Unit 2: Partnership Law, Trading Profits, VAT, and Income Tax

Flashcards covering partnership law under the Partnership Act 1890 and LLPA 2000, trade profit computations, VAT rules, and income tax mechanics.

How does section 1 of the Partnership Act 1890 define a partnership?

A partnership exists where $2$ or more persons are "carrying on a business in common with a view of profit".

Under section 2 of the Partnership Act 1890, what is the legal significance of sharing profits?

Sharing profits is prima facie evidence of a partnership, but it is not conclusive on its own. Sharing gross returns does not create a partnership.

Which provisions of the Partnership Act 1890 cannot be excluded or overridden by agreement between the partners?

Sections 1–2 (the existence of a partnership) and sections 5–18 (liability to third parties) cannot be excluded.

Under the Partnership Act 1890 defaults, which three decisions require unanimous consent rather than a simple majority?

Unanimity is required for: (1) changing the nature of the partnership business, (2) introducing a new partner, and (3) altering the partnership agreement (section 19).

What is the default rule under section 24(1) of the Partnership Act 1890 regarding the sharing of profits and losses?

Profits and losses are shared equally among the partners, regardless of whether they made unequal capital contributions.

What power does a majority of partners have under section 25 of the Partnership Act 1890 to expel a partner?

No majority can expel a partner unless the partnership agreement contains an express clause conferring that power.

What is the default duration and dissolution rule for a partnership under section 26 of the Partnership Act 1890?

It is a partnership at will; any partner can dissolve it at any time without giving a notice period or written notice (unless the agreement was executed as a deed).

If a partnership dissolves and there is no agreed payment provision, what interest is an outgoing partner entitled to on their share?

The outgoing partner is entitled to interest at $5\%$ per annum on their share, or a court-ordered sum.

What is the four-step order of distribution for partnership assets on dissolution under section 44 of the Partnership Act 1890?

1. External creditors are paid in full; 2. Partner loans (plus interest) are repaid; 3. Partners' capital contributions are returned; 4. Any remaining surplus is shared according to the partnership agreement.

What four conditions must be met for a partner's act to bind the firm under apparent authority pursuant to section 5 of the Partnership Act 1890?

1. The transaction relates to the kind of business carried on by the firm; 2. A partner in such a firm would usually be expected to have authority; 3. The third party did not know the partner lacked authority; 4. The third party knew or believed they were dealing with a partner.

How does a novation agreement differ from an indemnity regarding pre-retirement partnership debts?

A novation replaces the old contract with a new tripartite agreement between the creditor, retiring partner, and continuing partners, releasing the retiring partner from third-party liability. An indemnity only binds the partners inter se, leaving the creditor free to sue the retired partner.

What must a retiring partner do under section 36 of the Partnership Act 1890 to avoid liability for new debts incurred after their departure?

Give actual direct notice to existing contacts and publish a notice in the London Gazette (or the Edinburgh or Belfast Gazette in Scotland or Northern Ireland) for third parties with no prior dealings.

What constitutes 'holding out' under section 14 of the Partnership Act 1890?

A person represents (or knowingly allows themselves to be represented) as a partner, leading a third party to rely on that representation and extend credit as a result.

Under the Limited Liability Partnerships Act 2000, what happens if an LLP's membership drops to one member for more than six months?

If reduced to $1$ member for over $6$ months, that remaining member becomes jointly and severally liable for all LLP debts incurred from the $6$-month mark onward.

What are the minimum number and key responsibilities of designated members in an LLP?

An LLP must have at least $2$ designated members who handle legal and administrative obligations, including filing accounts, appointing/removing auditors, submitting confirmation statements, notifying membership changes, and managing winding up.

What is the statutory deadline for notifying Companies House of a new or departing member of an LLP?

Within $14$ days, using form LL AP01/LL AP02 for a new member or LL TM01 for a departing member.

What is the basic formula used to calculate business trading profit?

$$\text{Trading Profit} = \text{Chargeable Receipts} - \text{Deductible Expenditure} - \text{Capital Allowances}$$

What three statutory tests must expenditure satisfy to be deductible against trading income?

It must be: (1) income in nature (revenue expenditure), (2) incurred "wholly and exclusively" for the purposes of the trade, and (3) not prohibited by statute.

What is the standard annual rate for the Writing Down Allowance (WDA) on the main plant and machinery pool?

The WDA rate is $14\%$ per annum applied to the balance of the pool at the start of the financial year.

How does Full Expensing compare to the Annual Investment Allowance (AIA)?

Full Expensing offers an uncapped $100\%$ deduction for brand-new plant and machinery and is available to companies only. The AIA provides a $100\%$ deduction capped at $£1{,}000{,}000$ for both companies and unincorporated businesses on new, second-hand, or refurbished assets.

How does start-up trading loss relief operate for an unincorporated business?

Losses incurred in the first $4$ tax years of a new trade can be set against total income in the $3$ tax years preceding the loss year, applied earliest year first.

What is the statutory limit and time notification requirement for carry-forward loss relief?

Carry-forward relief allows unabsorbed trading losses to offset future profits of the exact same trade indefinitely, provided HMRC is notified within $4$ years of the end of the tax year in which the loss occurred.

What is the statutory threshold for mandatory VAT registration in any consecutive 12-month period?

A business must register for VAT if its taxable supplies exceed $£90{,}000$ within any $12$-month period.

What is the crucial commercial difference between zero-rated VAT supplies and exempt VAT supplies?

Customers pay $0\%$ VAT on both, but a supplier of zero-rated supplies can register for VAT and reclaim input tax, whereas a supplier of exempt supplies cannot register and cannot reclaim input tax.

What are the five steps in the income tax calculation framework?

Step 1: Calculate total income; Step 2: Deduct allowable reliefs to find net income; Step 3: Deduct personal allowances to find taxable income; Step 4: Split into NSNDI, savings, and dividends, taxing each slice at applicable rates; Step 5: Add the tax on each slice to determine total liability.

What is the standard Personal Allowance, and how does the taper mechanism apply above £100,000?

The standard allowance is $£12{,}570$. It is reduced by $£1$ for every $£2$ of net income above $£100{,}000$, reducing to nil at $£125{,}140$.

What are the Personal Savings Allowance (PSA) bands for basic, higher, and additional rate taxpayers?

Basic rate taxpayers receive a $£1{,}000$ allowance; higher rate taxpayers receive a $£500$ allowance; additional rate taxpayers receive $£0$.

What are the dividend tax rates across the basic, higher, and additional tax bands (above the £500 Dividend Allowance)?

Dividends are taxed at $10.75\%$ (basic rate), $35.75\%$ (higher rate), and $39.35\%$ (additional rate).

What are the main parameters of the Enterprise Investment Scheme (EIS) income tax relief?

Investors receive a $30\%$ income tax reducer on investments up to $£2{,}000{,}000$ per year in qualifying unquoted companies, provided they are not connected to the company (holding over $30\%$ shareholding or being an employee/director) for $2$ years prior and $3$ years post-investment.

Under what statutory condition are employment-related cheap or interest-free loans exempt from income tax as a benefit in kind?

They are exempt if the total outstanding balance on all such loans does not exceed $£10{,}000$ at any time during the tax year.

What are the key filing and payment deadlines under the self-assessment tax regime?

Paper tax return: 31 October following the tax year; Online tax return & 1st payment on account: 31 January following/in the tax year; 2nd payment on account: 31 July following the tax year; Balancing payment: next 31 January.

What test defines an 'abusive' tax arrangement under the General Anti-Abuse Rule (GAAR) in Finance Act 2013?

An arrangement is abusive if it cannot reasonably be regarded as a reasonable course of action (the double reasonableness test). The burden of proof rests on HMRC under section 209.