Revision Guide Flashcards
1
Q
How are sole proprietorships/partnerships formed?
A
Can be formed without filing anything
2
Q
How are sole proprietors taxed?
A
income is treated as their income + is subject to income tax
3
Q
How is a partner’s share of partnership income taxed?
A
Treated as the partner’s personal income + is subject to income tax
4
Q
How is a member’s share of income from an LLP taxed?
A
Treated as the member’s personal income + is subject to income tax
5
Q
How is income of a company taxed?
A
Treated as the company’s income + is not subject to income tax.
- Subject to corporation tax
6
Q
What may companies and LLPs grant when it comes to borrowing money that sole proprietors/partnerships may not?
A
Floating charges over their assets
7
Q
What is a floating charge?
A
A charge over present and future assets that are to be retained in the business (e.g., inventory)
8
Q
When is a partnership formed?
A
If:
1. Two or more persons
2. Carry on a business in common
3. With the intention to make a profit
9
Q
What does ‘business in common’ mean?
A
Means 2 or more people are selling goods or services together
10
Q
What is prima facie evidence that there is a partnership?
A
The sharing of profits
11
Q
When is the sharing of profits not prima facie evidence that there is a partnership?
A
If the receipt of the profits is:
i. repayment of debt
ii. payment for employment,
iii. annuity to a partner’s survivor
12
Q
When can a partner bind the partnership in contract?
A
When they act with actual or apparent authority
13
Q
When does a partner have actual authority granted?
A
I. expressly in any partnership agreement,
II. expressly, from a vote of the partners, or
III. impliedly, from the partners’ failure to object to past actions
14
Q
When is authority apparent?
A
A partner has apparent authority to carry on in the usual way business of the kind carried on by the partnership unless:
i. the partner had no actual authority to act, and
ii. the third party knew the partner lacked actual authority OR didn’t know they were dealing with a partner
15
Q
What is the test for deciding whether an act is carrying on in the usual way business of the kind carried on by the partnership?
A
Objective - would a reasonable third party think a business of this kind would usually do this act?
16
Q
What happens if a partner enters a contract with neither apparent nor actual authority?
A
The partnership will not be bound, but the partner will be.
17
Q
What liability do the partners have in a partnership?
A
Each partner has unlimited liability if the partnership lacks sufficient funds to pay.
18
Q
What will an outgoing partner be liable for when retiring from a partnership?
A
- Remains liable on all obligations the partnership incurred before the partner retired,
- Liable for obligations incurred after they retire unless they give:
i. Actual notice of their retirement to existing creditors, and
ii. Publication notice in the London Gazette to everyone else.
19
Q
What happens if a person holds themselves out as a partner of a firm even if they are not actually a partner?
A
They may be held liable as if they were a partner to any third party who has given credit to the partnership on the strength of the holding out.
The same rule applies if a person knowingly allows another to hold the person out as a partner
20
Q
Can partners use partnership property for personal use?
A
Partners have no right to use partnership property for personal use - they have a right to use it only for partnership purposes.
21
Q
How is property owned by one of the partners before the partnership was formed treated?
A
Treated as the partner’s individual property unless the parties agree otherwise.
22
Q
If a partner lends money to the partnership, what interest are they entitled to?
A
Interest at 5% per annum unless otherwise agreed
23
Q
How are members of a partnership who are natural persons taxed?
A
Subject to income tax for their share of the firm’s profit each year, regardless of whether the partners have distributed profits
24
Q
What do all partners in a partnership have the right to inspect?
A
The partnership’s books and records
25
How are most management decisions in a partnership approved?
Most can be approved by a majority vote
26
What management decisions in a partnership require unanimous consent?
i. admission of a new partner
ii. change in the nature of the partnership business
iii. alteration of the partnership agreement.
27
What is the effect of partners being fiduciaries of each other in a partnership?
i. they have a duty to disclose information relevant to the firm,
ii. they cannot compete with the firm's business, and
iii. they must account to the firm for any benefit or profit from any transaction concerning the partnership, its business, or use of the partnership's property
28
What will cause a dissolution of a partnership?
1. Expiration of the term or accomplishment of the goal stated in the partnership agreement
2. A partner gives notice of their intention to withdraw in a partnership at will - no term/goal was provided in the partnership agreement
3. By death or bankruptcy of any partner (unless agreed otherwise)
4. If the partnership business becomes unlawful, or
5. By court order
29
Why would a court order a partnership to dissolve?
if a partner:
- becomes permanently incompetent to enter a contract,
- is guilty of conduct that would prejudicially affect the ability of the partnership to carry out its business, or
- wilfully and persistently breaches the partnership agreement, or
- if business can be carried on only at a loss.
30
What authority do partners have to bind the partnership following dissolution?
They have the authority to bind the partnership after dissolution in order to wind up the partnership's business - but the partnership will be bound for other contracts made by a partner unless notice was given of the dissolution.
31
When a partnership is dissolved, what is the order assets must be distributed in?
1. To repay debts owed to outside creditors,
2. To repay loans made by the partners to the firm,
3. To return the partners' contributions
32
How are LLPs taxed?
Like general partnerships.
33
How are LLPs formed?
Only by registering with Companies House.
34
What does registration for an LLP include?
Must include:
i. the name of the LLP (must end in LLP or the words Limited Liability Partnership),
ii. location + address of the LLP's registered office,
iii. names and addresses of the LLP's members and who will serve as the designated members,
iv. details of people with significant control over the LLP
35
How can an LLP change its name?
At any time by delivering a notice of the change to the Registrar of Companies.
Change is effective when the Registrar issues a certificate of the name change.
36
What happens if an LLP carries on business without having at least 2 members for more than 6 months?
The person who carried on the business will be jointly and severally liable with the LLP for the debts of the LLP incurred after the initial 6 months + while the LLP has only 1 member.
37
How can new members be added to an LLP?
Only with unanimous consent of the existing members.
Registrar of Companies at Companies House must be notified of changes in LLP's membership or in its designated members within 14 days of the change/
38
What are designated members, and how many does an LLP need?
Main duty is to submit required filings to Companies House.
LLPs must have at least 2.
39
How can a person cease to be a member of an LLP?
By giving reasonable notice to the other members + giving notice to the Registrar at Companies House within 14 days.
40
What are people with significant control?
Those holding:
> more than 25% of the surplus assets on a winding up,
> more than 25% of the rights to vote on those matters which are to be decided upon by a vote of the members of the LLP,
> the right to appoint or remove the majority of those entitled to take part in management,
OR
someone who otherwise can exercise significant influence or control over a trust or the members of a firm that is not a legal person but meets any of the other specified conditions in relation to the LLP
41
What is the minimum nominal share capital a public limited company needs?
£50,000
42
When does a company come into existence?
When it is registered at Companies House
43
Who goes about arranging to bring the company into existence?
Promoters
44
What happens when promoters sign pre-incorporation contracts on behalf of the company?
Promoters are personally liable.
They remain liable even after the company is formed unless there is an agreement among the company, the third party, and the promoter the substitute the company for the promoter (a novation)
45
What is a shelf company?
A company that has already been purchased but which has never traded.
Purchase of such a company enables a promoter to set up a corporation quickly
46
What must the promoters file for a company to become incorporated?
A memorandum of association along with an application for registration with the Registrar of Companies at Companies House
47
What is the memorandum of association?
An authenticated/signed agreement of persons wishing to become members of a company upon its formation procured by the promoters
48
What must a company's application for registration include?
1. The proposed name of the company
- must end in 'Limited', 'Ltd', 'Public Limited Company', or 'Plc'
2. Location of its registered office
3. Details about the company's business
4. Whether the company will be limited by shares or guarantee
5. A statement of capital and initial shareholdings
6. Statement of proposed officers/directors
7. Details of persons with significant control
8. Statement of compliance with Companies Act 2006
9. Relevant fee
49
What will the statement of capital and initial shareholding include?
- The total number of shares to be taken by the subscribers to the Memorandum of Association
- The aggregate nominal value of the shares
- If the shares are to be divided into classes, a description of each class,
- The amount that will be paid up by the shareholders and amounts left unpaid for shares
50
On what date does a company come into existence?
On the date specified on the Certificate of Incorporation issued by the registrar if all submitted documents are in order
51
What is a company's constitution?
A company's articles of association, plus resolutions or agreements adopted by the members
52
If a company's objectives have been restricted and the directors don't adhere to this, what is the consequence?
They have breached their duty to the company.
An injunction can be obtained to prohibit prospective breaches, and
Damages can be sought from the directors for damages caused by such a breach
53
Who do the articles serve as a contract between?
The company and the shareholders, and
The shareholders with each other
54
When do the shareholders have the right to enforce the articles?
Shareholders have the right to enforce only the article provisions relating to their membership rights.
55
What does it mean to entrench articles?
Means that to amend the articles, the company must comply with additional conditions that go beyond the normal 75% approval required.
56
Can entrenched articles be included in the original articles?
Yes, but the Registrar must be given notice upon filing.
57
When will an entrenched article be ineffective?
If it purports to prevent amendment of a company's articles.
57
When can shareholders challenge alterations to the articles in court?
If the shareholders make an alteration that no reasonable person would consider to be for the benefit of the company, a shareholder who didn't vote in favour of the alteration can challenge it in court.
58
What is the veil of incorporation?
Protects members of a company against personal liability for obligations of the company.
59
When will the veil of incorporation be lifted/pierced?
Not unless the company form is being used to carry out a fraud or to avoid existing obligations.
- E.g., a business owner transfers all their assets to a company in an attempt to keep them out of the hands of a creditor
60
How many directors must a private company have?
1
61
Who must directors be?
Natural persons at least 16 years of age
61
How many directors must a public company have?
2
62
Under the Model Articles, who can appoint new directors?
Either the director or the shareholders (ordinary resolution)
62
When must the Registrar of Companies be notified of any new director appointments and of any changes to the details of existing directors?
Within 14 days
62
What is a shadow director?
A person who influences other directors, but who doesn't claim to be a director, and hasn't been appointed as a director.
62
What are executive directors?
Responsible for the day-to-day running of the company and are employees of the company
63
What are non-executive directors?
Usually consultants and take more of a supervisory role overseeing the activity of the executive directors
64
What is a nominee director?
Director appointed to the board to represent the interests of a particular stakeholder, usually a shareholder.
Still must act in the best interests of the company.
65
How may companies execute documents?
Either by affixing their seal to the documents, or
By the signature of either:
i. 2 directors, or
ii. a directors and a secretary, or
iii. a single director if signed in the presence of a witness who attests the signature
66
How are provisions in the articles/contract that try to exempt a director for liability that would otherwise attach to the director for breach of duty, negligence, or breach of trust in relation to the company treated?
Such provisions are void
67
When may a company indemnify directors against liability they incur?
On claims by third parties against the directors based on their position with the company except with respect to criminal or regulatory fines
68
What is the concept of enlightened shareholder value?
It means that when deciding what's best for the company as a whole, in addition to maximising profits, directors may consider effects of decisions on the interests of shareholders, suppliers, customers, the community and the like
69
Who do directors owe a duty to when a company is insolvent/on brink of becoming insolvent?
They must consider/act in the interests of the creditors of the company.
- The duty to shareholders is displaced
70
What is the standard of care, skill and diligence expected of a director?
The higher of the care, skill, and diligence that would be exercised by a reasonably diligent person with:
I. the general knowledge, skill, and experience that reasonably may be expected of a person carrying out the duties of a director (objective), or
II. the general knowledge, skill, and experience the director in question actually has (subjective)
71
When can a director obtain a loan from the company?
Only if the transaction is approved by the board
72
Who may call a meeting of the directors?
Any director may call a meeting of the directors by giving reasonable notice of the meeting to the other directors
73
What is needed for notice of a directors' meeting?
Need not be in writing, but
Must indicate the proposed date, time, and location + it must be given to each director
74
Under the Model Articles, what is the quorum requirement?
At least 2 directors must attend
75
When can directors pass written resolutions?
Without a meeting if all the directors approve - unanimous approval
76
What are Bushell v Faith clauses?
Clauses giving weighted voting to a director who is also a shareholder in the case of a vote to remove a director
77
What notice is needed before adopting a resolution to remove a director?
Notice to adopt a resolution to remove a director must be given at least 28 days before the meeting + the director must be given notice and a right to respond in writing and orally at the meeting
78
What are the statutory requirements for qualification of a secretary of a public company?
- Must have previously been a company secretary for at least 3 years,
- Member of a regulated accounting or secretarial body, or
- Is a barrister or solicitor
79
What is a 'large company'?
Typically companies with an annual turnover greater than £10 million + more than 50 employees
80
Where may dividends be paid from?
Only from profits available for the purposes.
- Accumulated realised profits less accumulated realised losses
81
What are preference shares?
Have a right to be paid the stated preference before dividends can be paid to common shareholders
82
What is needed for approval of a dividend?
Majority vote of shareholders (ordinary resolution)
83
When is a dividend unlawful?
If it's paid out of funds other than profits available for the purpose (such as paid in capital)
84
What is a derivative claim? When would it be used?
A shareholder who believes a director has or is about to breach a duty owed to the company and to whom it appears the board will not assert the company's rights to prevent or remedy the action may apply to the court to bring a derivative claim against the director
85
What can a minority shareholder do if it feels that the company's affairs are being conducted in a manner which is unfairly prejudicial to that shareholder?
They can petition the court for a remedy.
Usual remedy - force the majority shareholders to buy the minority's interest at a fair value.
86
When can a shareholder apply to have the company wound up?
If the company is solvent and the shareholder can show it is just and equitable to do so.
87
Where must directors' service contracts be kept, and for how long?
At the registered office for at least 1 year after the director leaves
88
Where must the register of members be kept?
At the registered office
89
What is needed for a shareholder to inspect the register of members?
Must have a proper purpose (one related to their rights as a shareholder)
the company has 5 working days to comply with the request
90
Who can call a general meeting?
Directors, or
Shareholders owning shares representing at least 5% of the paid-up voting capital shares can demand a meeting
91
If the shareholders demand a general meeting, when must the directors call it?
The directors must call it within 21 days of the request + the meeting must be held within 28 days
92
Who must notice of a general shareholders' meeting be given to?
Must be given to:
> all the shareholders + directors,
> the personal representatives of any deceased shareholders, and
> the trustee in bankruptcy of any bankrupt shareholders
93
When must notice for a general meeting be given?
At least 14 clear days in advance of the meeting,
Plus 2 days for deemed delivery if the notice isn't hand delivered.
94
What must a notice for a general shareholders' meeting include?
1. Company name
2. Time, date, and place of the meeting
3. General nature of the business to be discussed at the meeting
4. Statement of the right to appoint a proxy to attend the meeting
5. The full text of any special resolution
95
When must notice be given for the annual meeting of a public company?
Require 21 clear days' notice
96
What is needed for a general meeting to be held on short notice?
Agreed by a majority in number of the shareholders who hold 90% of the shares.
- 95% for non-traded public companies
97
What is needed for an ordinary resolutioN?
At least a majority of members at the meeting
98
What is needed for a special resolution?
75% or more of the members at the meeting
99
What is the normal method for voting at a shareholders' meeting?
By show of hands
100
What is a poll vote?
When voting is one vote per share
101
Who may request a poll vote?
5 or more shareholders, or
Shareholders with at least 10% of the voting rights, or
Shareholders with 10% of the paid-up capital of the company
102
When cannot written resolutions not be used?
To dismiss a director or auditor
103
Who can require the board to circulate a written resolution?
Shareholders who hold at least 5% of the total voting rights can require the directors to do so
104
When will a written resolution lapse if using the unamended model articles?
After 28 days from and including the day of circulation
105
How is voting based when using a shareholders' written resolution?
Based on all shareholders entitled to vote + based on 1 vote per share
106
What are matters that require shareholder approval by ordinary resolution?
1. Appointment/removal of a director or auditor
2. Adoption of the annual accounts _. the reports of the directors and auditors
3. Approval of a declaration of dividends
4. Approval of the directors' decision to allot shares
5. Approval of substantial property transactions
6. Ratification of a director's breach of duty
7. Entering a service contract with a director for more than 2 years
8. Making a loan to a director
9. Giving a director a payment for loss of office
107
What is a substantial property transaction?
Transaction involving directors with a personal interest.
More than £100,000 or more than £5,000 and the contract exceeds 10% of the company's assets
108
What matters require shareholder approval by special resolution?
1. Most decisions to buy back company shares
2. Changes to the company's articles of association
3. Changes to the company's name
109
When do changes made to a company need to be filed at Companies House? Time period?
If a resolution affects information filed at Companies House, a copy of the changes must typically be filed at Companies House within 14 days.
110
When do directors generally have the power to allot additional shares?
If the company has only 1 class of share + there is no restriction removing this power in the articles
111
Under the model articles, when must the full value of the shares be paid?
Must be paid to the company on allotment
112
When do pre-emption rights apply?
When a company proposes to issue additional shares in exchange for cash, unless its articles provide otherwise.
113
Under pre-emption rights, how long are shareholders given to accept the shares?
Must be given at least 14 days
114
How can pre-emption rights be disapplied?
By special resolution
115
When must charges and mortgages against company assets be registered? Where?
Must be registered at Companies House within 21 days of their creation
116
Can directors refuse to allow a transfer of shares?
The model articles for private companies grant the directors an absolute power to refuse to allow a transfer of shares
117
What registers must a company keep?
I. Register of members,
II. Register of directors,
III. Register of secretaries,
IV. Register of charges against the company's assets
V. Register of people with significant control ('PSC')
118
How long must minutes from general shareholders' meetings be kept for? Who has a right to inspect them?
At least 10 years
Kept available for inspection by members of the company
119
How long must copies of directors' service contracts be kept for?
At least a year beyond the term of the contract
120
What is an annual confirmation statement? When must it be filed?
Confirms that the information at Companies House is up to date.
It's a criminal offence to fail to file the confirmation within 14 days of the end of the company's review period (to Companies House)
121
When must private companies send copies of their accounts to Companies House?
No later than 9 months after the relevant accounting period.
122
When must public companies send copies of their accounts to Companies House?
No later than 6 months after the relevant accounting period
123
What must medium and large companies file in addition to the annual confirmation statement + annual accounts?
Annual directors' report
Annual strategic report
124
What is an annual directors' report?
Names the directors and states the amount (if any) that the directors recommend should be paid by way of dividend
125
What is an annual strategic report?
Gives members of the company a balanced and comprehensive view of the development and performance of the company's business so the members may assess the performance of the directors
126
What must a company letterhead disclose?
Registered name
Part of the UK in which the company is registered
Company's registered number
Address of the company's registered office
If a company chooses to display the name of any director on its letterhead, it must include the name of every director on the letterhead
127
What must a partnership letterhead disclose?
The name of the partnership
The name of each member of the partnership
The partnership's business address
128
What is required of a sole trader's letterhead?
The individual's business name
Their real name if it is different to the business name, and
The business's address
129
What options are available to a sole proprietor or partnership if they are insolvent?
1. Negotiate with creditors,
2. Individual Voluntary Arrangement (IVA)
3. Bankruptcy
130
What will an insolvency practitioner do in the case of an IVA?
1. Have the debtor prepare a statement of affairs
2. Apply to the bankruptcy court for an interim order
3. Prepare a report advising whether there is a realistic chance a proposal can be crafted that might be accepted + calling a meeting of creditors, and if so, call the meeting
131
Who needs to approve an IVA?
Creditors owed at least 75% of the unsecured debt owed by the debtor
132
Who can petition a bankruptcy order?
One or more of the debtor's unsecured creditors owed at least £5,000
Supervisor of an IVA if in default
133
When will a debtor be deemed insolvent if they owe a liquidated debt for £5,000 or more?
If the creditor makes a statutory demand for payment, and the debt isn't paid within 3 weeks, or the debtor doesn't apply to set aside the statutory demand within 3 weeks
134
Once declared bankrupt, what is the bankrupt entitled to keep?
- Things needed for day-to-day living
- Tools required for their job
- Their salary
135
What may a bankrupt not do during bankruptcy proceedings?
a. Apply for credit over a prescribed amount
b. Act as a company director
c. Be a partner
d. Trade under another name
136
Who is considered a culpable bankrupt?
A bankrupt who has caused the bankruptcy by their own dishonesty, negligence, or recklessness
137
How long can a culpable bankrupt be subject to a court bankruptcy order for?
Up to 15 years
138
What happens if the bankrupt person is a partner in a general partnership?
Partnership at will - partnership will be dissolved and the partner's share of assets will be turned over to the trustee
Partnership for term/undertaking - partnership will continue and the remaining partners will purchase the insolvent partner's interest
139
What options are available for a company facing insolvency?
1. Receivership
2. Restructuring plan
3. Administration
4. Company voluntary arrangement
5. Moratorium
6. Liquidation
140
What is receivership?
If a creditor has taken a charge over a company's fixed assets, the agreement will usually provide that if the company defaults, the creditor can appoint a receiver to take the charged asset + sell it to pay off the obligation
141
Who does the appointed receiver owe duties to?
The secured creditor and not to any other potential creditor
142
What is a restructuring plan? Who needs to approve it?
Allows the companies to restructure their debts with the sanction of the court if approved by those owed at least 75% in value of the unsecured debt
143
What is administration?
Procedure which enables the administration to run, reorganise, and/or sell the company as a going concern.
144
How can a company go into administration?
Through a formal court hearing, OR
By the company filing certain papers with the court
145
When will the court make an order for administration?
Only if the court is satisfied that the order is likely to achieve a better resolution for the company's creditors than liquidation
146
How is the process for a company voluntary arrangement (CVA) started?
Started by the directors of the company who make a written proposal to the creditors and nominate an insolvency practitioner to supervise the CVA
147
What is needed for a CVA to be implemented?
75% or more in value of the unsecured creditors must agree
148
What is a moratorium?
A court order which halts most actions by creditors to enforce their rights
149
What happens during a moratorium?
Directors of the company will appoint an insolvency practitioner as a 'monitor' to oversee the company affairs + ensure that it is likely that the moratorium will result in a rescue of the company as a going concern.
Directors remain in charge of running the business
150
What is liquidation?
Causes the company's assets to be sold to pay off debts.
Company will then cease to exist
151
What are the different types of liquidation?
Members' Voluntary Liquidation (MVL)
Creditors' Voluntary Liquidation (CVL)
Compulsory liquidation
152
What is Members' Voluntary Liquidation?
Process controlled by members + directors from start to finish.
Available only if the company is solvent but the individuals involved in running the company wish to wind it up.
153
What is a Creditors' Voluntary Liquidation?
Started by the directors but taken over by the creditors.
Usually commenced because the directors are advised that the company is insolvent and if they continue trading, they could be personally liable for the debts of the company through fraudulent or wrongful trading.
Directors resolve that the company is insolvent + should be placed into liquidation, and the members pass a special resolution to start the liquidation.
154
When does a preference arise?
When a debtor does something that intentionally puts a creditor in a better position on liquidation than they otherwise would have been
155
When do trustees in bankruptcy have the power to claw back a preference?
If made within 6 months of the onset of insolvency.
- 2 years if the preferred creditor is a connected person
156
When is the onset of insolvency for a company compulsory liquidation?
The date of presentation of the petition
157
When is the onset of insolvency for a CVL?
The date the company enters liquidation
158
When is the onset of insolvency for administration?
The date the company files a Notice of Intention to Appoint an Administrator, or
The date when it enters administration
Whichever is earliest.
159
When is the onset of insolvency for an individual?
The presentation of the bankruptcy petition
160
What is a transaction at undervalue?
Transaction in which property that would have otherwise been part of the bankruptcy estate/assets of the company was given as a gift or was sold for significantly less than the market value within 2 years of a company's insolvency, or 5 years of an individual's insolvency.
161
What defence is available for a company that entered into a transaction at an undervalue?
That the transaction was entered into in good faith, for the purpose of carrying on the business, and if when it was made there were reasonable grounds for believing it would benefit the company.
162
What is wrongful trading?
Where directors carry on business when they knew or ought to have known that the company has no reasonable prospect of avoiding insolvency and failed to take adequate steps to minimise the losses to the company's creditors.
if proved, the court may order the director to contribute to the company' assets as the court deems appropriate
163
Who is income tax paid by?
Individuals (and their personal representatives)
164
When is the UK tax year?
6 April to 5 April
165
How is most of income tax collected?
By employers from the PAYE system
166
How does the PAYE system work?
Each payroll period, the employer must deduct the appropriate tax from each employee's salary along with National Insurance contributions for employees earning more than £242 per week.
167
PAYE: when must employers send HMRC a report of deducted money?
On or before each payday.
168
PAYE: what is the report employers send HMRC called?
A 'Full Payment Submission' or 'FPS'
169
When may payments be submitted to HMRC under PAYE?
Monthly (or quarterly if paying less than £1,500).
170
If reporting and paying electronically, when must reports and payments be made under PAYE?
They must be received by the 22nd of each month.
171
What happens if reports/payments are late under PAYE?
HMRC may assess interest + a penalty
172
Who must report income through self-assessment?
Taxpayers who have significant income from trading or rental profits, or who receive dividends on shares they own.
173
Under the self-assessment rules, when must tax returns be submitted?
Electronically filed - by 31 January after the tax year
Paper return - 31 October after the tax year (3 months earlier)
174
How many payments are taxpayers who self-assess typically required to make?
2 payments on account towards the income tax due for any year:
1 on 31 January in the tax year, and
1 on 31 July after the tax year.
Each should be at least 50% of the previous tax years' liability.
If a balance is owed after the first 2 payments, it must be paid by 31 January after the tax year
175
What are the 3 categories of income?
1. Non-savings income
2. Savings income
3. Dividend income
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What is foreign income?
All income arising outside the UK.
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When will a UK resident pay tax on foreign income?
If they spent 183 days or more in the UK during the tax year
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What income is exempt from tax?
1. Interest from National Savings Certificates
2. Interest or dividends received from an Individual Savings Account
3. Winnings on Premium Bonds and any income from betting, gaming, or lotteries
4. Many social security benefits (universal credit, housing benefits, and winter fuel allowances for pensioners)
5. Child Benefit, Child Tax Credit, and Working Tax Credit
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What must a sole trader/partner in a partnership include in their non-savings income?
Their trading income
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When must a sole trader/partnership register with HMRC?
Within 3 months of becoming self-employed/starting their business
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How do you calculate trading income ?
Start with gross income for the business's accounting period and subtract expenses of the business which are revenue related
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What is a business's accounting period?
The 12 month period the taxpayer has chosen for keeping financial records of the business
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What expenses are revenue related for a business?
Employee salaries
Electricity bills
Cost of goods sold
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When is an expense deductible when calculating trading income?
Only to the extent that it was incurred wholly and exclusively for business purposes
If an expense was incurred for both personal + business purposes, only the proportion wholly and exclusively related to the business is deductible
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How is a purchase of a capital asset treated when calculating trading income?
Treated differently to revenue expenses of the business.
Taxpayer is given an annual investment allowance (AIA) which allows them to deduct all of the costs of plant + machinery in the accounting period in which they were incurred, up to the available AIA amount for the period
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What is the current AIA?
£1,000,000 for a 12-month accounting period
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What happens if the cost of capital assets purchased in a year exceeds the AIA?
A Writing Down Allowance is available.
Enables the taxpayer to deduct a fixed percentage of the cost of the asset each year
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What percentage does the Writing Down Allowance enable a taxpayer to deduct?
18% for most assets
6% for long-life assets
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What happens to the value of the asset pool (Writing Down Allowance) each year?
It is reduced by the amount of the allowance taken and increased by newly acquired assets not coming within the AIA
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What does an individual need to include in their non-savings income if they are a partner in a partnership?
Their share of the partnership's trading profit.
They must include their whole share even if the partners decide to retain part (or all) of the year's profit in the business.
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How do you know what share a partner has of the partnership's trading profit?
Each partner's share is the share set out in the partnership agreement.
If the partnership agreement is silent, each partner has an equal share.
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What must a partnership do re income tax?
A partner must be nominated to file a Partnership Tax Return with HMRC, which declares the partnership's income, expenses, and deductions and clearly shows the net income of the partnership + each partner's share of that income under the partnership agreement.
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What happens if a business's accounting period doesn't coincide with the tax year?
The business is taxed on the profits made during the accounting period that ends in the tax year to 5 April (the basis period) and, as a result, some first-year profits will be taxed twice (overlap profits)
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When will a business receive relief for overlap profits?
Business will not usually get relief for tax paid on these overlap profits until trade ceases (or if the sole trader changes their accounting date to 5 April)
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How does a person determine their tax liability?
1. Add up all of their income in each of the three categories
2. Subtract out any allowances they have
3. Multiply the income in each category by the tax applicable to that category
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How does a taxpayer calculate their net income after determining their gross income?
Subtract out interest paid during the year on certain loans (if any):
i. interest on loans taken to make a capital contribution or loans to a partnership
ii. interest on loans taken to make an investment in a close trading company (small company with 5 or fewer shareholders)
iii. interest on loans taken to pay IHT for personal representatives
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What available allowances are there for income tax?
1. Personal allowance
2. Marriage allowance
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What is a personal allowance?
Each individual taxpayer (including sole traders and partners) is entitled to a Personal Allowance
£12,570
Tapered by £1 for every £2 of income above £100,000
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What is a marriage allowance?
Enables a person to transfer part of their Personal Allowance to their spouse
- £1,260 for 2023/24
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What conditions must be met for the marriage allowance to apply?
1. Couple must actually be married or in a civil partnership.
2. Transferring spouse's income must be less than the Personal Allowance
3. Recipient spouse must be a basic rate taxpayer
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What happens if the conditions for the marriage allowance to apply are met?
The transferring spouse reduces their personal allowance by the amount transferred + the recipient spouse gets a credit against tax owed of 20% of the amount transferred
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What are the three tax bands and rates for non-savings income?
Basic rate band - 20%
Higher rate band - 40%
Additional rate band - 45%
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When is the Personal Savings Allowance available?
Only to basic rate and higher rate taxpayers.
Basic rate - PSA of £1,000
Higher rate - PSA of £500
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How does the Personal Savings Allowance work in practice?
It is a nil rate band.
The income still counts as being there for purposes of determining the taxpayers highest income band, but the £1,000 or £500 is taxed at 0% regardless of the band in which it falls.
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What rates are dividend income bands taxed at?
Basic rate - 8.75%
Higher rate - 33.75%
Additional rate - 39.35%
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What dividend allowance is available?
£1,000 available to all taxpayers
It is a nil rate band + doesn't lower a person's income for purposes of determining their highest rate band
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What income tax relief is available to sole traders/partnerships if they had a loss that tax year?
Loss Relief - available
Allows the sole trader or partner to offset the loss against other income that would otherwise be taxed.
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What restrictions surround Loss Relief (income tax)?
Only the sole trader or partner is entitled to claim the loss.
The loss cannot be transferred to a spouse or anyone else.
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What are the 4 alternatives available for offsetting a loss (other than applying Loss Relief)? (brief)
1. Set losses against total income from current/previous year
2. Carry loss forward against future profits of same trade
3. Set trading losses against salary/dividend payments if incorporated business
4. Relief upon cessation of trade
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How can an individual offset trade losses against previous/current losses?
May be set off against the taxpayers total income (before personal allowances) from the current year or from the prior year.
A taxpayer must either utilise all the loss available for relief or relieve all their available income - no partial claims permitted.
If losses are great enough, this may cause the taxpayer to lose the ability to take all of their personal allowances, which, as a result, disappear
211
How can an individual offset their losses by carrying them forward?
Can carry loss forward to be set off against future profits of the same trade.
Once a claim has been made, the carried forward loss must be set off against the next available trading income - not against other forms of income
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What incorporation relief is available for an individual when offsetting loss?
If a sole trader or partner transfers the business to a company and receives shares in return, they can set off any unused trading losses that remain against salary or dividend payments received from the company for any year in which they own those shares.
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How can an individual offset their losses when they cease trading?
When a trader ceases trading, losses can be deducted from trading profits in the tax year of cessation (if there are any) and then be carried back to the 3 preceding tax years, taking later years first.
The losses may be set off only against profits of the trade - they cannot be used to offset other income.
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When is the General Anti-Abuse Rule?
Designed to deter taxpayers from entering schemes that abuse the tax system + promoters of such schemes.
Allows HMRC to set aside a tax arrangement if it cannot reasonably be regarded as a reasonable course of action (double reasonableness test(
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What happens if a tax arrangement if found abusive? (income tax)
HMRC may make a tax adjustment which is just and reasonable under the circumstances, such as taxing the income in a legitimate way
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Who pays capital gains tax?
Individuals (including partners in a business partnership).
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Do companies pay tax on capital gains?
They don't pay capital gains tax, but their capital gains are taxed like other income of the company
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What do individuals who are resident in the UK pay capital gains tax on?
Basic rule - they are chargeable to CGT on the disposal of any chargeable assets they own, regardless of where in the world the asset was situated
219
Do individuals who aren't resident in the UK pay CGT?
Generally, they do not pay CGT even if they sell an asset that is situated in the UK.
However, non-UK residents are chargeable to CGT if they dispose of interests in UK land.
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What are wasting chattels?
Moveable property with a life of less than 50 years (e.g., cars, boats, watches, and farm animals)
221
Is machinery a wasting chattel?
Machinery not used in business falls within the wasting chattels category, but gains on machinery used in business are taxable
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What non-wasting chattels are exempt from CGT?
Any that are disposed of for less than £6,000
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What are 'exempted disposals' (CGT)?
1. Transfers of property upon death of the property owner
2. Transfers between spouses
3. Transfers to charity
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When is CGT payable?
31 January following the year in which the gain was made
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Where are details of disposals included? (CGT)
In an individual's tax return
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When is CGT payable on disposals of UK residential property?
Tax must be reported to HMRC and paid within 30 days of completion
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CGT - when determining the costs of acquisition, when can we add costs of enhancement?
If the enhancement is still part of the asset when it's disposed
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What reliefs might apply in relation to CGT?
1. Private Residence Relief
2. Business Asset Disposal Relief
3. Holdover Relief
4. Incorporation Relief
5. Enterprise Investment Scheme
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What is Private Residence Relief (CGT)?
Exempts all or part of a gain which arises on a property which an individual has used as their home.
It reduces the capital gain.
If the home was always occupied during ownership, 100% of the gain is exempt from CGT
230
What happens to Private Residence Relief if the owner didn't occupy the home 100% of the time? (CGT)
Use the following formula to calculate the exempt amount:
gain x (period of occupation / period of ownership)
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When will the homeowner be deemed to have occupied the home even if they were not in the home? (CGT)
1. Any period of absence for any reason - up to 3 years
2. Abroad by reason of employment - unlimited
3. Working elsewhere - up to 4 years
4. Last 9 months of ownership
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When is Business Asset Disposal relief available?
On gains made by individuals on the sale or gift of certain business assets, including:
1. All or part of a trading business carried on as a sole trader or in partnership for at least 2 years before disposal
2. Shares in a trading company in the individual owns at least 5% of the ordinary voting shares of the company + was an officer/employee of the company for at least 2 years before disposal
3. Assets owned and used by the individual's personal trading company or trading partnership in the 2 years before disposal
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What is the effect of applying Business Asset Disposal Relief to CGT?
Taxed at 10% with a lifetime limit of £1 million
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What does holdover relief do re CGT?
Enables an individual to give away certain types of business assets without paying CGT
235
What is needed for Holdover Relief to apply? (CGT)
The donor and donee must agree that the donor will not pay CGT + when the donee sells the asset they'll pay CGT on both their gain and the deferred gain of the donor.
236
What assets qualify for Holdover Relief? (CGT)
1. Assets used for the purposes of a trade or profession carried on by the transferor or their personal company (they own at least 5% of the shares)
2. Shares in an unquoted trading company
3. Shares in the transferor's personal company
4. Assets that qualify for agricultural relief
237
What is Incorporation Relief? (CGT)
Can be applied when an individual transfers their business or partnership interest as a going concern to a company.
Gain from the transfer is deferred by subtracting the gain from the acquisition cost of the company shares the transferor receives in exchange for the business interest transferred.
- The deferred gain will be taxed when the transferor disposes of the shares/
238
What is the Enterprise Investment Scheme Relief? (CGT)
To encourage investment in small companies, an individual can defer payment of CGT on any chargeable gain by investing in shares in a qualifying unquoted trading company (EIS), either up to 1 year prior to the gain being made, or in the 3 years after it is made.
The deferred gain will become chargeable when the EIS shares are sold
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Can the Annual Exempt Amount for CGT be carried forward?
No
239
What is the Annual Exempt Amount for CGT?
£6,000
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What are the CGT rates?
BADR - 10%
Higher or additional rate taxpayer - 20%
Taxed at 10% to the extent that they do not exceed the individual's unused income tax basic rate band.
241
What are the CGT rates on residential property?
28% (higher + additional rate taxpayer)
18% - basic rate
242
What property does the residential property CGT rates apply to?
Both UK and overseas residential property
243
What happens if a taxpayer incurred losses on a disposition of a capital asset? (CGT)
The losses must be used to offset gains in the same year before applying the Annual Exempt Amount
The loss may be applied 1st to residential gains in order to use the loss in the most efficient way.
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What happens if capital losses in the year exceed gains? (CGT)
The excess loss is carried forward to reduce capital gains in future years.
In this case, the chargeable gains for the year are nil and the Annual Exempt Amount is lost
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Who pays corporation tax?
Companies - on income and chargeable capital gains
246
What are the corporation tax rates?
19% for profits below £50,000
25% for profits above £250,000
As profits rise above £50,000, the tax rate gradually increases to 25%
247
When is corporation tax payable and when are tax returns due if a company's profits don't exceed £1.5 million?
Corporation tax must be paid 9 months and a day after the end of its accounting year.
Corporation tax returns for the same period must be submitted 12 months after the end of a company's financial accounting period
248
When must company's pay corporation tax if their profits exceed £1.5 million?
They must pay their taxes in quarterly instalments
249
What is the basic formula for computing corporation tax for a company's accounting period?
(Trade Profit + Other Income + Chargeable Gains - Charitable Donations) x Applicable Corporation Tax Rate %
250
How do companies calculate trade profit?
Trade income - (cost of sales + capital allowances)
251
What are allowable deductions against a company's taxable trading profits?
Salaries (and bonuses) paid to directors and employees
Dividends received by a company from another company
252
What is not a deductible expense for a company when calculating trade profit?
Dividends paid by a company
253
What is a company's annual exemption amount for capital gains?
haha - they don't get one
254
What is replacement of business asset/rollover relief? (corporation tax)
A company is entitled to tax relief when it disposes of a capital asset at a profit + uses the profit to buy a replacement asset.
The gain is deferred to when the replacement asset is sold, and is calculated by subtracting the gain from the acquisition cost of the new asset.
255
What losses are available to a company if it has a loss in a particular year? (corporation tax)
1. Set loss against total profits (before qualifying charitable donations) in the current accounting period
2. Carry the loss back to set it against total profits (before qualifying charitable donations) in the preceding 12 months - only after current period offset
3. Carry the loss forward to set it against total profits (after qualifying charitable donations) of a later accounting period
256
What is a close company?
A company which is resident of the UK and is controlled by:
1. 5 or fewer participators (shareholders), or
2. any number of directors who are also shareholders
257
When do special rules apply to loans re close companies?
If a close company makes a loan to a participator/shareholder who is also an employee/director and either charges no interest or charges interest below the official rate, the forgone interest is a taxable benefit if the loan exceeds £10,000
258
What rules apply if a close company makes a qualifying loan to a participator?
Company must pay HMRC an amount equivalent to 33/75% of the loan.
The payment must be made within 9 months + 1 day after the end of the accounting period in which the loan is made.
The payment will be refunded to the company when the loan is repaid or written off.
- To the extent the loan is written off, it is taxed as a dividend distribution to the participator.
Payment of the 33.75% tax isn't deductible as an expense for the company
259
When is VAT charged?
On any supply of goods or services made in the UK (unless the supply is exempt) if the supply is made by a taxable person whilst carrying on business.
260
What is exempt from VAT?
Supply of:
> land
> insurance
> financial services
> education
> health services, or
> postal services
261
What is outside the scope of VAT?
Sale of shares of a company, and
Sale of a business as a going concern
262
What is the standard VAT rate?
20%
263
What is subject to VAT but taxed at 0%?
The supply of:
- food
- books and newspapers
- water and sewer services
- residential construction
264
What is subject to reduced rate VAT of 5%?
Domestic fuel
Installation of energy-saving materials
Child car seats
265
When must a business register for VAT?
If its turnover exceeds that VAT threshold (currently £85,000) within any 12-month period, or
If looking forward, the registration threshold is expected to be exceeded in the following 30 days alone (future tests)
266
When must the business register for VAT if they have satisfied the historic test?
Within 30 days + must charge VAT from the start of the following month
267
When must the business register for VAT if they have satisfied the future test?
HMRC must be notified before the 30-day period ends + VAT must be charged from the date that the business was aware that its taxable supplies were going to exceed the registration threshold within the 30-day period
268
When can a business deregister for VAT?
If its taxable turnover falls below £83,000 for a 12-month period.
269
When must a business deregister for VAT?
Within 30 days of the time it ceases trading.
270
Who may opt to charge VAT on property? Why might they?
The owner of a commercial property so that they may recover their input tax.
271
When can the option to charge VAT on commercial property be revoked?
Within 6 months of making the election if it hasn't been put into practice.
Otherwise, it cannot be revoked for 20 years, and even then HMRC's consent is required
272
What VAT is payable on a contract to construct?
Subject to tax at 20% automatically
273
When must a business file an electronic VAT return?
Each quarter
