The tax and legal aspects of business


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The tax and legal aspects of business

  1. 1. Thetaxandlegalaspectsof business At the end of this unit, candidates should be able to demonstrate an understanding of: • the main legal forms of business and how they are set up and managed; • the consequences of bankruptcy or insolvency; • business accounts and financial controls; • the taxation of each type of business entity, its owners and employees; • the main legal responsibilities businesses have to employees. Summaryoflearningoutcomes 1. Understand the main legal forms of business in the UK; 2. Understand the main principles of business accounting and the interpretation of accounts for each of the main legal forms of business; 3. Understand the main internal and external options for financing a business; 4. Understand the principles and application of the following taxes and allowances in the business context: • Income Tax; • National Insurance contributions; • Corporation Tax; • Capital allowances; • Value Added Tax; • Capital Gains Tax; • Inheritance Tax. 5. Understand the impact of employment law on business; 6. Understand the main principles of business protection insurance. Importantnotes • ThissyllabuswillbeexaminedintheOctober2009andApril2010sessions.Candidateswillbeexaminedonthe basisofEnglishlawandpracticeinthetaxyear2009/2010unlessotherwisestated. • ThegeneralruleisthattheexamsarebasedontheEnglishlegislativepositionthreemonthsbeforethedateof theexams. • lawandpracticeandwhentheywillbeexamined. 2009/2010 J03 © The Chartered Insurance Institute 2009
  2. 2. 1. Understandthemainlegalformsof 2. Understandthemainprinciples businessintheUK ofbusinessaccountingandthe Soletraders interpretationofaccountsforeach 1.1 The lack of separate existence of the business from the ofthemainlegalformsofbusiness business owner; 2.1 Setting up a basic accounting system – accounting 1.2 Personal liability; records and cash flow control; 1.3 Responsibilities of sole traders; 2.2 Basic accounting principles – accruals basis, 1.4 Business names and passing off, Business Names the matching principle, the going concern basis, Act 1985; consistency and comparability, prudence and reliability; 1.5 Bankruptcy – definition, procedures before and after 2.3 The profit and loss account – different definitions the bankruptcy order, the effects of bankruptcy, of profit, the difference between the profit and loss discharge, transactions voidable by the court, individual account and the cash flow statement; voluntary arrangements. 2.4 The relationship between accounting practice and taxation; Partnerships 2.5 Interpreting accounts – use of key ratios for measuring 1.6 The role of the Partnership Act 1890 in providing performance, the importance of the directors’ and the basic code for partnerships, the significance of auditors’ reports, the balance sheet; partnership agreements; 2.6 The Companies Act 1985 and accounts – accounting 1.7 Creating an ordinary partnership – the implications for standards, audits for limited companies, small the partners. Creation of partnerships by implication companies; and expressly; 2.7 The use of budgets and budgetary control in business; 1.8 Formation and existence of a partnership – numbers of partners, names, duration, ceasing to be a partner; 2.8 How businesses make investment decisions – payback periods, net present value calculations, measuring 1.9 The relationship between partners – duty of good faith, internal rates of return, deciding whether to lease or accountability, competing, right to indemnity, partners’ purchase assets. capital, profit and loss sharing, interest on loans and capital, loans and capital, partnership property; 1.10 Partners’ relations with third parties – agency and 3. Understandthemaininternaland authority, holding out, liability; externaloptionsforfinancinga 1.11 Changes in the composition of partnerships – expulsion, retirement and novation, death, bankruptcy; business 1.12 Dissolution of a partnership – when it occurs, the 3.1 Capital structures of partnerships – partnership capital, realisation of partnership assets; profit sharing ratios, loans by partners, loans by third parties; 1.13 Limited liability partnerships (LLPs)– relationships between partners, property, designated members, 3.2 Company share structures – ordinary shares, special company related requirements, features that LLPs have classes of shares, voting and non-voting shares, in common with limited liability companies and how preference shares; they differ from limited liability companies. 3.3 Fixed interest securities – priorities, interest rates, security, debentures, difference in the tax position of Unincorporatedassociations dividends and interest payments; 1.14 The nature of unincorporated associations, the lack 3.4 The loan of assets to a company or partnership by of a separate existence of the association from the business owners; members, responsibilities of members. 3.5 Reinvestment of company profits; Limitedcompanies 3.6 Banking and financing practices – company security, 1.15 The Companies Act 2006 – the main provisions and fixed and floating charges, personal guarantees and the reforms introduced by Companies Act 2000, the personal assets used as security; Company Law Reform Act 2005; 3.7 Tax relief on loans to sole trader businesses, 1.16 The company as a separate legal person from the partnerships and companies, for the purchase of shareholders, the main features of a company, when shares and partnership interests, for the purchase or company law is likely to impact on directors and improvement of property used in a business, refinancing shareholders, buying and selling shares; partnership capital and directors’ loan accounts; 1.17 Company formation and documents – the promoters 3.8 Ownership of business assets and financing of and pre-incorporation contracts, incorporation and the businesses by pension schemes. main documents of the company, the main contents and functions of a company’s memorandum and articles of association, how companies are set up; 4. Understandtheprinciplesand 1.18 Company management – the relationship between the applicationofthefollowingtaxes shareholders and the board, the powers and duties of the directors, the appointment and removal of directors, the andallowancesinthebusiness role of the company secretary, the role and responsibility of auditors, rights of minority shareholders; context 1.19 Corporate insolvency – the differences between IncomeTax–selfemployedandpartners compulsory liquidation and voluntary winding up, 4.1 Taxable profits – registering a business with HMRC, distribution of assets, duties of liquidators, transactions determining whether a trade is being carried on, the defrauding creditors, personal liability of directors, the treatment of stock and capital, capital allowances, main alternatives to liquidation: administration, voluntary allowable expenses, interest relief and the introduction arrangements, administrative receivership, Enterprise Act of partnership capital into a business, the treatment of 2002, the Company Directors Disqualification Act 1985, losses, private assets used in a business, goods for own wrongful trading and fraudulent trading. use, employment of spouse and partnership with spouse; 2009/2010 2of4 © The Chartered Insurance Institute 2009
  3. 3. 4.2 The basis of assessment – the current year basis, CapitalGainsTax(CGT) opening and closing years of a business and overlap 4.17 Basic principles of Capital Gains Tax – disposals, profits, choosing an accounting date, the self residence status, exemptions, valuation, calculating assessment tax return, tax payment dates, HMRC gains, effect on available relief introduced by the enquiries into returns, special rules for partnerships. Finance Act 2008, losses, identification rules, IR35 impact on partnerships. calculating the tax liability, holdover relief, rollover IncomeTax–employeesanddirectors relief and reinvestment relief, incorporation, share for share transactions. 4.3 Employee taxation – employed or self employed, the PAYE system of collecting tax, taxable payments, InheritanceTax(IHT) termination payments, tax treatment of expenses; 4.18 Basic principles of Inheritance Tax – lifetime transfers, 4.4 Share option and incentive schemes – savings exempt transfers, potentially exempt transfers, related schemes, share option schemes, enterprise chargeable lifetime transfers, settlements, business management incentives, profit sharing schemes, share property relief, agricultural property relief, gifts with incentive schemes, employee share ownership trusts; reservation and pre-owned assets, valuation. 4.5 Taxation of employee benefits – P11D and other employees, general principles of taxing benefits on P11D and other employees, company cars and fuel for 5. Understandtheimpactof private use, mileage allowances, beneficial loans, living employmentlawonbusiness accommodation, medical insurance, main benefits 5.1 Contract of employment – the main provisions, rights wholly or largely exempt, e.g. income protection, and duties of employers and employees; provision of mobile phone. 5.2 Employers’ duties – statutory sick pay, maternity NationalInsuranceContributions and paternity pay, allowances and leave, maternity 4.6 NI contributions for the self employed – who is leave, pension rights, methods of pay and deductions, self employed, class 2 NI contributions, class 4 NI equal pay, trade union membership, testimonials and contributions, maximum annual NI contributions, link references, employer’s liability insurance; of NI contribution records to benefit entitlements, 5.3 Employees’ duties – skill and care at work, fidelity, collection of NI contributions; confidentiality, employer’s vicarious liability; 4.7 NI contributions for employees and directors – 5.4 Employer’s liability for injuries to employees, health employments and offices, earnings subject to NI and safety at work; contributions, class 1 NI contributions, class 1A NI 5.5 Discrimination – sex, marital status, sexual orientation, contributions on benefits, rates of NI contributions, disability, laws on age; contracted out NI contributions, special position of directors, maximum annual NI contributions, collection 5.6 Terminating a contract of employment – unfair of NI contributions. dismissal, grounds for dismissal, redundancy, other methods of terminating a service contract. CorporationTax 4.8 The structure of Corporation Tax – rates of tax, accounting periods, treatment of capital gains and 6. Understandthemainprinciplesof losses, associated companies; businessprotectioninsurance 4.9 Taxation of corporate profits – computation of profits, 6.1 Key person insurance – identifying key people, accounts basis of profits, research and development calculating amounts of life and health cover needed, the expenditure, purchase of goodwill and other intangible tax rules, the main types of suitable insurance policies; assets, disposal of substantial shareholdings, corporate 6.2 Share protection insurance – the provisions in venturing; companies’ articles of association, shareholders’ 4.10 Self assessment for companies – payment of agreements, main types of life cover used, how policies Corporation Tax, self assessment tax return; are written, calculating the level of cover needed, tax 4.11 Dividends – the position of the company and the and legal implications, retirement, ill-health; shareholder, franked and unfranked income, company 6.3 Partnership protection insurance – the Partnership year end tax planning and choosing between dividends Act 1890, main types of partnership agreements and and bonuses for owner-directors; succession planning, capital accounts, main types of 4.12 Aspects of Corporation Tax – trading losses, groups life cover used, how policies are written, calculating of companies, close companies and close investment the level of cover needed, tax and legal implications, companies, company residence, companies buying their retirement and ill health, limited liability partnerships. own shares; 4.13 Tax rules for key person insurance – allowable and non- allowable premiums, treatment of the benefits. Capitalallowances 4.14 General principles – allowable expenditure, who can claim, date of expenditure; 4.15 Plant and machinery – first year allowance, writing down allowances, qualifying expenditure, how allowances are calculated, special assets e.g. cars, short life and long life assets. ValueAddedTax(VAT) 4.16 Basic outline of VAT – registration, VAT system, taxable, exempt and partially exempt supplies, zero rated supplies, flat rate schemes, schemes for second hand goods, farmers, trade between EU states, bad debts, collection of VAT. 2009/2010 3of4 © The Chartered Insurance Institute 2009
  4. 4. Reading List Periodicals The following list provides details of various publications which Financial Adviser. London: FT Business. Weekly. Also available may assist with your studies. Periodicals and publications online at will be of value in ensuring candidates keep up to date with Financial Solutions. London: Personal Finance developments and in providing a wider coverage of syllabus Society. Six issues a year. Also available online at topics. Any reference materials cited are authoritative, detailed works which should be used selectively as and when required. (CII/PFS members only). Note:Theexaminationwilltestthesyllabusalone. Financial Times. London: Financial Times. Daily. Also available The reading list is provided for guidance only and is not in online at itself the subject of the examination. Money Management. London: FT Business. Monthly. CII/PFS members can borrow most of the study materials from Money Marketing. London: Centaur Communications. Weekly. CII Knowledge Services and may be able to purchase some Also available online at at a special discount. For further information on lending and discounts go to The tax and legal aspects of business. London: CII. Examination guides Coursebook J03. Guides are produced for each sitting of written answer examinations. These include the exam questions, Accounting for non-accounting students. J R Dyson. 7th ed. examiners’ comments on candidates’ performance and key Harlow, Essex: Pearson Education, 2007. points for inclusion in answers. You are strongly advised Business law. Denis Keenan, Sarah Riches. [8th ed.] Harlow: to study guides for the last two sittings. Please visit Longman, 2007. to buy online or contact CII Customer Service Business protection simplified. Tony Granger. Kemble, for further information on +44 (0)20 8989 8464. Older Gloucestershire: Management Books 2000, 2008. examination guides are available (for members only) at Business tax and law handbook. David Bertram, Richard Lawson. 4th ed. Harlow, England: Pearson Education, 2003. Essential accounting for the taxation technician. [New ed] Exam technique/study skills London: Association of Taxation Technicians, 2006. There are many modestly priced guides to study skills and Essential law for your business: a practical guide to all legal exam techniques in bookshops. You will also find advice at and financial requirements. Patricia Clayton. 13th ed. London: (CII/PFS members only). Kogan Page, 2009. For a more interactive approach, you should consider: Winning Financial management for the small business. Colin Barrow. the brain game. London: CII, 2006. CD–Rom. 6th rev ed. London: Kogan Page, 2006. The Financial Times guide to using and interpreting company accounts. Wendy McKenzie. 3rd ed. Harlow, Essex: Pearson Education, 2003. Law for the small business: an essential to all the legal and financial requirements. Patricia Clayton. 11th ed. London: Kogan Page, 2004. Partnership law. Geoffrey Morse. 6th ed. London: Blackstone, 2006. Reference materials Lamont’s glossary: the definitive plain English money and investment dictionary for the finance professional and money-minded consumer. Barclay W Lamont. 9th ed. Surbiton, Surrey: Lamonts Glossary Ltd, 2004. Also available online at (CII/PFS members only). PFS focus. London: CII Knowledge Services. Comprehensive archive of PFS publications, including technical and regulatory bulletins and technical tips. Available online at (CII/PFS members only). St James’s Place tax guide. Walter Sinclair. Basingstoke, Hampshire: Palgrave Macmillan. Annual. Taxation. London: CII Knowledge Services. Tax tables and other data, updated as necessary. Available online at (CII/PFS members only). Tolley’s tax guide. Arnold Homer, Rita Burrows. London: LexisNexis Butterworths. Annual. Tolley’s tax planning. London: LexisNexis. Annual. Zurich tax handbook. A Foreman, G Mowles. Harlow [Essex]: Pearson Education. Annual. HM Revenue and Customs Companies House Businesslink Bank of England Office for National Statistics 2009/2010 4of4 © The Chartered Insurance Institute 2009