## Question 1 Two individuals have invested in a tech startup structured as a limited partnership. One partner is a limited partner who initially opted out of any operational decisions, providing solely financial support, while the other took on the role of general partner. Six months after the launch, the limited partner starts attending board meetings and influencing hiring decisions due to concerns over the startup's slow growth. Based on the limited partner's increased involvement in operations, what implications does this have for the limited partner's liability in relation to the partnership's obligations should the startup incur significant debts? - A. The limited partner's liability remains limited to the value of the initial investment. - B. The limited partner's liability does not change unless officially made a general partner. - C. The limited partner becomes fully liable for the partnership's debts, similar to the general partner. - D. The limited partner's liability increases by a fixed percentage relative to the initial contribution. - E. The limited partner's liability includes the initial investment and any profits received.

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The correct answer is C. When the limited partner begins actively participating in the strategic and operational decisions of the partnership, they risk losing their status as a limited partner with limited liability. Under section 6(1) of the Limited Partnerships Act 1907, a limited partner who takes part in the management of the partnership business becomes liable for all debts and obligations of the firm incurred while taking part in management, as though they were a general partner. Option A is incorrect because the limited partner's liability extends beyond just the initial investment once they start taking part in the management of the partnership. 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 all debts and obligations of the partnership, not just an allocation based on investment and profits.

## Question 2 A technology firm in England has experienced a booming growth in revenue due to the launch of a groundbreaking software product in the fiscal year ending March 2022. With the increase in profits, the board of directors is exploring effective strategies to optimize their tax liability for the company. Which of the following strategies would legally enable the company to reduce its corporation tax liability for the fiscal year ending March 2022? - A. Electing for the Patent Box regime to apply to relevant profits. - B. Delaying invoice issuance for services rendered until the next fiscal year. - C. Applying carry-back relief for trading losses from future years. - D. Transferring profits to an overseas subsidiary in a lower-tax jurisdiction. - E. None of the above.

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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.

## Question 3 A consultant is in the process of setting up a boutique consultancy firm specializing in environmental sustainability. The consultant is aware that adhering to the legal framework is crucial for the seamless incorporation of the company. Among the various documents required, the consultant knows that the Memorandum of Association is essential. Which of the following statements correctly describes the content of the Memorandum of Association under the Companies Act 2006? - A. It must contain a detailed list of the projects the company intends to undertake. - B. It must contain the names and addresses of all the company directors. - C. It is a simple document evidencing the subscribers' intention to form a company and become members. - D. It must contain a declaration of the company's commitment to ethical business practices. - E. It must contain projected financial statements for the first three years.

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The correct answer is C. Under the Companies Act 2006, the Memorandum of Association is a simple document in which the subscribers state their intention to form a company and agree to become members. The memorandum must be in the prescribed form (section 8 CA 2006) and state that the subscribers wish to form a company and agree to become members. The registered office address is provided separately in the application for registration (Form IN01), not in the Memorandum. Option A is incorrect because the Memorandum of Association does not require a detailed list of projects the company intends to undertake. Business plans are separate from constitutional documents. Option B is incorrect because the names and addresses of company directors are provided in the application for registration (Form IN01), not in the Memorandum of Association. Option D is incorrect because ethical commitments do not form part of the required content of the Memorandum of Association. Option E is incorrect because projected financial statements are not a requirement for the Memorandum of Association. Financial projections are relevant for business planning but are not required by Companies House for registration purposes.

## Question 4 A freelance graphic designer has just concluded their first year of self-employment. The designer approaches you for advice on their tax situation, explaining that their earnings for the year include proceeds from client projects, occasional photography services, and the sale of digital assets online. The designer is aware that the tax system is progressive and involves multiple rates but is unsure how to categorize the various income streams for accurate tax reporting. What would be your initial advice to ensure the designer correctly categorizes their income for tax purposes? - A. Advise the designer to lump all earnings together and apply the basic rate across the total. - B. Recommend that the designer separates income into self-employment earnings, other income, and capital gains to accurately calculate tax. - C. Suggest the designer focus on the highest earning stream, client projects, to estimate the tax bracket first. - D. Tell the designer to prioritize capital gains tax calculation over self-employment income and other earnings. - E. Encourage the designer to deduct business expenses from photography services income before considering other incomes.

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The correct answer is B. Initially advising the designer to separate income into self-employment earnings, other income, and capital gains is crucial for accurately determining 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.

## Question 5 A successful software developer who operated as a freelancer decides to form a limited company, into which the developer transfers all freelance business assets, including client contracts and proprietary software. The developer seeks advice on the tax implications of this transfer, especially concerning the value of the proprietary software. What should the developer be aware of regarding the tax implications of transferring the proprietary software to the new limited company? - A. Transferring proprietary software as an asset to the company will result in immediate personal income tax liability for the developer. - B. The developer can claim roll-over relief on the transfer of proprietary software to the new company to defer any tax liability. - C. The company must recognise the proprietary software at its original development cost, thereby avoiding any immediate tax implications. - D. Under connected party rules, the transfer may be treated as a disposal at market value, potentially triggering capital gains tax. - E. The company is eligible for an immediate tax deduction for the market value of proprietary software transferred as a business expense.

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The correct answer is D. The transfer of proprietary software to the company may be considered a disposal at market value for the developer, potentially leading to a capital gains tax exposure depending on the appreciation of the asset's value since its creation. Under section 17 of the Taxation of Chargeable Gains Act 1992, transactions between connected persons are deemed to be at market value. 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.

## Question 6 A director of a startup focused on sustainable urban development overhears in a strategic planning meeting that the company is about to enter a lucrative partnership with a leading renewable energy firm. Recognizing the potential for significant company growth from this partnership, the director advises a close friend to purchase shares in the company before the partnership is announced to the public. Given the responsibilities and legal obligations of directors under the Companies Act 2006, particularly in terms of confidential information and personal gain, how should the director's actions be analyzed? - A. The director's actions are justifiable since the director did not profit directly from the information. - B. As the information was about to become public, the director's actions do not constitute a misuse of information. - C. The director's advice to the friend violates fiduciary duties by leveraging confidential information for indirect personal gain. - D. Since the director's actions could potentially lead to an increase in shareholder value, they do not breach the director's duties. - E. The director's effort to induce confidence in the company's future by leveraging inside information is in line with duties to promote the company's success.

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The correct answer is C. The director has breached fiduciary duties by leveraging confidential information for the benefit of a close friend, which can be considered an indirect personal gain. Under section 175 of the Companies Act 2006, a director must avoid situations where they have a direct or indirect interest that conflicts with the company's interests. Additionally, the Criminal Justice Act 1993 prohibits insider dealing. 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.

## Question 7 A technology start-up specializing in artificial intelligence has incurred substantial trade debts over its initial two years of operation. To facilitate a crucial phase of expansion, the company secured a loan from a major bank two years ago, granting a qualifying floating charge over all of the company's assets including its patents and intellectual property. Given the failure to meet several repayment milestones, the bank is now contemplating enforcement options concerning the security held. Given that the bank holds a qualifying floating charge created after 15 September 2003, which type of enforcement is the bank most likely to pursue? - A. Appointing a fixed charge receiver over specific assets. - B. Initiating a winding-up petition immediately. - C. Appointing an administrator under Schedule B1 of the Insolvency Act 1986. - D. Taking possession of the secured assets directly without court involvement. - E. Seeking a court order for sale of the patented technology only.

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The correct answer is C. Appointing an administrator is the most appropriate enforcement option for a holder of a qualifying floating charge created after 15 September 2003. Following the Enterprise Act 2002, the ability to appoint an administrative receiver was largely abolished for floating charges created after this date. Instead, the holder of a qualifying floating charge can appoint an administrator out of court under paragraph 14 of Schedule B1 of the Insolvency Act 1986, who takes control of the company's affairs to rescue the company or achieve a better result for creditors. Option A is incorrect because a fixed charge receiver is appointed over specific assets subject to a fixed charge, not over the company's entire undertaking. The scenario describes a qualifying floating charge. Option B is incorrect because a winding-up petition is a measure to dissolve the company entirely. While available, it is typically a last resort and administration offers the bank more control over the process and potentially better recovery. Option D is incorrect because taking direct possession of assets without formal insolvency proceedings could expose the bank to liability and is not standard practice for enforcing floating charge security. Option E is incorrect because seeking a court order for sale of specific assets does not maximize the bank's recovery position compared to administration, which allows control over the company's entire undertaking.

## Question 8 A family-run textile business specializing in luxury fabrics has been operating at a loss for several months. In a bid to stabilize the company, the board decided to transfer ownership of their most valuable manufacturing equipment to a new entity controlled by the family, significantly below market value, three months prior to filing for insolvency. The rationale provided was to secure new financing arrangements to save the business. Creditors, however, believe this move was detrimental to their interests. Which ground under the Insolvency Act 1986 is most likely to be the basis for a liquidator to challenge the transfer of the equipment? - A. The transfer was not subjected to an independent valuation. - B. The company was already insolvent at the time of the transfer. - C. The transfer constitutes a transaction at undervalue under section 238. - D. The board did not seek unanimous shareholder consent for the transfer. - E. The transfer violates terms of previous contracts with creditors.

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The correct answer is C. The transaction can be challenged as a transaction at undervalue under section 238 of the Insolvency Act 1986. This section applies where a company enters into a transaction for significantly less consideration than the value provided, and the company goes into liquidation or administration within two years (or, where the transaction is with a connected person, the company is presumed to have been insolvent). The transfer of valuable assets below market value to a connected party falls squarely within section 238. 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 was at an undervalue. Option B is incorrect because while insolvency at the time of the transaction is relevant, it is not the primary ground for challenge. Under section 238, insolvency is presumed when the transaction is with a connected person, making option C the more direct and accurate answer. Option D is incorrect because unanimous shareholder consent is not a typical requirement for asset transfers. The key consideration under the Insolvency Act is whether the transaction depleted assets available to creditors. Option E is incorrect because the specific issue here is the statutory ground under section 238 regarding transactions at undervalue, not breach of contractual terms with creditors.

## Question 9 Three individuals constitute a partnership operating a boutique design firm, with a financial year that concludes on 31st December. Two of the partners have been contributing to the partnership since its inception on 1st January 2018. The third partner joined the partnership on 1st January 2021. According to the partnership agreement, profits are to be allocated equally among the partners. The profits for the year ending 31st December 2021 amounted to £210,000, and for the year ending 31st December 2022, the profits were £270,000. Under the current UK taxation rules for partnerships, how much of the partnership's profits will the third partner need to include in their income tax assessment for the first and second tax years as a partner? - A. £70,000 for the first year and £90,000 for the second year. - B. £35,000 for the first year and £90,000 for the second year. - C. £0 for the first year and £90,000 for the second year. - D. £35,000 for the first year and £45,000 for the second year. - E. £70,000 for the first year and £45,000 for the second year.

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The correct answer is A. The third partner's portion of the profits to be assessed for income tax in the 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, their share would be 1/3 of £210,000, equating to £70,000. For the second tax year, the third partner'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 the first year. Option C is incorrect because it incorrectly suggests that the third partner would not be entitled to any share of the profits in the 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 the partner would receive the whole sum of profits in the first year and then diminishes the share in the second year, which does not align with the partnership's profit-sharing agreement.

## Question 10 Following a strategic alignment, a company specializing in green technology decides to split its renewable energy division into a separate entity. Prior to the split, the company had entered into multiple long-term agreements with suppliers and clients, specifically for products developed within the renewable energy division. The CEO is concerned about the continuity of these agreements post-division and seeks to understand the best course of action to ensure business continuity and adherence to legal and ethical standards. What should be the first action of the CEO to ensure the smooth transition of contracts to the new entity? - A. Announce the division and automatically assign all renewable energy-related contracts to the new entity. - B. Review the terms of the existing contracts to determine the possibilities for assignment or need for renegotiation with the counterparties. - C. Declare all previous contracts related to the renewable energy division as void and initiate new contract negotiations under the new entity. - D. Assume the contracts are transferable and proceed with business operations without consulting the other parties to the agreements. - E. Sell the contracts to a third party, and then have the new entity negotiate new agreements with that third party.

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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.

SQE1 FLK1 Business Law and Practice Sample Questions July 2024