R01/3: Understand the legal concepts and considerations relevant to financial advice

What is a sole trader in the UK legal system?

A sole trader is a person who solely controls their own business and is personally liable for its debts.

How are sole traders taxed in the UK?

Sole traders are taxed on their business profits as personal income, and capital gains are treated as gains made by the individual.

What are the National Insurance contributions (NICs) for sole traders? What is the difference in tax liability between sole traders and their employees?

Sole traders pay NICs under Class 2 or Class 4, depending on their profit level. Sole traders pay income tax directly to HMRC, while employees pay income tax under PAYE and Class 1 NICs.

What is a partnership in the context of UK business law?

A partnership is a business structure where two or more individuals share ownership and profits, but it is not a separate legal entity.

How is tax handled in a partnership?

Each partner pays income tax on their share of the partnership's profits directly to HMRC.

What is the liability of partners in a traditional partnership?

Partners have unlimited liability for the trade debts of the partnership.

What is a Limited Liability Partnership (LLP)?

An LLP is a type of partnership that is a separate legal entity, providing limited liability to its partners.

What are the tax implications for partners in an LLP?

Partners in an LLP are treated as self-employed and pay income tax and NICs on their share of the profits, but the LLP itself does not pay corporation tax.

What legislation introduced Limited Liability Partnerships in the UK?

The Limited Liability Partnerships Act 2000.

What are the advantages of an LLP for professional firms?

LLPs provide limited liability protection, making them attractive to firms facing large liability claims.

What is the relationship between a partnership and its partners in terms of legal status?

A partnership is not a separate legal person; it is merely the sum of its partners.

How do sole traders report their income tax?

Sole traders report their income tax twice yearly directly to HMRC.

What does it mean for a partnership to have unlimited liability?

Each partner is personally responsible for all debts incurred by the partnership.

How does the tax treatment of an LLP differ from that of a traditional company?

An LLP is taxed like a traditional partnership, meaning it does not pay corporation tax.

What is the significance of HMRC in the context of sole traders and partnerships?

HMRC is the tax authority that collects income tax and NICs from sole traders and partners.

What is a contract for services in relation to sole traders?

A contract for services is an agreement under which a sole trader provides services to others without being an employee.

What is the impact of the legal system on the financial services industry in the UK?

The UK legal system significantly affects the financial services industry, influencing business structures and tax obligations.

What are the main types of business structures discussed in the notes?

The main types are sole traders, partnerships, and limited companies, including public limited companies.

What is the importance of understanding the legal principles behind business types?

Understanding these principles is crucial for navigating the differences in tax and liability among various business structures.

What happens to the profits of a sole trader's business?

The profits are liable to income tax and capital gains tax, treated as personal income of the sole trader.

What is a limited company (Ltd)?

A limited company has a legally separate identity from its owners (shareholders) and is responsible for its own debts.

What is the main advantage of forming a limited company compared to a sole trader or partnership?

The main advantage is limited liability, meaning owners are not personally liable for the company's debts.

What must a limited company do before it can start trading?

It must be registered with the Registrar of Companies and supply specified information and yearly accounts to Companies House.

How can you identify a limited company?

By the presence of 'limited' (Ltd) for private companies or 'public limited company' (PLC) for public companies in its name.

What is the tax liability of limited companies compared to unincorporated businesses?

Limited companies pay corporation tax on profits, while unincorporated businesses pay income tax and capital gains tax.

What happens to the tax obligations of owners when a partnership is incorporated into a limited company?

Owners like John and Nadia become directors and are classified as 'office holders', with their earnings taxed as employment income under PAYE.

What is the minimum requirement for a public company (PLC) in terms of directors and shareholders?

A PLC must have at least two directors, two shareholders, and a company secretary.

What designation must a public company's name include?

It must end with 'public limited company' or 'PLC'.

What is required for a PLC to start trading after incorporation?

It must obtain an extra certificate from the Registrar of Companies and have allotted shares with a nominal value of at least £50,000.

What is the minimum amount a PLC must receive from its allotted shares to start trading?

At least £12,500 plus the whole of any premium.

What qualifications must a company secretary of a PLC have?

They must be a member of a professional body or recognized by the directors as qualified through experience.

What is a key requirement for public companies regarding their financial accounts?

Public companies must lay their accounts and reports before a general meeting of shareholders and hold annual general meetings.

What is the consequence of unlawfully trading for company directors?

They may become liable for the company's debts if they continue to trade while knowing the company is insolvent.

What is the purpose of the annual cumulative basis for Class 1 NICs for directors?

To prevent directors from altering their income flow to take advantage of the NIC system.

What is the difference in share advertising between private limited companies and public limited companies?

Private limited companies cannot advertise their shares for sale and can only transfer shares through private agreement.

What is meant by the term 'incorporation' in a business context?

Incorporation refers to the process of changing a partnership or sole trader into a limited company.

What is the role of HMRC in relation to limited companies?

HMRC looks to the limited company itself for tax payment, not to the individual owners.

What type of tax do limited companies pay on profits?

Limited companies pay corporation tax on all forms of profit made, including capital gains.

What is the liability of directors regarding business profits in a limited company?

Neither the directors nor the company is liable to NIC on business profits, but the company must pay secondary Class 1 NIC on employees.

What happens to the personal tax obligations of owners when they become directors of a limited company?

They no longer pay income tax directly to HMRC on their salaries from the business.

What is the significance of holding annual general meetings for public companies?

It ensures transparency and accountability to shareholders regarding the company's financial performance.

What is the difference in tax treatment between a private limited company and a public limited company?

There is no difference in tax treatment; both are taxed the same way.

What is the filing requirement for public companies regarding their accounts?

Public companies must file their accounts within six months of the end of their accounting period and cannot waive the requirement for audited accounts.

What are the responsibilities of a sole trader?

A sole trader is an individual who solely controls their business, is self-employed, and has no distinction between themselves and the business.

What is the liability of a sole trader?

A sole trader is personally liable for the liabilities of their own business.

How is tax treated for a sole trader?

Tax is levied on the owner rather than the business; profits are subject to income tax and capital gains tax (CGT), and self-employed individuals pay income tax twice a year directly to HMRC.

What distinguishes a partnership from a sole trader?

In a partnership, each partner is self-employed and has unlimited, joint, and several liability for the trade debts of the partnership.

What is the liability structure of a Limited Liability Partnership (LLP)?

In an LLP, partners have limited liability and are not individually liable for the partnership's debts.

How do Ltd and PLC companies differ in terms of liability?

Both Ltd and PLC companies are legally separate from their owners (shareholders), who are only responsible for the company's debts to the limit of their own assets.

What tax obligations do Ltd and PLC companies have?

Limited companies and PLCs pay corporation tax on all forms of profit, including capital gains, while shareholders do not pay tax on the company's profits.

What is a key distinction between a PLC and a limited company?

A PLC can be floated on the Stock Exchange, which requires it to follow additional rules to protect investors.

What does the Powers of Attorney Act 1971 allow an individual to do?

It allows a person to give power to another individual to act on their behalf in various matters such as banking or investments.

What are examples of situations where someone might grant power of attorney?

Examples include someone leaving the country for an extended period or an elderly person wanting someone to manage their affairs.

What is an ordinary power of attorney?

An ordinary power of attorney grants authority while the individual is mentally capable and is withdrawn upon mental incapacity.

What should a power of attorney document specify?

It should specify the powers conferred, the duration of validity, and the authority for intended transactions.

What happens to power of attorney during mental incapacity?

The power to act on behalf of an individual is often removed when mental incapacity occurs.

What is the tax treatment for partners in a partnership?

Partners pay income tax on their share of the partnership's profits directly to HMRC and are liable for National Insurance contributions based on their profits.

How are LLPs taxed compared to traditional partnerships?

LLPs are treated like traditional partnerships for tax purposes; partners are self-employed and pay income tax and NIC on their share of profits, while LLPs do not pay corporation tax.

What is the liability of partners in a partnership?

Partners have unlimited liability for the trade debts of the partnership, meaning they can be held responsible beyond their share of profits.

What is the significance of a power of attorney being specific?

A specific power of attorney grants authority only for designated areas or transactions, unlike a general power which is broader.

What must advisers and institutions clarify regarding power of attorney?

They need to be clear about what powers are conferred by the power of attorney, as stated in the original document.

What are the implications of a PLC needing to protect investors?

A PLC must follow specific rules for quoted companies to ensure investor protection, leading to operational differences from a private limited company.

What is the role of HMRC in the taxation of sole traders and partners?

Sole traders and partners must pay income tax directly to HMRC based on their business profits.

What is the relationship between a sole trader and their business in terms of liability?

There is no distinction; the individual is personally liable for all business debts.

What is the main difference in tax obligations between unincorporated businesses and limited companies?

Unincorporated businesses pay income tax and CGT, while limited companies pay corporation tax on profits.

What is the purpose of the Enduring Powers of Attorney Act 1985?

To enable a person to hold a power of attorney that continues in the event of the mental incapacity of the donor.

When did the Mental Capacity Act 2005 come into force?

1 October 2007.

What is an Enduring Power of Attorney (EPA)?

A power of attorney that continues to be effective if the donor becomes mentally incapacitated.

What are the conditions under which a power of attorney is automatically revoked?

On the death or bankruptcy of the donor, or on the expiry of a specified time.

What is the assumption regarding an individual's mental capacity according to the Mental Capacity Act 2005?

Every individual is assumed to have mental capacity unless otherwise established.

What constitutes a lack of mental capacity?

An individual is unable to make a decision for themselves due to impairment or disturbance in the functioning of their mind or brain.

List the four criteria that indicate an individual is unable to make a decision for themselves.

1. Unable to understand relevant information. 2. Unable to retain that information. 3. Unable to evaluate that information in making a decision. 4. Unable to communicate that information.

What are the requirements for establishing an Enduring Power of Attorney (EPA)?

1. Established before 1 October 2007. 2. Established while the individual had full mental capacity, was aged 18 or over, and was not bankrupt. 3. Satisfied the conditions of the Enduring Powers of Attorney Act 1985.

What must an attorney do when they believe the individual has lost mental capacity?

Register the EPA with the Office of the Public Guardian (OPG).

Can an individual restrict the powers granted in an Enduring Power of Attorney?

Yes, the individual can restrict the EPA so that the power does not come into effect until it is registered.

What areas do Enduring Powers of Attorney not cover?

The individual's attitude to health care provision.

What is the standard procedure for registering an EPA?

A standard form must be used, and notice of registration must be given to at least the first three eligible family members.

What are attorneys forbidden to do under the Enduring Powers of Attorney Act?

Use the power to make gifts.

What is required for revoking a registered EPA?

The consent of the Court of Protection (COP) is required once the EPA is registered.

What is a Lasting Power of Attorney (LPA)?

An agreement where a donor gives their attorney(s) power to make decisions about their personal health and welfare or property and financial affairs.

What are the two types of LPAs required if both welfare and financial matters are covered?

A health and care decisions LPA and a financial decisions LPA.

What are the age requirements for the donor and attorney in an LPA?

Both must be over 18 years old.

What must be included in the LPA regarding the understanding of duties?

The LPA must state that the donor and attorney have read the prescribed information and that the attorney understands their duties.

What is required from a prescribed person in the context of an LPA?

A certificate confirming that the donor understands the LPA and that there has been no fraud or undue pressure.

What powers does a health and care decisions LPA include?

The power to make decisions to give or refuse consent for medical treatment.

What happens if an individual wishes to cancel their power of attorney?

The donor can cancel the attorney at any time.

What happens to an EPA if the donor becomes bankrupt?

The EPA is automatically revoked.

What is the role of the Office of the Public Guardian (OPG) in relation to EPAs?

The OPG is responsible for registering the EPA and overseeing its compliance with the law.

What restrictions exist for making gifts under a financial decisions LPA?

Gifts can only be made on customary occasions to persons related to the donor or to charity, and only if the value is reasonable.

Can a donor cancel a financial decisions LPA?

Yes, a donor can cancel an LPA if they have capacity.

Under what circumstances can an LPA be revoked?

An LPA can be revoked upon the donor's bankruptcy, the death or bankruptcy of the sole attorney, dissolution of marriage or civil partnership between donor and attorney, or the incapacity of the sole attorney.

What is the role of the COP regarding individuals who lack capacity?

The COP can appoint a deputy to manage the affairs of a person who lacks capacity, but the deputy cannot make settlements of the person's property or act as a trustee.

What happens to advanced medical decisions made when a person had capacity?

They remain valid after the person loses capacity.

What significant change occurred regarding Enduring Powers of Attorney (EPAs) on October 1, 2007?

The Enduring Powers of Attorney Act 1985 was repealed, meaning no new EPAs can be created, but existing EPAs must be registered upon the donor's incapacity.

What is required for a binding contract to exist in life assurance policies?

There must be an offer and acceptance, intention to create a legally binding contract, and consideration from both parties.

What additional requirements apply to life assurance contracts beyond standard contract requirements?

Good faith and insurable interest are additional requirements.

Define good faith in the context of insurance contracts.

Good faith is the duty to disclose all material circumstances related to the risk, whether requested or not.

What does the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) require from consumers?

Consumers must take reasonable care not to make misrepresentations.

What obligation does the Insurance Act 2015 (IA 2015) impose on non-consumers?

Non-consumers must make a fair presentation of the risk that is clear and accessible to a prudent insurer.

What is meant by insurable interest in life contracts?

The proposer must have a financial interest in the life assured, arising from a legal or equitable obligation.