SQE1 FLK1 Business Law and Practice Sample Questions July 2024

The correct answer is C. When James begins actively participating in the strategic and operational decisions of the partnership, he risks losing his status as a silent partner with limited liability. This increased involvement can make him fully liable for the partnership's debts, just as Laura, the managing partner, according to principles under the Limited Partnerships Act 1907 and the Partnership Act 1890 regarding the role and liability of partners.

Option A is incorrect because James's liability extends beyond just his initial investment once he starts taking part in the management of the company.

Option B is incorrect because the designation or title does not solely determine liability; the actual involvement in management activities does.

Option D is incorrect as liability for debts in a partnership does not typically increase by a fixed percentage but may become unlimited upon participation in management.

Option E is incorrect because it does not accurately represent the full scope of liability that can be assumed, which encompasses the entire debt of the partnership, not just an allocation based on investment and profits.

The correct answer is A. Electing for the Patent Box regime to apply to relevant profits allows companies to benefit from a lower rate of corporation tax (10%) on profits generated from patented inventions and certain other innovations. This regime aims to encourage companies to maintain and commercialize patented inventions in the UK.

Option B is incorrect because delaying the issuance of invoices to shift income to another fiscal year can be considered tax avoidance and is against HMRC regulations.

Option C is incorrect because carry-back relief for trading losses allows companies to offset losses against profits of previous years, not to apply losses from future years retroactively.

Option D is incorrect because transferring profits to an overseas subsidiary could be considered tax avoidance and likely violates anti-avoidance laws, subjecting the company to penalties.

Option E is incorrect because there is a legitimate and legal strategy to reduce corporation tax liability, which is electing for the Patent Box regime.

The correct answer is C. The company's proposed registered office address is a mandatory element that must be included in the Memorandum of Association for it to be accepted by Companies House. This requirement ensures that there is a registered physical location associated with the company for legal and communication purposes.

Option A is incorrect because, while having a business plan is important, the Memorandum of Association does not require a detailed list of projects the company intends to undertake.

Option B is incorrect because the names and addresses of company directors are not included in the Memorandum of Association; this information is provided in other documents during the company registration process.

Option D is incorrect because, although ethical commitments are significant, they do not form part of the required information in the Memorandum of Association for the purpose of company registration.

Option E is incorrect because projected financial statements are not a requirement for the Memorandum of Association. Financial projections are relevant for business planning and perhaps for securing investment but are not required by Companies House for registration purposes.

The correct answer is B. Initially advising James to separate his income into self-employment earnings, other income, and capital gains is crucial for accurately determining his tax liabilities. This categorization is key as different types of income may be taxed at different rates or have different allowances and exemptions associated with them. Accurate classification ensures a comprehensive understanding of tax obligations under the progressive tax system in England and Wales.

Option A is incorrect because simply lumping all earnings together without considering the different categories and tax rates applicable to each could lead to inaccurate tax calculations and potential overpayment or underpayment of taxes.

Option C is incorrect because while it may seem practical to estimate taxes based on the highest income stream, this overlooks the nuanced approach required for dealing with multiple income streams that are taxed differently.

Option D is incorrect because prioritizing capital gains tax over other types of income disregards the need to accurately categorize and calculate tax on all income sources correctly, leading to potential inaccuracies in tax calculations.

Option E is incorrect because although deducting business expenses from specific streams of income is important, it should not precede the categorization of income types for accurate tax calculation.

The correct answer is D. The transfer of proprietary software to JCS Solutions Ltd may be considered a disposal at market value for Jonah, potentially leading to a capital gains tax exposure depending on the appreciation of the asset's value since its creation.

Option A is incorrect because the transfer of assets to a company controlled by the transferring individual mainly has implications for capital gains tax, not personal income tax.

Option B is incorrect because roll-over relief generally applies to tangible assets used in the business, and its application to intangible assets like software is more complex and not automatically available.

Option C is incorrect because for tax purposes, assets transferred into a company are typically required to be recognised at market value, which can have implications for both the individual and the corporation in terms of tax liabilities.

Option E is incorrect because while the company can recognise the proprietary software as an asset, it does not receive an immediate tax deduction for the market value of the software as an expense. Instead, tax treatment would typically involve considerations around amortisation and possible research and development credits.

The correct answer is C. Samantha has breached her fiduciary duties by leveraging confidential information for the benefit of a close friend, which can be considered an indirect personal gain.

Option A is incorrect because even indirect benefits stemming from the misuse of confidential information violate a director's fiduciary duties under the Companies Act 2006.

Option B is incorrect because the misuse of confidential or insider information is prohibited, irrespective of whether it is about to become public.

Option D is incorrect because the potential increase in shareholder value does not justify the misuse of confidential information. Directors must act within the legal framework, which prohibits such actions.

Option E is incorrect because leveraging inside information to boost confidence in the company's future, in this manner, contravenes the legal obligations and fiduciary duties of a director.

The correct answer is C. Appointing an administrative receiver allows the secured creditor to take control of all or most of the company's assets, including intangible assets such as patents and intellectual property. This is a common enforcement option for secured debts under the Companies Act 2006 when the security involves a comprehensive range of the company's assets.

Option A is incorrect because a 'fixed charge receiver' is generally appointed over specific physical assets rather than intangible assets like patents and intellectual property.

Option B is incorrect because initiating a winding-up petition is a measure to dissolve the company, not directly related to the enforcement of a secured loan based on the company’s assets.

Option D is incorrect because taking possession of secured assets directly is more applicable to tangible assets, and it can be complex when dealing with intellectual property due to their intangible nature.

Option E is incorrect because seeking a court order for the sale of the patented technology is a possible course of action, but it is not the most likely initial enforcement option pursued by a bank in this context, especially when administrative receivership offers a directly applicable solution.

The correct answer is C. The transaction can be challenged as a preference under the Insolvency Act, since it involves transferring assets to a connected party (FabriCraft Ltd, controlled by the family) below market value shortly before filing for insolvency. This act could be seen as trying to put the assets beyond the reach of the general body of creditors, favoring the interests of the connected party over others.

Option A is incorrect because while an independent valuation is best practice to ensure fairness, the absence of an independent valuation itself is not sufficient grounds to challenge a transaction under the Insolvency Act without evidence that the transaction unfairly impacted creditors.

Option B is incorrect because a company does not need to be insolvent at the time of the transfer for the transaction to be challenged; the timing in relation to insolvency proceedings and the nature of the transaction are the relevant considerations.

Option D is incorrect because unanimous shareholder consent is not a typical requirement for asset transfers. What matters more from a legal standpoint in the context of insolvency is whether the transaction unfairly disadvantages creditors.

Option E is incorrect because the specific issue here is not about violating contractual terms with creditors but rather the preferential treatment of connected parties through the transfer of assets at undervalue.

The correct answer is A. Nia's portion of the profits to be assessed for income tax in her first tax year would be calculated based on the partnership profits for the year ending on 31st December 2021, which are £210,000. As the profits are divided equally among the three partners, her share would be 1/3 of £210,000, equating to £70,000. For the second tax year, Nia's share would be 1/3 of the profits for the year ending on 31st December 2022, being £270,000, which equals £90,000.

Option B is incorrect because it does not reflect the accurate share of profits based on the partnership agreement for Nia's first year.

Option C is incorrect because it incorrectly suggests that Nia would not be entitled to any share of the profits in her first year of joining the partnership.

Option D is incorrect because it both underestimates the share for the first year and mistakenly reduces the share for the second year, not adhering to the equal distribution of profits as per the partnership agreement.

Option E is incorrect as it incorrectly asserts that Nia would receive the whole sum of profits in her first year and then diminishes her share in the second year, which does not align with the partnership’s profit-sharing agreement.

The correct answer is B. The CEO should review the terms of the existing contracts to determine the possibilities for assignment or need for renegotiation with the counterparties. This ensures compliance with legal requirements and respects the rights and obligations of all stakeholders involved.

Option A is incorrect because the automatic assignment of contracts without review or the consent of all parties may violate the terms of those contracts and could lead to legal complications.

Option C is incorrect because declaring previous contracts void without due process could breach contractual obligations, harm business relationships, and potentially result in legal penalties.

Option D is incorrect because assuming contracts are transferable without verifying the terms can lead to breaches of agreement and legal disputes. It disregards the interests and rights of the other parties.

Option E is incorrect because selling contracts to a third party without the consent of all original parties involved may breach the terms of the agreement and does not directly address the transition to a new entity in a legal or ethical manner.