer has borrowed.
How is administration commenced through the out-of-court route - appointment by QFCH
?
A QFCH is a floating charge where the charge document states that it empowers the holder of the charge to appoint an administrator or it empowers the holder of the floating charge to appoint an administrative receiver
AND the charge document relates to the whole or substantially the whole of the company’s property (or does so when the other charges held by the lender are aggregated).
If there is another QFCH who would have priority, the lender must notify them in advance and give them the opportunity to appoint an administrator if they want to.
The floating charge must be enforceable i.e. the charge holder must be entitled under the loan agreement to enforce the security (usually because of late payment but there will be other default events).
The lender must file the notice of appointment at court along with certain documents.
The notice of appointment must include a statutory declaration by the lender stating that:
a) The lender is a holder of QFC in relation to the company’s property
b) The floating charge is enforceable
c) The appointment complies with statute
The administration only begins when those documents are filed at court.
What is the CGT stance on tangible moveable property?
Wasting assets are generally exempt from CGT. Wasting assets are assets with a predictable life of less than 50 years. This includes most consumer goods, for example kitchen appliances and televisions.
Tangible property that does constitute a wasting asset:
Not all tangible moveable property constitutes a wasting asset: some assets, such as antiques, will go up in value. These assets are exempt from CGT if the consideration for the disposal is £6,000 or less.
Will there be a provision for pre-emption rights in companies articles?
There are no pre-emption rights in the MA so if there are pre-emption rights they will be a special article.
What happens if the court orders that the company be wound up in compulsory liquidation ?
The Official Receiver will automatically become the company’s liquidator. The OR is a civil servant or court official who is employed by the insolvency service.
The OR can appoint a private insolvency practitioner, depending on the nature of the case and the creditors’ wishes as long as the company has sufficient assets to pay the insolvency practitioner’s fees.
Who is the company secretary?
They are an officer of the company and it is possible to have a corporate company secretary in which case the secretary will act through a human being authorised by the company appointed as company secretary.
Some companies decide to have more than one company secretary and they will act as a joint company secretary.
What is a revolving credit facility?
The bank agrees to make a maximum amount of money available to a business throughout the agree period of the revolving credit facility.
During the lifetime if the facility, the business can borrow and repay money.
Interest is payable at regular intervals.
The business is also able to reborrow amounts that it has already repaid so long as it does not exceed the overall maximum figure.
The contract for a credit facility is usually called a facility agreement.
What are the civil consequences for breach of director’s duties?
Account of profits
Equitable compensation for the loss suffered by the company
Rescission of any contract entered into as a direct or indirect result of the breach
An injunction, to prevent further breaches/a continuing breach
Restoration of property transferred as a result of the breach of duty
Breach of s 174 is the same as negligence so the remedy for breach of duty to exercise reasonable care, skill and diligence is common law damages assessed in the same way as damages for negligence.
What sources of income (non-comprehensive) do income taxes have to paid on?
(a) trading income: profits of trade, profession or vocation. This applies to sole traders, trading partnerships, sole practitioners and professional partnerships;
(b) property income: rents and other receipts from land in the UK;
(c) savings and investment income: interest, annuities and dividends;
(d) employment and pensions income, including social security payments such as sick pay and maternity pay; and
(e) certain miscellaneous income.
How are LLPs taxed in terms of income tax?
When an LLP is used to carry on a trade or profession, it will be treated for most purposes in the same way as an ordinary partnership as far as income tax is concerned. However, the availability of relief for trading loss is restricted for partners in an LLP in certain conditions.
Allotment of shares
If a company was incorporated pre CA 2006, what needs to be considered with regards to any constitutional restrictions on allotment?
If the company was incorporated pre October 2009 and the company’s articles have not been updated, then the company will have an authorised share capital in the company’s articles.
It can be removed by ordinary resolution and a copy of the resolution must be sent to CH.
Regarding the additional requirements to authorise buyback out of share capital, when must company directors make a statement of solvency?
Company directors must make a statement of solvency no sooner than one week before the general meeting stating that the company is solvent and that it will remain solvent during the year following the buyback.
If this is a false statement, the directors may face criminal sanctions and the seller of the shares and the directors may have to contribute to the financial losses of the company.
What is double entry bookkeeping?
Businesses must keep records of every financial transaction, otherwise they will not be able to work out how much they have spent or earned.
They need to record their day- to- day financial transactions in order to prepare accurate accounts. The recording of a business’s financial transactions is known as bookkeeping. All businesses use the double entry bookkeeping system.
It is based on the principle that there are two aspects to every transaction – for example, if a business buys premises, it both acquires premises and has less cash. If a business receives payment for an outstanding invoice, it has more cash and loses the debt owed to it. The two aspects of every transaction are recorded in the business’s books, which have a left- hand column and a right- hand column.
The left- hand column is called the debit column (shortened to DR) and the right- hand column is called the credit column (shortened to CR).
Under the double entry system, the business has separate accounts for each aspect of the business. For example, it will have one for cash, one for each type of expense, and one for each debtor. Every single transaction is recorded as it occurs.
Bookkeepers check the accuracy of the books at regular intervals, perhaps daily or monthly, perhaps weekly. They will also check the business’s books at the end of its accounting period, which is usually one year. They will add all the DR balances and all the CR balances on the accounts. If there are no errors in the books, the two figures should be the same.
This process of adding together all the DR and CR entries is called preparing the trial balance.
Preparing a trial balance is the first step in preparing the business’s final accounts, which are
its year- end summary accounts.
What is subordination?
It is possible for lenders to enter into an agreement between themselves to alter the order of priority of their charges.
This is known as subordination and the agreement is known as a deed of priority.
It is executed by the creditors concerned and sometimes the company.
This may happen if the bank would only advance new funds to allow a borrower to trade if the bank could have priority.
What is the process of administration?
Once the administration has started the moratorium comes into effect.
The administrator puts forward the proposals for the company to the creditors.
The creditors can ask for more information on the amended proposals, especially if the administrator has been appointed by the directors.
Creditors can suggest amendments to the proposals.
The administrator’s proposals will be approved if a majority in value of the creditors, present and voting, vote in favour of them, provided that those who vote against the proposals do not constitute more than 50% in value of the creditors who are unconnected to the company.
When is a person insolvent in personal insolvency?
a) A debt is payable but the debtor does not currently have enough money to pay
b) A debt is payable in the future and there are no reasonable prospect that the individual will be able to pay
What rights other than the power to vote can a shareholder exercise?
Right to receive dividends (as long as there are profits available for this and the directors have made a recommendation as to its amount and this has been approved by shareholders)
Right to apply to court for the company to be wound up on the grounds that it is just and equitable to do so
Right to remove director by ordinary resolution
Right to remove auditor by ordinary resolution
Right to inspect without charge - company minutes of GM and all shareholder resolutions passed otherwise than at GMs, all of company’s statutory registers, directors service contracts and any director’s indemnities and any contracts relating to the company’s of its own shares
Right to receive a copy of the company’s annual accounts and reports
Right to seek an injunction to restrain company from doing something that is prohibited by the constitution
How does s 182 differ from s 177?
The declaration must be made at a meeting of the directors or by notice in writing sent to all the other directors or by general notice of the interest given at a board meeting.
What happens if the share transferee is never entered onto the register of members?
Shares are deemed issued when the shareholder is entered on the register of members.
If the transferee is never entered onto the register of members, they will be the beneficial owner of the shares, but the transferor will remain the legal owner of the shares.
Who can attend a GM and receive dividends in this case?
The transferor as the legal owner.
However, the transferor must vote in accordance with the wishes of the beneficial owner of the acres and must pay any dividends to the beneficial owner.
Does a partnership have liability in tort?
Under the PA 1890, the firm is liable for any wrongful act or omission of a partner who acts in the ordinary course of the firm’s business or with authority of their partners.
What are the two key shareholder resolutions where the votes of a shareholder with a personal interest in the matter are not counted?
A resolution to buy back some or all of a shareholder’s shares
An ordinary resolution to ratify a director’s breach where the director in question is also a shareholder
What is bankruptcy?
The process of the debtor’s assets passing to a trustee in bankruptcy whose job it is to pay as many of the debts as possible to the debtor’s creditors.
The debtor is known as the bankrupt. They are subject to restrictions on their activities and spending during the bankruptcy process and possibly afterwards.
What are distributable profits?
These are the company’s accumulated, realised profits less its accumulated, realised losses. They are shown on the bottom half of the company’s balance sheet under profit/loss reserve.
How are dividends presented in the business accounts of a company?
Companies are only permitted to pay dividends from profits (although they could be paid from previous years’ accumulated profits, rather than the current year).
However, companies are unlikely to distribute all of their net profit. This is partly because they need money to pay expenses and run the business. Secondly, much of the company’s profit may not be in the form of cash.
Debtors are counted as an asset, so will be factored into the net profit calculation in the profit and loss account, but they do not produce any cash for the company until they pay. Or perhaps the company used some of the money it made during its accounting period to buy a fixed asset.
If this is the case, the profit will be shown in the profit and loss account, but will not be represented by cash sitting in the company’s bank account; instead, it has been ploughed into a fixed asset.
Dividends as such will not be included as an item in the profit and loss account but, once paid, the cash figure will be reduced accordingly.
How are written resolutions weighted?
Each shareholder has one vote per share that they own.
Does a company need to be insolvent to apply for a restructuring plan?
No but they must have encountered or be likely to encounter financial difficulties.
How is personal insolvency proven?
a) Serving a statutory demand on the debtor for a liquidated sum of £5,000 or more and waiting three weeks to see whether the debtor pays or applies for the court to set aside the statutory demand
b) Serving a statutory demand on the debtor in respect of a future liability to pay a debt of £5,000 or more and waiting three weeks to see whether the debtor either:
I) Shows a reasonable project of being able to pay the sum when it falls due
II) Applies to court to set aside the statutory demand
c) By obtaining a court judgment of £5,000 or more and attempting execution of the judgment without success
What kind of clauses will a lender want in the facility agreement concerning the payment of the loan to the borrower?
The initial clauses of the facility agreement will set out:
a) The amount of the loan
b) The currency
c) The type of loan if it is to be a term loan or revolving credit facility
d) The availability periods during which the loan can be taken (for revolving credit facility this is almost the entire length)
What are the administration and notification requirements regarding the change of a company secretary?
The company must notify the Registrar of Companies within 14 days of any change of particulars of the company secretary kept in the register of secretaries on form CH03 (human secretary) and CH04 (corporate secretary).
What is the accounting reference date?
This is the date up to which it must prepare annual accounts and will be the last day of the month in which the company was incorporated.
e.g. if company is incorporated 5 May, its accounting reference date will be the 31 May.
If they want to change this they need to make a board resolution and complete AA01 form and file it at CH.
How are assets distributed in a personal insolvency?
Secured creditors can sell their charged assets and take what they are owed and pay any surplus to the trustee.
If the sale of the charged assets does not realise enough money to pay the secured creditor, the entire amount owed to them, the secured creditor will join the unsecured creditors in relation to the outstanding part of the debt.
Order of distribution:
a) The costs of the bankruptcy - means all of the expenses incurred as a result of the bankruptcy which will mainly be the trustees professional charges and disbursements
b) Preferential debts
c) Ordinary unsecured creditors
d) Postponed creditors who are the bankrupt’s spouse or civil partner
Within each category, the creditors will rank and abate equally, meaning that they will share in the money available.
Each creditor will receive the same percentage of the debt owed to them.
Preferential debts:
This includes the wages and salaries of employees for work the carried out in the four months preceding the date of the bankruptcy of their employer up to a max of £800 plus accrued holiday pay owed to employees. Not all bankrupts will have employees only those who were sole traders partners.
HMRC is a secondary preferential creditor.
What is the distinction between a listed public company and an unlisted public company?
Publicly traded companies are more regulated than unlisted public companies and private companies to protect the public.
Unlisted companies can also offer shares to the public but because their shares are not listed it is harder for unlisted public companies to find buyers.
Who uses overdraft facilities?
Usually small and medium sized businesses.
What can a director do to minimise the risk of a claim for wrongful trading? A solicitor may need to advise on this
Director should:
a) Seek professional advice from solicitors and/or accountants at the first sign of problems.
b) Limit spending
c) Check the company’s accounts regularly
d) Keep records of their own actions
What are the grounds for an unfair prejudice petition?
The company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or some part of its members including the claimant or
An actual or proposed act or omission of the company is or would be so prejudicial.
The conduct must be prejudicial in the sense that it causes harm to one or more shareholders and it must also be unfair.
Who is liable if a charge is not registered in time?
If the failure to register was due to the solicitor’s mistake, then this could lead to a claim in negligence.
Can the PSCs request more privacy on the PSC register?
PSCs can apply to keep their residential address private so it does not appear in public registers at CH.
They can also apply to have their name private.
How are a company’s assets distributed during liquidation?
1) Fixed charges holders
These are paid first. They will receive the amount they are owed when the asset subject of the fixed charge was sold.
Any surplus is paid to the liquidator.
What happens if there is a shortfall once the asset has been sold?
If there is a shortfall instead, the fixed charge holder can join the pool of unsecured creditors and try and obtain some kind of contribution towards the outstanding debt.
1) Unsecured creditors
Administration:
The liquidator will send a standard form to unsecured creditors. They fill this in outlining the debts that are owed to them to prove their debt.
The liquidator then approves or rejects the creditor’s debts.
If the claim is under the sum of £1,000 these claims are admitted automatically.
Once the liquidator has told the company’s assets and collected as much money as they can and paid the holders of valid fixed charges, they will make the payments in the following order.
Order of distribution:
a) Expenses of the winding up (fees payable to the liquidator and their professional advisors)
b) Preferential debts which rank and abate equally
c) Money which is the subject of a floating charge in order or priority
d) Unsecured creditors who rank and abate equally.
e) Remaining money is distributed to shareholders
Preferential creditors:
The most common preferential debt are the wages/salaries of employees for work carried out in the four months immediately preceding the date of the winding up order.
There is a maximum of £800 per employee.
Employees’ accrued holiday pay is a preferential debt.
HMRC is a preferential creditor in relation to PAYE and VAT but only these.
Ring fencing:
Statutory procedure whereby by a portion of money for floating charge holders is set aside for be benefit of unsecured creditors.
This only applies if the security was created on or after 15 September 2003.
The amount set aside is 50% of the first £10,000 of money received from the property which is subject to floating charges and 20% of the remaining money up to a limit of £800,000 if the share was made on or after 6 April 2020. If the charge was made before that the upper limit is £600,000. However if the floating charge that was made on or after 6 April 2020 ranks equally or in priority ti the pre-April 2020 charge, the limit of £800,000 will apply to both charge holders.
Dependant on specific facts, what resolutions may need to be sent to CH and when following allotment of shares?
All special resolutions
An ordinary resolution removing the authorised share capital in a pre-CA 2006 company
Any ordinary resolution to activate s 550 in a pre-CA 2006 company
Any s 551 ordinary resolution granting directors authority to allot
When?
Within 15 days
What is an event of default clause?
If the business breaches any of these terms, the lender may terminate the agreement if it so wishes.
Such events include failure to pay any sum due, commencement of an insolvency procedure or breach of other obligations under the facility agreement.
Can a director act in a quorum on a vote concerning their own personal interests?
If a company has MA and the company only has two directors, they cannot approve a service contract at a board meeting as the meeting must be quorate (have two directors) and only one can count in the meeting as the other has a personal interest.
What are the administrative requirements of paying corporation tax?
- Inform HMRC
A company must inform HMRC in writing of the beginning of its first accounting period, and must do so within three months of the start of that accounting period.
After that, every year HMRC will issue a notice to the company requiring it to deliver a self- assessment corporation tax return.
- Payment
The deadline for filing the self- assessment return with HMRC is 12 months from the end of the relevant accounting period.
For most companies, corporation tax is payable within nine months and one day from the end of the relevant accounting period.
This means that the company is required to pay corporation tax to HMRC before it is required to file its tax return.
Therefore companies will make a payment based on their anticipated corporation tax liability for the period, and will make a balancing payment (or receive a rebate) once the final figure for corporation tax has been established.
Large companies, meaning those with annual taxable profits of £1,500,000 or more, usually (depending on the company’s overall corporation tax liability) have to pay tax in four
instalments.
Very large companies, which means those with annual taxable profits of over £20,000,000,
have to pay the tax in four instalments during the accounting period (different dates compared to companies with annual taxable profits of £1,500,000 or more).
What are the advantages of overdraft facilities?
An overdraft is known as an uncommitted facility which means that it will usually be payable on demand without notice which can be advantageous if there is immediate need.
It is flexible and there are few formalities.
How is it payable?
Payment can be made using HMRC’s real- time CGT service, the HMRC property service or by completing a self- assessment tax return in the same way as is required for income tax.
Sometimes (although rarely) payment by ten annual instalments is an option. This is only available where:
- the disposal was a gift;
- the qualifying asset is land, a controlling shareholding in any company or any shareholding (whether controlling or not) in a company whose shares are unquoted; and
- the conditions for hold- over relief to apply must not be met.
If payment by instalments is an option, the first payment will be due by 31 January following the end of the tax year in which the disposal was made.
What is the purpose of business accounts?
The business owner (or a bookkeeper) will use all of the business’s financial records – statements, invoices, receipts – to prepare the business’s accounts.
The accounts provide a useful summary of the business’s financial position.
There are two common meanings of the word ‘accounts’. The first is the day- to- day records of the business’s transactions, and the second is the accounting year end summary (Final Accounts).
In bankruptcy proceedings, what happens to the debtor’s salary?
Bankrupts are entitled to be paid their salary but if their salary is more than what is sufficient to meet the reasonable needs of the bankrupt and their family, the trustee can ask the bankrupt to enter into income payment agreements (IPA) which requires the bankrupt to pay some of their salary to the the trustee to meet their liabilities,
Agreement of salaried sum to be paid to trustee:
If they cannot agree on the sum to be paid, the trustee can apply to court for an income payments order (IPO) and the court will determine the amount payable.
An IPA is enforceable just as an IPO.
They normally last for a maximum of three years from the date of the arrangement/order. In most cases they last for longer than the debtors discharge from the bankruptcy.
Can a director be compensated for loss of office?
They may be legally entitled to payment as part of the service contract terms.
They may also be entitled to compensation if there is an element of unfair or wrongful dismissal or discrimination.
Payment for more than £200 for loss of office can only be agreed to by ordinary resolution.
What happens if a partner of a general partnership cannot pay back their debts to their fellow partners?
If the partner cannot pay what is owed to their fellow partners, the other parters have the same enforcement mechanism as the third party and there may be other consequences set out in the partnership agreement such as expulsion.
Do companies incorporated pre 2009 have model articles?
They may do if they have if they have modernised their articles to adopt the MA or an amended version of the MA. If not then they will have Table A articles which were the articles under CA 1985.
What is a sleeping partner in a partnership?
They do not make day-to-day decisions and only make fundamental decisions about the business.
What is the definition of a partnership?
A partnership is formed when two or more people are carrying on a business in common with a view to profit.
When does the tax year run from?
The tax year runs from 6 April until 5 April the following year. This means that an individual will pay tax on all income earned between these dates.
The tax year is described by reference to the calendar years which it straddles. So the tax year
beginning on 6 April 2023 and ending on 5 April 2024 is referred to as the tax year 2023/24.
What happens if the requirement to authorise a loan to directors is breached?
The transaction/arrangement is voidable at the instance of the company. *
The director who loan the money from the company and any director who authorised it are liable to account to the company for any gain they have made and are jointly and severally liable to indemnify the company for any loss or damage resulting from the transaction or arrangement.
It is unlikely the board will avoid it if they authorised it. It is more likely that if the company becomes insolvent, an insolvency practitioner would avoid it to pursue the director for immediate repayment of the loan.
What is the deadline for updating the register of members?
The deadline is two months after the transfer was lodged with the company.
If the company has elected to keep this information at Companies House, they must instead notify the registrar of the share registration as soon as practicable with a deadline of two months.
