Legal Practice Course (LPC) Business Law and Practice Flashcards

24 sample cards from the Business Law and Practice deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Under the Companies Act 2006, out of what may a company lawfully pay a dividend (a distribution)?

   A distribution may only be made out of profits available for the purpose, i.e. accumulated, realised profits less accumulated, realised losses (s.830 CA 2006). The company must have sufficient distributable reserves; a dividend paid otherwise is an unlawful distribution and may be recoverable from shareholders who knew or had reasonable grounds to believe it was unlawful.

2. What is the difference between an interim dividend and a final dividend, and how is each declared under the Model Articles?

   A final dividend is recommended by the directors and declared by ordinary resolution of the members at/after the year end; it creates an immediate debt due to shareholders. An interim dividend is paid during the year by decision of the directors alone, based on management accounts, and can be revoked before payment.

3. In reading company accounts, what are the three primary financial statements and what does each show?

   The balance sheet (statement of financial position) shows assets, liabilities and equity at a point in time. The profit and loss account (income statement) shows income, expenses and profit/loss over a period. The cash flow statement shows cash inflows and outflows over the period across operating, investing and financing activities.

4. Give the basic accounting equation and explain what it represents on a balance sheet.

   $$\text{Assets} = \text{Liabilities} + \text{Equity}$$ It represents the fundamental balance sheet identity: everything the business owns (assets) is financed either by amounts owed to others (liabilities) or by the owners' capital and retained profits (equity). Equivalently, net assets (assets minus liabilities) equal shareholders' equity.

5. How is a UK company's corporation tax charge computed in outline, and what is the basic structure of rates from April 2023?

   Corporation tax is charged on Taxable Total Profits (income profits plus chargeable gains, less reliefs). From 1 April 2023 the main rate is 25% for profits over £250,000, the small profits rate is 19% for profits up to £50,000, and marginal relief applies between £50,000 and £250,000. The accounting profit is adjusted (e.g. add back disallowable expenditure, deduct capital allowances).

6. How are the profits of a partnership and a sole trader taxed for income tax purposes?

   A partnership is tax-transparent: it is not taxed itself; instead each partner is taxed individually on their share of the profits as trading income. A sole trader is taxed on the profits of the trade as the proprietor's trading income. Both pay income tax (and Class 2/4 NICs) on profits, regardless of drawings.

7. State the main UK income tax bands and rates for non-savings income for 2023/24 (with the standard personal allowance).

   Personal allowance £12,570 (taxed at 0%, tapered away above £100,000). Basic rate 20% on taxable income up to £37,700; higher rate 40% from £37,701 to £125,140; additional rate 45% above £125,140.

8. How is capital gains tax computed in outline for an individual, and what is the basic structure of the annual exemption and rates?

   CGT is charged on the chargeable gain (disposal proceeds less allowable acquisition and enhancement costs and incidental costs), reduced by the annual exempt amount. The gain falling within an individual's remaining basic rate band is taxed at the lower rate and the excess at the higher rate (for non-residential assets, historically 10%/20%). Business Asset Disposal Relief may reduce the rate to 10%.

9. What is Business Asset Disposal Relief (BADR), and what are its key conditions and lifetime limit?

   BADR (formerly Entrepreneurs' Relief) charges qualifying business disposals to CGT at a reduced rate of 10%, up to a lifetime limit of £1 million of gains. It applies to disposals of all or part of a trading business, or of shares in a personal trading company where the individual is an officer/employee holding at least 5% of ordinary shares and voting rights, with the qualifying conditions generally met for at least two years.

10. What is VAT, what is the standard rate, and when must a business register?

    VAT (Value Added Tax) is an indirect tax on the supply of goods and services. The standard rate is 20% (with reduced 5% and zero rates for certain supplies). A business must register for VAT once its taxable turnover exceeds the registration threshold (£85,000 in a rolling 12-month period, frozen for the relevant years).

11. How does the VAT system of output tax and input tax work for a VAT-registered business?

    A registered business charges output VAT on its taxable supplies to customers and pays input VAT on its purchases. It accounts to HMRC for the output tax it collects, less the input tax it has incurred. The net amount payable (or reclaimable) is: $$\text{VAT due} = \text{output tax} - \text{recoverable input tax}.$$

12. How are dividends received by an individual shareholder taxed, and what are the dividend tax rates for 2023/24?

    Dividends are taxed as the top slice of income after a dividend allowance (£1,000 for 2023/24) is taxed at 0%. Above the allowance, dividends are taxed at 8.75% (basic rate band), 33.75% (higher rate band) and 39.35% (additional rate band). Dividends are paid out of post-corporation-tax profits, so represent a second layer of tax.

13. What are the two statutory tests of insolvency under s.123 of the Insolvency Act 1986?

    The cash-flow test: a company is unable to pay its debts as they fall due. The balance-sheet test: the value of the company's liabilities (including contingent and prospective liabilities) exceeds the value of its assets. Either test being satisfied means the company is unable to pay its debts.

14. What evidence of inability to pay debts is provided by a statutory demand under s.123 Insolvency Act 1986?

    A creditor owed more than £750 may serve a written statutory demand; if the company fails to pay or secure the debt within 21 days, the company is deemed unable to pay its debts. This is one of the prescribed ways of proving insolvency to support a winding-up petition.

15. Distinguish compulsory liquidation, creditors' voluntary liquidation (CVL) and members' voluntary liquidation (MVL).

    Compulsory liquidation is by court order following a winding-up petition (usually by a creditor) where the company is insolvent. A CVL is commenced by the company's members where the company is insolvent, with creditors effectively controlling the choice of liquidator. An MVL is a solvent liquidation, requiring the directors to make a statutory declaration of solvency that debts will be paid in full within 12 months.

16. What is the statutory order of priority for distribution of assets in a liquidation?

    Broadly: (1) fixed-charge creditors (from their charged assets); (2) liquidation expenses; (3) preferential creditors (e.g. certain employee claims, and secondary preferential HMRC claims); (4) the prescribed part ring-fenced for unsecured creditors; (5) floating-charge creditors; (6) unsecured (ordinary) creditors; (7) interest on debts; and finally (8) shareholders.

17. What is administration under the Insolvency Act 1986, and what is the statutory purpose hierarchy?

    Administration places the company under the control of a licensed insolvency practitioner (the administrator) to pursue, in order of priority: (a) rescuing the company as a going concern; or if not reasonably practicable, (b) achieving a better result for creditors than a winding up; or if not, (c) realising property to pay secured or preferential creditors. The administrator owes duties to creditors as a whole.

18. What is the moratorium in administration, and what protection does it give the company?

    On entering administration an automatic statutory moratorium arises: no winding-up petition may proceed, and no legal proceedings, enforcement of security, repossession of goods under hire-purchase, or forfeiture may be commenced or continued against the company without the administrator's consent or the court's permission. This gives the company breathing space to be rescued or reorganised.

19. What is a Company Voluntary Arrangement (CVA), and what approval threshold is required?

    A CVA is a binding compromise or arrangement between a company and its creditors (e.g. to pay debts in part or over time), supervised by an insolvency practitioner. It is approved if 75% or more (by value) of creditors voting agree, subject to the rule that it is not approved if more than 50% of unconnected creditors vote against. Once approved it binds all unsecured creditors entitled to vote, but cannot bind secured/preferential creditors without their consent.

20. What is receivership (administrative receivership), and how does it differ from administration in whose interests the office-holder acts?

    An administrative receiver is appointed by the holder of a qualifying floating charge to realise the charged assets and repay that secured creditor. The receiver acts primarily in the interests of the appointing charge holder, not creditors as a whole. Administrative receivership is now largely abolished for floating charges created after 15 September 2003, with administration the usual route instead.

21. What is a preference under s.239 Insolvency Act 1986, and what must a liquidator/administrator show to set it aside?

    A preference is where a company does something that puts a creditor (or guarantor) in a better position on insolvency than they would otherwise have been, and the company was influenced by a desire to prefer that person. It is challengeable if given within 6 months before the onset of insolvency (2 years for a connected person, with a presumption of the requisite desire).

22. What is a transaction at an undervalue under s.238 Insolvency Act 1986, and what is the relevant time period?

    A transaction at an undervalue is a gift or a transaction for significantly less consideration than the company provided. It can be challenged if entered into within 2 years before the onset of insolvency, while the company was (or became as a result) unable to pay its debts. The court may restore the position to what it would have been. A defence applies if the company acted in good faith for the purpose of carrying on business and reasonably believed it would benefit the company.

23. What are the main routes into personal bankruptcy, and how long does bankruptcy typically last before discharge?

    An individual may be made bankrupt on their own application (online to the Adjudicator), or by a creditor's petition to the court for a debt of at least £5,000 where the debtor cannot pay. On bankruptcy the debtor's assets vest in the trustee in bankruptcy for distribution to creditors. The bankrupt is usually automatically discharged after 12 months, after which most debts are released.

24. What is an Individual Voluntary Arrangement (IVA), and how does it compare to bankruptcy for an individual debtor?

    An IVA is a formal, binding agreement between an individual and their creditors to repay debts (in whole or part) over time, supervised by an insolvency practitioner and approved by 75% or more by value of voting creditors. Compared to bankruptcy it allows the debtor to avoid the asset-vesting and restrictions of bankruptcy and can preserve assets such as the home, while still binding dissenting unsecured creditors.

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Business Law and Practice flashcards FAQ