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					PLAN B


John Backhouse, B.A. LL.B.
3rd Edition

Most Hands- on- Business Owners are at least cautiously optimistic about
their prospects of success. They are somewhere between always wanting
their own business with a great passion for it or at the other end of the
spectrum have been forced reluctantly into it as a way of making a living
when employment opportunities are not available.
There are invariably some risks involved in being in ones own business
and some businesses are clearly riskier than others.
A business which owns land or supplies stationary products to the
Government has fewer risks than businesses in the construction industry
working on small margins with lots of subcontractors.
Problems can arise from the most unexpected sources.
A few years ago I visited a company whose director came to one of the
seminars we ran in Lancashire. There was a plaque on the wall:

   We are pleased and proud to announce our association with
        Enron Limited, the World’s 7th largest company.

It turned out that they had a phased contract with Enron and the last
instalment of over a £1m was paid less than a month before Enron’s
Had this instalment had not been paid, it would have been difficult to see
how the company would have survived. Had I asked the director 6
months before Enron folded which was their blue chip client, I know what
their answer would have been.
Most of our hands-on-shareholder customers are not wealthy if one
excludes the value of their business and private residence, (or some of
them including the value of their business and private residence).
What can you do to protect yourselves from financial downsides?
Strategies need to be put in place ahead of time. Once the problem has
arisen it is often too late.
This makes strategies important but not urgent.


  1: FORMATS OF TRADE                              1
  2: FINANCE FOR BUSINESS                          6
  3: DEBENTURES AND DIRECTORS                     12
  4: SHARED BUSINESS                              18
  5: PROPERTY OWNERSHIP                           25
  6: FRINGE BENEFITS                              33
  7: PRIORITY ON INSOLVENCY                       53
  8: DIRECTORS DUTIES                             56
  11. IRISH PROSPECTIVE                           79

Appendix 1: Solomon Case                          86
Appendix 2: Tax and Protection Strategies         89
Appendix 3: Insolvency Comparisons                92
Appendix 4: Business and Personal Review          95


This book provides an introduction to the work of the author who
provides a consultancy service to ‘hands-on’ business owners.
   Any profits received from this edition will be given to KIND Children
in need and distress
  John Backhouse is the founder of Corporate & Staff Benefits
Partnership Ireland which markets strategies for “hands-on” business
owners in the UK and Ireland to help them get what they want from their
   He has 20 years experience as an advisor to entrepreneurs since
finishing articles to a firm of Solicitors in 1983.
     He is the author of Exit Routes for Hands-On-Business Owners.


This is the third edition of Plan B for Hands-On Business Owners which
include the updating of the tax allowances & bands and new information.
Additionally Capital Gains Tax changes have been reflected in the text as
have new rules on the taxation of Benefits in Kind.


I am very grateful for all the help and assistance which has been provided
by many people in connection with writing this book particularly to
Andrew Bairstow and Steve Fallon for their contribution on tax planning
  Finally, I would like to thank Richard Brandwood for his efforts over
many months and his contribution to design and layout.


This is not a legal text book. Its objectives are to provide information for
‘hands-on’ business owners to help them in three areas:
    1. To ensure that if their business is profitable they maximise their
       personal benefit from this, which includes Tax & NIC planning.
    2. To ensure that if the business has financial problems, perhaps
       through bad debts, poor trading, uninsured losses or a combination
       of these that the owner loses as little as possible.
    3. To plan to transfer the business to the next owner either by way of a
       sale or by passing on.
   When working in a solicitor’s office as an articled clerk there were
many occasions when business clients came in with their problems. In
most cases better planning would have either avoided their difficulties
completely or significantly reduced the adverse consequences of the
   There are many skills required to run a business successfully and lots
of ‘hands-on’ business owners are very good at the technical or creative
side of the company.
   However often they are not trained to deal with the legal and quasi-
legal/financial problems which can flow primarily from businessmen
borrowing money, giving credit, or having other people share equity in
the business. They are often unclear how they would hope to capitalise
their business in the future.
   For a variety of reasons the 1980’s has seen an explosion in the number
of businesses which have started or grown significantly 1.
   There are many individuals who, due to their own temperament or the
type of work they want to do, may well be better off working for someone
else. Those interested in research or with particularly artistic abilities may
feel much more comfortable working for a big organisation with all the
benefits which flow from that. Some occupations, such as being a captain
of an airliner or a buyer with a large budget, invariably mean that running
one’s own business is almost impossible (with notable exceptions).

 In the UK up to January 1973 less than 1.1 million Limited Companies had been
registered. By 2001 more than 4 million had been registered.


   There are also those people, often the professionals, who have few
aspirations beyond their vocation, but find themselves in business almost
unexpectedly. Young architects, doctors and solicitors, to name a few, find
themselves being assessed by the Inland Revenue for profits or
partnership profits when their vocation in life was to cure the sick or help
people with their legal problems.
   Over the last ten years the bodies which govern these professions have
changed their view and now allow for incorporation or Limited Liability
Partnership use in some circumstances. A good example of this would be
that of a company set up to own property, provide staff, or be involved in
financial services provision. For the first time some professionals may, in
part at least, enjoy the protection afforded by limited liability and the
separation of private assets from business obligations.
   Whilst it is not expected that the scope of liability in the law of
negligence and that of product liability, which currently applies in the
United States, will come to the United Kingdom, the amounts awarded by
the courts are growing, particularly for personal injury cases. Insurers
may wish to avoid liability if a claim arises which is, strictly speaking,
outside the terms of the policy.


To be (a Company) or not to be (a Company), that is the question!
It is possible to trade in the United Kingdom in the following formats.
This is where a person is in business on their own and there is no longer
a requirement to register with the Registrar of Business Names.
   Until a few years ago it was necessary to register with the Registrar of
Business Names if a person was trading in a name or style which was
different from their own name. The requirement to do so dated from
19161, and was designed to allay public fears, during the first World War,
of Germans trading under the name ‘Smith’s General Store’ or whatever.
   If a sole trader business fails, then the sole trader is personally liable for
the full extent of his personal assets for all of the business debts.
This is defined by Section 1 of the Partnership Act 1890 as “the
relationship which subsists between persons carrying on a business in
common with a view to profit.”
   A partnership is a state of affairs not a written document. If a business
arrangement between two or more persons satisfies this definition, the
consequences of partnership flow irrespective of the parties’ intentions,
subject to statutory exceptions2
   A large part of case law on partnership is where the defendant is trying
to show that he was not a partner, in order to avoid the unlimited personal
liability for business debts which flows from being a general partner. All
partners’ (except limited partners)3 private assets are exposed to business
debts irrespective of their share in profits, so far as outsiders are
concerned, i.e., a 10% partner can be 100% liable for the firm’s debts,
albeit that he may have an indemnity (perhaps of little value) against the
other partners by the terms of the Partnership Agreement or the Act.

1 Register of Business Names Act 1916
2 S2 (3) Partnership Act 1890
3 Limited Partnership Act 1907


This is available as outlined in the Limited Partnership Act 1907.
   A Limited Partner is not liable for partnership debts beyond capital
subscribed, but may not take an active part in the business. Where
registered as such there is at least one general partner, i.e. who is liable
for all the firm’s debts. This is not the same as a sleeping partner where
one person just puts up the money into a business. He is a general partner
and therefore still liable for all the firm's debts on an insolvency.
This is available by virtue of the Limited Partnership Act 2000 which is
now possible for individuals to form a Limited Liability Partnership
which gives all of the partners limited liability status. It is also possible
for a limited company to be one of the partner’s.
   The prohibition of the 1907 Act barring being involved in the day-to-
day running of the partnership does not apply to these LLP’s. Many well
known firms of accountants and solicitors have used this route in recent
This is a very popular way to trade and the last name of the trading style
must be Ltd or Limited. This is to warn all those who trade with a Limited
Company that the liability of the members is limited.
  There is also a doctrine of Constructive Notice which deems all those
who trade with Limited Companies to have read the Memorandum and
Articles of Association and other publicly recorded information of the
company concerned.
   The main advantage of trading as a Limited Company is that, subject
to wrongful trading (and a number of other statutory exceptions and rules
to protect company creditors against fraud) the liability of the members is
limited to their unpaid share capital, i.e., if the shares are fully paid, as is
usually the case, there is no further liability4 . If a person subscribes for £1
share but has only paid 25p in respect of it and the business were to fail,
the liquidator could claim the other 75p, but no more.
   There is now less requirement in the Articles of Association of the
private company to restrict the transfer of the shares, but the standard
4   57ii(1) + (2) Companies Act 1985

                                                    FORMAT OF TRADE

Table A in the Articles invariably includes a clause allowing the directors
an absolute discretion as to whether to register the transfer of any share
(whether or not it is a fully paid share) and this particular clause can
create difficulties for the owners of shares in private companies who are
not directors, or who are no longer directors.
   In practice there are many companies with between £100 and £1,000
authorised capital and a nominal number of shares issued, e.g., two
shareholders who wish to trade on a 50/50 basis may take a £1 share each
leaving £998 unissued.
   The debts of a company are not the debts of the shareholders or
directors. The famous House of Lords case in 1897 decided this
fundamental principle of company law, overturning decisions in the
lower courts. (See Appendix 1)
This company has no share capital, merely an undertaking to pay a
guaranteed sum in the event of a ‘winding up’. It may be possible to drop
the name Limited if the objects of the company are charitable or quasi-
charitable, provided there is a prohibition on dividends and any residual
assets on liquidation are transferred to a similar body. A company Limited
by Guarantee has not proved to be a popular way to trade.
The main differences between limited and unlimited companies are:
1. Shorter notice periods for an extra ordinary general meeting.
2. No return to the Register of Companies is required of its shares
3. No annual accounts need be filed unless a subsidiary of a limited
   company is controlled by limited companies.
4. Share Capital and Share Premium Accounts may be repaid to
   shareholders without court authorisation.
5. A Debenture can still protect a personal Guarantee.
   It is difficult to be categoric about which is the best business format
because the factors which influence the decision will vary. The business
owner(s) will need to consider all the relevant matters before coming to a
final decision.


Advantages of a Sole Trader/Partnership
a.   It is easy to set up and run.
b.   There is a minimum of paperwork required.
c.   There is no formal agreement required, but in the absence of a
     formal partnership agreement the Partnership Act, 1890 applies to
     shared businesses.
d.   The start-up rules for Income Tax provide cash flow advantages in
     many cases.
e.   Accountancy may cost less due to reduced compliance costs1.
f.   There is privacy in that there is no need to publish accounts.
g.   Advantages on sale of the business.

Advantages of Trading as a Limited Company
a.   Subject to personal guarantees, statutory provision and common law
     exceptions, there is no personal liability for company debts.
b.   The company director is not liable for the income tax of his co-
c.   It is possible to separate business debts from personal assets.
d.   There is continuity in the event of a death of a shareholder/director.
e.   Debts owed to a company are recognised by lending sources in the
     UK as being available as security to support a loan.
f.   It may be easier to pass on a business to the next generation.
g.   In the event of an uninsured loss, for whatever reason, then the
     burden will fall on the company not on the shareholder/directors
h.   Use of debentures

1Limited Companies with turnover of less than £1 million need less in the way of formal
accounts and no audit

                                                     FORMAT OF TRADE

The more of the following that is true in relation to a particular business
venture the more likely it is that it would be beneficial for the business to
trade as a Limited Company or Limited Partnership.
1.   There are two or more people involved.
2.   The business gives a lot of credit to its customers.
3.   The business needs a lot of credit from its suppliers or bankers.
4.   The business is involved with supplying goods or services where
     there is a risk of injury to customers.
5.   The business is involved in trade which by its nature may incur risk
     to the general public, who are not necessarily customers.
6.   One of the participators is contributing significantly more to the
     business than the others.
7.   One of the participators will not be involved in the business on a day
     to day basis.
8.   One of the participators is significantly personally wealthier than the
9.   The business has the opportunity to benefit from a long-term contract
     or lease, on advantageous terms.
10. The business is operating from the premises owned by one of the
11. The business is buying a high value asset, with the benefit of a loan
    which the lender is prepared to provide without personal guarantees.
NB: If one of the participators has other businesses which are profitable
and the new venture is expected initially to make actual trading losses or
losses because of capital allowances, then a partnership has tax


Where the business needs capital, then the owners may put in funds, or
extra funds, as equity capital. These monies have the highest exposure to
risk if the venture fails, but equity participants stand to make the most if
the business succeeds.
   With Limited Companies shares may be in different categories, e.g.
ordinary, class A, class B, etc., and different classes will have different
rights accruing to them.
   It is possible to issue preference shares which may have priority over
ordinary shares in a winding up. Preference shares may carry interest. If a
dividend is paid at all, then the preference shareholding may be entitled
to first payment. Preference shares may also carry interest on an
cumulative basis which means that if a dividend is not paid in one year,
but is paid in a subsequent year, then the preference shareholder has an
entitlement to both years interest before an ordinary shareholder receives
a payment.
   For practical purposes on an insolvency it is usually irrelevant which
class of share is held since rarely do the shareholders get anything on a
   Preference shares have fallen out of fashion, but at least one major
venture capital company still uses them when they participate as passive
   In starting a business the entrepreneur needs to decide how much
equity in the business he is prepared to give up in order to attract suitable
sums from outside investors. Venture capital companies tend to tie up the
powers of the directors when dealing with the company’s assets. The
declaration of any dividend usually means that the venture capitalist’s
shares will have a priority claim on any dividends paid.
   A shareholders agreement is recommended no matter whether there
are institutional investors or not. This is to ensure that there is an orderly
exit route for shareholders in the event of death, disability or

                                                       FINANCE FOR BUSINESS

A properly drafted shareholders agreement can provide protection to a
minority interest to ensure fair value is paid on disposal of the shares. It
will also enable the majority shareholder to control all of the shares with
his fellow working directors, so there are no former directors, now outside
the company, who still own shares. To this extent some ‘hands-on’
companies are effectively quasi-partnerships and there are cases where
the courts have treated limited companies as such. 2
1. Bank Overdraft.
An overdraft is a flexible line of credit which allows the account holder to
overdraw by an agreed amount.
  Interest is charged only when the credit is used and it is a margin
above current bank base rates. Bankers like to see movement in balances
and ideally for the account to move into credit from time to time.
    1Overdrafts   are repayable on demand
  If secured by debenture the bank can appoint a receiver and collect
what is owing to the bank at any time.
2. Bank Term Loans.
A term loan may be of a fixed, variable or capped variety. Variable rates
will be base plus a margin while fixed rates stay the same during the
whole term irrespective of interest rates generally. Capped rates prevent
what would otherwise be a variable rate going above a certain level and
can provide protection against overall interest rate increases in the future.
  Term loans are not always repayable on demand, but in recent years
banks have tended to make them so.
3. Government Small Firm Loan Guarantee Scheme.
To assist banks in providing finance to small businesses where there is
insufficient formal security an application may be made under this

1 Client CM: “All you have to do to borrow money from a bank is to prove that you
don’t need it! In the good times the bank gave me a financial umbrella, but took it away
as soon as it started to rain.”
2 Ebrahimi v Westbourne Galleries

If approved the lender has recourse to the Department of Trade and
Industry in the event of default for a maximum of 85% up to £250,000 with
lower limits for new business.
  The DTI charge a premium for this facility which is paid by the
4. Finance Companies.
Finance companies provide fixed or variable rate loans for the purchase of
plant, machinery and equipment, and may retain title to the goods
purchased for the duration of the facility.
   They may also provide a line of credit for the purchase of unusual
assets such as ships, aircraft or specialist plant and in this case loans are
normally secured by way of asset mortgage.
   Finance companies can also provide either factoring or invoice
discounting facilities.
4. Hire Purchase
This is a contract of bailment with an option to purchase.
   Assets are sold from the supplier to the hire purchase company and the
hire purchase company lets the borrower use them with a purchase option
when all the instalments have been paid.
   Although assets are owned by the finance company conventional
accounting practice includes hire purchase assets in the balance sheet of
the bailee borrower
5. Leasing
The leasing company holds title throughout the term until the assets are
paid for and subject to certain exceptions the full rental payment is tax
deductible. Leased assets are not normally included in the balance sheet
of the lessee company and as such the borrowing involved is not shown
as a debt of the lessee in its accounts i.e. off balance sheet borrowing.
   The problem of lease arrangements is that where there is a personal
guarantee involved, the lessor, on the lessee’s insolvency can repossess
the asset and claim unpaid balances of payments from the guarantor.
   There is not usually a right of relief against forfeiture with leasing in
the same way as there can be with hire purchase agreements. Some of the

                                               FINANCE FOR BUSINESS

court decisions have been very hard on the lessee who has lost all his
value because of a small financial default.

6. Factoring
A business may sell its debtors to a factoring company in exchange for a
sum which is in effect early payment of a debt. Sometimes insurance
against bad debts can be included.
The title to the debt passes to the factoring company on payment and the
factoring company is responsible for the collection of the debt within an
agreed time limit.
Factoring is available to non-incorporated businesses, and as compared
with invoice discounting, a greater level of insurance protection is usually
available, at a price. The debtor knows that there is a third party finance
company involved in collection the outstanding account.

7. Invoice Discounting
A finance company lends a limited company an agreed percentage of its
book debts. The borrowing company controls its own sales ledger and the
customer does not know that his invoice has been discounted. For this
reason the facility is sometimes called Confidential Invoice Discounting.
A line of credit, often 85% of certain book debts, is allowed and the
borrower may use all or part of this. The security is a debenture over the
book debts themselves. Once an account is unpaid beyond a given time -
usually 60-90 days - then that invoice falls outside the scheme and the
borrower finances this debt unassisted.

Advantages of invoice discounting:
1.   confidentiality
2.   a partial financing arrangement is possible
3.   the security for the facility is a debenture with an undertaking that
     the invoices are validly issued.
4.   it is sometimes possible to arrange invoice discounting without
     giving collateral security and this compares favourably with bank


Disadvantages of invoice discounting and factoring:
1.   cost
2.   companies may restrict the amount of credit they are prepared to give
     in relation to a particular customer to reduce their risk. This often
     reduces the amount actually provided by the finance company from
     the maximum of 85% to a much lower figure and can reduce the
     value of the facility.
   Rapidly expanding businesses can find fixed credit limits normally
associated with an overdraft insufficient since the company may simply
run out of credit to increase turnover. Both invoice discounting and
factoring allow the business to draw a percentage of book debts so the
larger the turnover, the larger the line of credit.
   From a risk management point of view the security required by an
invoice discounting company may be a debenture and warranty of valid
invoice. Traditional bank facilities often require personal securities and
    There is a cost involved for invoice discounting or factoring in terms of
having the facilities available and it is normally only worth while if there
is an increase in business generated. In addition to interest charges there
is an annual fee based on the turnover of the whole company whether the
facility is used or not.

Bank managers have a personal discretion which is lower for unsecured
borrowing as compared with secured borrowing. Secured borrowing is
normally defined as loans secured on land and buildings, cash deposits or
shares in quoted companies (not book debts).
   A good strategy is to use outside finance companies and lenders for
term loans for two reasons:
1.   These loans are often not repayable on demand (only on default)
2.   The borrower’s clearing bank can be left for the type of finance that
     only they can do, i.e., overdraft and short-term facilities.
NB: A local bank manager who knows his customer will normally be

                                                  FINANCE FOR BUSINESS

more receptive to the request for credit facilities than the regional office of
the bank concerned. To keep the maximum number of decisions about
credit facilities at a local level it is desirable for the request to be below the
local manager’s discretion. The more this discretion is used for term loans
which could otherwise have been arranged outside, the more likely it is
that the decision will have to be referred. The regional office of a bank
rarely has any personal knowledge of the business concerned and is more
likely to deal with credit applications on a stricter basis.


The use of debentures by shareholder directors or other connected
persons to enhance their position with a limited company.
   The famous House of Lords decision in Salomon v Salomon 1897
decided clearly for the first time, a hundred years ago, that a limited
company is a separate legal entity from the shareholders. The importance
of this decision (details of which are included in the Appendix 1) is that
since a limited company is a separate legal entity, then there can be a loan
between the director and the company and that loan can be secured.
   This is one of the major differences between limited companies and
other unincorporated businesses, e.g. partnerships. The effect is that a
company may give an outside creditor or a shareholder/ director, secured
creditor status by use of debenture.
   Debentures can be used for the benefit of hands-on shareholder
directors in three circumstances:

1. To reduce the risk of a personal guarantee or personal
collateral security being enforced
In the cut and thrust of borrowing/lending the borrower is often trying to
borrow as much as possible with the minimum amount of security. The
lender is trying to protect his position by taking as much security as
possible for the credit facilities provided.
   Where a financial institution provides a line of credit to the limited
company and takes personal guarantees (with or without other personal
security) to cover the debt and nothing else but the covenant of the limited
company to repay, then in the event of an insolvency the bank is a
unsecured creditor as against the limited company.
   Unsecured creditors rarely get paid anything from a limited company
on an insolvent liquidation which means that the banker will rely on the
personal guarantee (and any other personal security given). This is most
common when the amount lent is small and the guarantor is financially
strong by comparison with the company. Whilst it does not matter to the
banker from where the repayment comes, clearly from the
shareholder/director point of view it would be preferable that the
company pay the company’s debts first to the extent that it is able to do so

                                       DEBENTURES AND DIRECTOR’S

and reliance on personal security be only a secondary security after the
company’s resources are fully exhausted.
   In the same situation if the financial institution were to take a
debenture over the company’s assets to fully secure the facility, every £
recovered from the company as a secured creditor is a £ less to be
recovered under the personal guarantee.
NB: A request that the facility be secured by the lender at the time it is
granted is sufficient. Also renewal or continuation of an overdraft facility
to a company by an outsider is sufficient consideration for the debenture
at that time.

2. To protect directors loans to the company and quasi-
directors loans to the company.
A director may have lent money to his limited company
a.   on start up instead of share capital
b.   to fund further working capital
c.   when remuneration is awarded, but not drawn out
d.   to replace other loans owing by the company
e.   with a dividend declared but not drawn
   A sum owed by a company to the director will normally be an
unsecured creditor in the accounts of the company, i.e., director’s loan
   Unsecured creditors rarely make any recovery when a company goes
into liquidation. This means that such funds are usually lost in the case of
an insolvent liquidation or on receivership.
   Unpaid directors remuneration and holiday pay may be a preferred
creditor. However, if there is a debenture in place in favour of the director
then the loan account may be secured which will improve the likelihood
of a recovery.
   There are rules to prevent directors or connected persons from taking
advantage of a floating charge debenture within two years of insolvent
liquidation unless money lent was new money, i.e., lent simultaneously


with the creation of that debenture. The Insolvency Act 1986 seems to
have widened the definition of new money for these purposes.
  For immediate security the registration of the debenture with
Company’s House and other Registries needs to be within time limits.
   Care needs to be taken to avoid breaking the rules which apply where
any payment is made as a preference within six months of an insolvent
NB: Directors pension funds may lend money unsecured to the company
now reduced to 25%, pension fund value since ‘A’ Day 2006. It is
recommended that security be taken by the pension fund trustees to
protect the fund and hence the directors pension assets.
3. To convert equity into loan.
Many hands-on shareholder/directors are not wealthy, especially if one
excludes the value of the residence and their interest in the company.
  Usually shareholder/director funds tied up in the company are equity
and therefore fully exposed to trading risks.
   If a company makes a profit then by use of dividends this profit can be
used to shift value to the director’s loan account, or loan account of an
outside company controlled by the shareholder/director who owns
shares in that company.
   This loan account can then be secured by debenture. There is a good
case for a shareholder/director (and spouse - where appropriate) to
declare dividends from current years profits for at least the amount up to
which their total income for a given tax year does not exceed the higher
rate tax threshold.
   The dividend, once declared, is credited to the directors loan
account/spouses loan account and these funds can be drawn down (tax
paid) whenever the company can afford it. The annual basic rate tax
allowance can be lost to the extent that it is unused after each tax year.
Shares can be allotted or transferred to a spouse.

                                        DEBENTURES AND DIRECTOR’S

   If between a quarter to one third of the value of the company is held
as a loan secured by debenture, then this can provide protection to a
shareholder/director to ensure priority payment in the event of
NB: Under current rules a married couple or a person with same sex
partner may have a taxable income of 1 £76,700.00 per year without
incurring higher rate tax liability.
NB: Where the sums involved exceed these limits, it is possible to use an
associated company to take advantage of a debenture and therefore defer
higher rates of tax. This does have the disadvantage of the associated
companies rules. Care needs to be taken in setting up the transaction to
mitigate any higher rate tax liability.

1.     If a bank has a personal guarantee and/or securities from the director
       or connected person ensure that the bank takes a debenture from the
       company to fully secure the borrowing and registers it. (search
       Companies House to check).
Client: “We gave the bank a personal guarantee and a second mortgage
on our house, to secure my son’s business overdraft. The company went
bust because of bad debts. Since the bank did not register the debenture
they could claim nothing from the company except as an unsecured
creditor and came to me for the whole overdraft amount plus interest. I
considered suing the bank for negligence, but in the end they have all the
money and time to defend this kind of action which could cost thousands
and take years. So in the end we paid by taking out a re-mortgage. But this
is unsatisfactory because I am now 62, not in good health and my house
is mortgaged when it need not have been.”
2.     If you lend money to your company take a debenture.
3.     If your pension fund lends money to your company have the pension
       fund take a debenture.

1   Tax year 2006/2007


4.   If you share a business with others and there are private securities
     being used to support the company’s overdraft, consider a
     refinancing arrangement.
Eg, Company XYZ Ltd has an overdraft facility of £300,000 and the
business is owned by three shareholder/directors A, B and C one third

                    A’s house is valued at £600,000 with an £160,000

                    B’s house is valued at £400,000 with a £200,000

                    C has £200,000 value house with a £80,000

A    600,000 house value     160,000 1st mortgage      440,000 equity
B    400,000 house value     200,000 1st mortgage      200,000 equity
C    200,000 house value     80,000 1st mortgage       120,000 equity

   In total they have £300,000 overdraft that is secured by second
mortgages on all properties together with a joint and several guarantee
from directors and wives.
   If the loan is called in (overdrafts are repayable on demand) then A’s
property may well be the easiest route to the money. He is then in an
unfortunate position. If the company had made £300,000 profit, then he

                                          DEBENTURES AND DIRECTOR’S

would have a third of it. But if the company has a claim against it for
£300,000 by the bank then he is liable for all of it.
   Even if he has an indemnity against other parties this does not
guarantee that he will recover his loss. In these circumstances a better
strategy would be for each of them to borrow £100,000 a piece, either by a
term loan or by remortgage.
      The advantages of restructure in this way are:
     a) There is a loan of £100,000 each, not £300,000 joint and several
     b) It is often cheaper to borrow money, particularly when the cost of the
        overdraft renewal and service fees is calculated. There is little control
        over bank charges when the company is forced to be overdrawn for
        most of the time.
     c) A repayment loan would provide for a final repayment date and
        when rates are low it would be a good time to lock in to a fixed rate.
     d) The directors could take a debenture over the company’s assets to
        ensure that they (and not the bank) have the power to appoint a
        receiver as well as getting secured status for their loan.
     e) The directors are invariably in a better position to assist in the
        collection of book debts and asset realisation than a liquidator or
     f) The loan to the company need not be repayable on demand.

5.      Consider factoring or discount invoicing as a substitute to overdraft
        and reduce personal guarantee risks providing there are significant
        growth prospects and margins will stand the cost.

6.      Use outside source of finance for term loans and bank only for
        finance which only it can do, e.g., overdraft and guarantee bonds, etc.


Many businesses run as a joint venture. It may be that the business owners
have complementary skills or wish to share the responsibilities of running
a business.
    Sometimes one owner has capital and the other works in the business.
In these situations it is important to ensure that there is a share of profit
with which both owners are comfortable. If the business is a success the
working participator may feel that the capital provider has contributed
little to the business but shares the profits in full. It is often easy to forget
the risks taken early on by an investor in a potential risky venture.
   From the point of view of the “hands-on” business man, if all this
partner is providing is capital he may be better off with a bank or other
financial source than with such a co-owner.

Subject to any agreement to the contrary, then under the Partnership Act
1890, the partnership is dissolved by a written notice, bankruptcy or death
of any of the partners. Bankruptcy, death or written notice from a
shareholder or director does not wind up a limited company.
   A problem may arise when a shareholder/director becomes ill, dies or
there is a disagreement. Many company’s Articles of Association include
the following clause or one very similar to it: “the directors may, without
assigning any reason thereto, refuse to register the transfer of any share
whether or not it is a fully paid share”.
   Additionally, by statute, a company may remove any director by
resolving to do so by a simple majority in general meeting. However the
Articles of Association may provide that on such a resolution to remove a
director, the director concerned would be entitled to a multiple of votes in
respect of his shares, thereby allowing him the opportunity to defeat such
a resolution1 .
   In the absence of such multiple voting rights and a shareholder’s
agreement to the contrary, the effect of these two rules is that at
minority shareholder can find himself removed from the company with
no ready market for his shares.

1   Bushell v Faith 1970

                                                  SHARED BUSINESSES

A majority shareholders position is better but not perfect.
Potential problems for the minority shareholder who has been
1.   There is no automatic right to wind up the company and the minority
     shareholder in this situation has lost his job with presumably an
     immediate loss of income. (He may be able to claim against the
     company for unfair or wrongful dismissal).
2.   The investment which the minority shareholder had in his previous
     company is tied up.
3.   Any personal guarantees which were provided for company
     obligations are likely to be still in force, e.g. bank overdraft, hire
     purchase or lease, etc.
4.   The minority shareholder cannot claim a dividend as of right
5.   A minority shareholder usually cannot sell his shares without the
     agreement of the company, i.e. the remaining directors.
   It follows that the position of a minority shareholder-director who has
been removed from the company is most unsatisfactory from his point of
NB: A shareholder may claim relief under the Companies Act 1989 if the
company’s affairs have been conducted in a manner which is unfairly
prejudicial to the interest of the members generally or some part of the
members. Additionally the courts have provided relief where there is a
quasi-partnership, but clearly litigation is only to be embarked upon as a
last resort due to its high cost and uncertain outcome.
Potential problems for the majority shareholder director who remains
Although not as bad as being in a minority, the majority shareholder
director still has problems to face because he does not control all the
      1. Where the business is a quasi-partnership and it was anticipated
         that shareholder-directors would put effort into making the
         business grow, the problem would be if the remaining
         shareholder-director double the value of the company due to his
         effort, then the former shareholder would benefit from this.


     2. If there is only one class of shares which is usual, it would
        prevent the remaining director taking remuneration as dividends
        since it would require him to pay dividends to the shareholder
        who had left, which under normal circumstances he would not
        want to do. There are considerable advantages in using the
        dividend route as remuneration which is not available if there are
        hostile minorities.
     3. When the business comes to be sold there may be a tax advantage
        for the vendor to be able to sell all of the shares in the company
        rather than the limited company sell the business. If all the shares
        are not controlled by the owner then this option is not available.
NB: It is not unknown where there has been a disagreement for the
minority shareholder to attend meetings or call meetings and be generally

     a) “We set up in Mold 6 years ago with the shares being held 40-40-20.
        The idea was that we would all work in the business, but within three
        months the 20% man had left and he has contributed nothing to the
        business since. He also refuses to sell his shares perhaps because he
        thinks that one day they may be worth a lot of money.
        The company’s overdraft is secured by second mortgage on our two
        houses and I find it galling that we have put in 100 per cent of the effort
        to get only 80 per cent of the reward. It seems that short of winding up
        the company which is disruptive and causes potential difficulties with
        our customers, there isn’t a great deal we can do.”
     b) “We gave Mr Roberts 5 per cent of the shares after he had been with us
        for six months because he showed good promise as a manager of our
        Warrington depot. He left us two weeks later to set up in competition
        400 yards down the road. I was furious. He turned up at a shareholders
        meeting and was generally rude and obnoxious and wants a silly price
        for the shares and it means I can’t take dividends.”
     c) “My mother-in-law has 7 per cent of the shares and she keeps wanting
        a dividend even when we don’t take one. She almost implies that we
        cheat her by not paying her a dividend. She got the shares when her

                                                 SHARED BUSINESSES

   husband was in the business - they were joint owners - and she got them
   when he died.”
d) “When my wife and I got divorced she kept her one share for years. It
   wasn’t included in the financial settlement. It took years to get the
   share back and I’ll never give a share to anyone else ever again.”
e) “ I came into the business 8 years ago to rescue it from bankruptcy. The
   two existing shareholding directors were very keen to get me involved.
   I’ve got a third of the shares and the two other shareholder -directors are
   much older than me. Apart from only coming in two days a week and
   drawing a full salary, one of them has mental problems and upsets
   customers when he speaks with them. Additionally he disappears for
   months on end and then comes back as if nothing has happened. He still
   draws a full salary, takes a company car and expenses and I feel as
   though I am carrying this firm for only a third of the profit. The other
   shareholder director feels a sense of loyalty to him as they started the
   business together many years ago. Happily he resigned his directorship
   recently on the grounds of ill health at a meeting with our accountant.
   From time to time he rings up saying he doesn’t mean it and can he
   come back. We offered him a fair value for the shares based on what the
   accountant said they were worth, but he refused. But at least we are not
   paying his salary any more for doing very little.
   The other director wants to pass on his shares to his son who works in
   the business. I have no objection to this and the son makes a useful
   contribution. But I do wish he would get one with it. It is unsettling for
   me because while the shares are held by the father, there is always the
   chance that the old pals act will prevail and they may try to oust me.
   The whole thing is unsettling and it distracts me from the main work of
   developing the business.”
f) “It’s clear now that John wants to bring his son into the business. This
   hadn’t cropped up before, but really I wanted to sell the business as a
   going concern.
   There is nothing wrong with the lad, but clearly I’ll get more if I keep
   half the proceeds for all of it rather than try to sell my half share
   independently even if I could find a buyer.”
g) “As a minority 40 % shareholder I was a bit concerned to discover that
   it was my personal guarantee mainly covering the overdraft of £60,000


        with bits of security from the company. When the majority shareholder
        other company went bust he moved in to take over and there wasn’t a
        great deal I could do about it.
     g) “Steve, the other director, believed he was going to get this refinance
        package for £2million extra to solve all our business problems. After 18
        months I got fed up of waiting and left to start on my own. The old
        company went bust six months later and my 15 per cent share is now
        worthless. I still have a person al guarantee on the overdraft. It seems
        that one of the other directors is rich enough to pay the bank off, but its
        been a lot of hard work for nothing and it sounds irrational, but the old
        debt of £400,000 plus interest seems to hang over me like the Sword of
        Damocles until the matter is sorted out.”
     h) “This was a 50-50 business and we were to cover the overdraft on a 50-
        50 basis. My house was up as security by way of second mortgage.
        There was supposed to be £50,000 deposited by Eric to cover his half.
        But it seems that the bank took that £50,000 to pay off some other debt
        of his, leaving my house to cover the whole of the overdraft. I would like
        to move, but the bank won’t let me without paying off the loan. When
        the company’s premises were sold by the receiver they got a lot less than
        expected leaving a high residual liability for me. . It seems a bit unfair
        that I shared only 50 per cent of the profits but am now carrying 100
        per cent of the losses.”
     i) “I own 40 per cent of the shares and have run the company since 1967
        when my uncles who own the balance of the shares emigrated to
        Australia. They are now in their 70s and refuse to sell the shares. My
        position is insecure because between them they hold a majority. Happily
        for me they hate each other and haven’t spoken since they emigrated.
        They are not likely to gang up on me, but you never know.”
     j) “I own 40 per cent of the shares and 35 per cent are owned by ex-
        shareholder-directors when my father ran the business. The rest of the
        company, i.e. 25% is owned by the investment group 3I. Relations are
        not good as they operate a similar business about 8 miles away and are
        effectively in competition with us. They won’t sell their shares except for
        some ridiculous price. I’m in the unenviable position of guaranteeing
        the overdraft from a minority shareholders position. Happily 3I have
        said that they will support the current management as against the old
        shareholder directors. But the position is clearly unsatisfactory and it
        would be much better if in some way I could buy them out.”

                                                  SHARED BUSINESSES

One way to resolve most of these difficulties would be to have in place a
properly thought out shareholders agreement or partnership agreement
which provides for an orderly exit from the business when one of the
owners leaves, whether this is because of death, illness, or disagreement
and provisions can be included to deal with the position of personal
guarantees on leaving obligations, e.g. guarantees on overdrafts, leases,
hire purchase, etc.
   On death you can add cash to the estate of the deceased in exchange for
the shares. This will provide fair compensation to the estate for the value
of business owned by the deceased, and at the same time leave the
remaining owners in control of 100% of the business. As an alternative
shares may pass to the next generation. Where the shares are to be bought
for cash in these circumstances, this can be funded by the use of insurance.
   On disability or long-term illness the agreement can give the right to
those who remain to buy the shares from the person who is no longer
participating in the business for an agreed value or the agreement can
outline the machinery by which a fair value would be calculated. If this is
insufficient to provide the degree of financial independence required for
the ill or disabled shareholder director , then insurance may be a partial
solution to this.
   Perhaps most important of all is to have a machinery in place to deal
with disagreement. The relevant matters are those of valuation and
payment terms. An ideal arrangement is one which is both acceptable to
the leaving shareholder director and is affordable by the company.
   As in the case of marriages which break down, a financial clean break
is usually the best solution if this is at all possible.
   Either the company can buy back the shares of the person who is
departing business, or the other shareholder directors can do so. The
advantage of the company doing so is that it is usually better placed to
borrow the money to do so but the disadvantage is that the base price of
the shares is lost in connection with a subsequent disposal, eg business
worth £2,400,000.00 with three equal shareholders, A, B and C.
   If the company buys the shares back, the base cost for A and B on
disposal of their shares in the business is their original acquisition cost
which may be low.


   Alternatively if A and B are able to raise the money to buy the shares
then when they come to sell they will have an uplifted base cost of
£400,000 each ie, they save the tax on disposal of £400,000.
  One option to consider, is for another company to take the shares.
Subject to the assisted purchase rules, the later disposal by the new
company of those shares could be tax free.
    Depending upon the proportions owned, a company buying back its
shares may change the ownership proportion of the existing shares or
create a majority or minority shareholder position. Suppose the company
is owned 40%, 30% 30% by A, B and C respectively, if the company buys
back the shares from C, the 40% shareholder now has 40% shares out of
70, a majority controlling position instead of a minority and B may not like
this since it allows A a controlling position.


Most shareholder/directors would prefer to own their business premises
rather than pay rent. If outright purchase for cash is not possible a loan
(using what would otherwise be rent to an outside landlord) can assist in
the acquisition.
   Ownership is not an objective for all business people; other
considerations may apply.
   DL: “Our children’s clothes shop has to be on the High Street in the
main retail drag. Properties here rarely come up for sale and when they
do an enormous price is asked. We could buy a less suitable location, but
sales would suffer badly.”
    HC, GC Ltd.: “I don’t want to buy because the property would be of
little value to any prospective purchaser and when I retire I want out - a
clean break”.
   DC, HHT Ltd: “The property next door has been on the market for
£50,000 less than we can buy our freehold for and there has been little
interest in that property for two years. If we bought we would have a
white elephant that we couldn’t sell”.
   JCS, C Ltd: “Our rent is so low that we couldn’t afford to buy. It would
cost us three times as much and we just can’t afford it”.
   RI, RI Ltd: “Our landlord supplies us with half of our firm’s turnover
and the rent is low, too. If we bought somewhere else he might not be so
keen to put the work our way”.
   WC Ltd: “As printers we moved in four years ago and we now pay
£17,000 per year rent with 21 years to go and rent reviews every 5 years.
For what it will cost us in rent we could have bought the premises and
have something to show for it. The landlord is a big institution and has no
interest in selling”.
   WR Ltd: “On the advice of the bank my sons, then aged 20 and 22,
entered into five long term leases of duration between 15 to 25 years for
shops to sell hats. The market for hats then collapsed and there was no
one to buy the leases.


The current losses from the hats business is about £70,000 a year which is
what the rent would be if the properties were empty. My son feels like he
is serving a life sentence. He dare not buy his own house because if it all
goes wrong he’d lose it. How could we have been so stupid”.1

   Usually there are many advantages to purchasing the business
1.   To build up an asset - possibly outside the business.
2.   To have an asset available to help with business borrowing in the
3.   To own the land and buildings after the mortgage is paid to generate
     income which can be kept even if the business is sold or passed on to
     the next generation.
4.   To provide security on the current site against landlord’s rights on
     non-renewal of lease.
5.   To be able to expand the premises if the business needs extra space or
     to guarantee to be able to sub-let if business shrinks. Some leases
     don’t allow sub-letting. .
6.   To change the ownership proportions of the building from that of the
     shares in a limited company.
7.   The purchase by the company can fund for an older shareholder
     director’s retirement plan.

  If the premises are not owned inside the business, but by the business
owners personally, then this will:
1.   Increase the value of assets owned personally
2.   Remove the asset from exposure to trading risks and other business
3.   Provide an income in the long run to help with retirement planning.
4.   Improve the position of minority share owner as compared with
     ownership via the company.

1Happy ending: under pressure landlords accepted lease surrender on properties or
rejigged leases with new tenants

                                                PROPERTY OWNERSHIP

NB: Often purchase is not an option when a business starts with limited
capital. It is not always possible to buy all the plant and equipment
required for the business and still have sufficient funds left for a deposit
to purchase the premises. There is also a reluctance on the part of banks
and other financial institutions to lend money to brand new businesses for
property purchase when they have no track record.

Where the decision to own has been taken there are a number of ways that
this can be achieved. This discussion focuses on where the business trades
as a limited company.

  a) If the company buys the premises the property will become an asset
     and reflect favourably in the balance sheet of the company. Over
     time the value of the property can be expected to rise while the debt
     will reduce with a capital and interest type loan. An increasing net
     property value will improve the value of the company and may give
     comfort to the company’s bank and those who are considering
     supplying the company with goods and services on credit.

  b) Property will be available to a bank to take as security in connection
     with facilities, thereby reducing/removing reliance on personal
     guarantees or other securities.

  c) It may be administratively simpler to have ownership in the

  d) The funding for purchase may only be in the company, e.g. deposit
     or loan.

NB: A franchisee may be required to carry a minimum capital balance in
the company’s books and the building ownership by the company may be
the only way of doing so.


     a) Possible double taxation. Suppose premises were purchased for
        £300,000 with a £200.000 bank loan to the company over 10 years. In
        10 years time when the loan is paid off the company sells the
        property. If a good price of £600,000 is obtained the company will
        pay corporation tax on the gain. There was indexation to relieve
        against inflation gains of Corporation Tax at 19% or 32.5% will be
        payable so after taking that into account the tax payable will
        When these funds are eventually distributed to the shareholder/
        directors this may be done in one of three ways:
     I. a dividend
     II. a bonus
     III. a winding up - e.g. the company ceased to trade, but is not
          necessarily insolvent.
   Where there is a distribution of the company’s assets to the
shareholder/director there is often a second tax charge. Corporately
owned land and buildings may therefore be exposed to double taxation
on sale.
     b. Insolvency. If the company fails due to bad debts, poor trading or
        uninsured losses or a combination (and some of these events may be
        wholly outside the control of the directors) a liquidator can sell the
        property to make a recovery.
   It is unusual for the best price to be obtained in these circumstances
and the reduced proceeds of sale would invariably go to the secured
creditors, liquidator’s expenses and other preferred creditors. It is rare for
the ordinary creditors or the shareholders to be eligible to participate in
any distribution on an insolvent liquidation so effectively this represents
a loss of the value of the building to the shareholder/directors in most
   The wealthier a shareholder director is in his own right, the less this
may be a concern. However, many shareholder directors have few assets
outside the shares in their company and personal residence. For them the
business failure is a major financial loss and if the building is lost as well
this merely makes the position worse.

                                               PROPERTY OWNERSHIP

   When a company fails the shareholders and unsecured creditors are
usually the major losers. A solvent company can be made hopelessly
insolvent by a “fire sale” of all the assets compounded by the costs of the
liquidation, lease penalties and redundancy expenses.
a) Shared ownership. The company may have non-director shareholders
   (as shareholders) because they have put in capital or been previously
   involved in the management of the company and have since left
   relinquishing their directorship but still retained their shares.
  E.g.: mother-in-law owns 10%
  E.g.: 20% owned by shareholder/director who has since left as
  NB. One of the shareholder/directors may not want to participate in
  the purchase, perhaps because of age and it is easier not to buy the
  property in a company name because of this.

Many companies operate an occupational pension scheme for the
shareholder/directors, chief executives and other staff. It is often
suggested that the premises be put into the pension scheme or transferred
into the pension scheme if already owned by the company.
a) If there is no mortgage the cost of the building going into the pension
   scheme is a tax deductible item for the company as a single premium
   pension contribution (subject to Inland Revenue rules on deductibility
   for single premiums).
b) If there is a loan to pension fund to assist then the deposit is tax
   deductible as the premium.
c) The property appreciation is tax free on disposal by the pension fund.
d) Any rent paid by the company that is commercially reasonable is tax
   deductible as it would be to a third party landlord.
e) The receipt of rent by the pension fund is not taxed.
f) 25% tax free commutation of fund is available to repay debt after ‘A’
   Day 2006.


At retirement the property need not be sold under new retirement rules
from ‘A’ Day 2006 but the new Inheritance Tax on pension funds levies a
40% tax charge. A personally owned property rented to a business which
qualifies for the business taper would have 50% relief on death, therefore
reducing the tax liability to 20%. This is a worst case situation since there
may be unused nil rate band to offset against this.

This is purchase in name of shareholder/director personally or
shareholder/directors in combination, or via other joint venture.
a) No double taxation of corporately owned land and buildings.
b) Inflationary gains are not taxed (many gains are inflation only) up to
c) £8,800 per shareholder/director is available as additional relief on
   eventual sale as individual capital gains tax relief, i.e. personal relief.
d) Interest on any loan taken to assist with the purchase is offsetable for
   tax purposes against income from the company drawn to sustain the
   loan payments programme.
e) Capital Business Taper Relief means that properties rented to business
   and owned by individuals qualify for a 75% discount at the Capital
   Gains Tax rate reducing liability down to a maximum of 10% or even 5
   _ %. This is a very generous relief can extend to include the value of
   any building occupied by the business and owned by a qualifying
   person (e.g. the shareholder/director) providing no rent is being
   charged. If income is required they can be taken in another way .
f) Tax free cash is available on computation of pension fund,

                                                 PROPERTY OWNERSHIP

g) If shared ownership can be set up on a joint basis this would avoid the
   need for a separate agreement to transfer the interest as the survivor
   could automatically take the deceased’s share as part of a shareholders
NB. Shared ownership also can be set up on equal or unequal basis as
required. On death the share can go to the deceased’s estate. The
ownership split of the building can be different from that of the
ownership of the companies shares.
h) If required a pension fund commutation can be used to fund debt
   repayment with an interest only loan to improve the tax efficiency of
   the purchase vehicle.
i) The asset    boosts the personal balance sheet value of the
   shareholder/director directly rather than indirectly.
j) The asset can produce rental income (after the loan to purchase is
k) On disposal of the company separate ownership often enhances the
   value that can be obtained because a prospective business purchaser
   may not want to find the extra funds for the building, but will enter
   into, or take over, a lease arrangement. It follows that there would also
   be an opportunity to sell the company and keep the building.
   Consideration can be given to using a separate Limited Company or a
Limited Partnership under the 2000 Limited Partnership Act as the vehicle
to purchase the building.
   Where there would be a large chargeable gain on disposal of the
currently owned building on sale, it is possible to remove the building
from the trading risks by transferring the business entity to a brand new
limited company leaving the ownership of the building in the existing
   Jus accrescendi inter mercatores locum non habet. In the absence of a clear
intention to the contrary commercial transactions will be treated as
tenants in common since the law of survivorship has no place in business

1   Authority is Lake v Craddock 1732


TR, TF Ltd: “We personally owned half the building and were advised
(badly by our accountants) to put the other half in the pension fund. We
are now considering a bid to sell the company to a large plc. The premises
would generate a rent of £300,000 a year and this rent is payable equally
to the pension fund and myself personally. I am quite prepared to sell the
company for asset value only plus 10% providing the purchaser will pick
up the covenants under the lease which has 10 years to run. I am 50 and
the 10 year income on the lease would suit me fine.”
     a) If the business fails and the property is not rentable, then there is
        still the problem of dealing with the loan. To help counter this we
        recommend a fairly modest proportion of the value of the building
        is borrowed and the rest is drawn from the company as a deposit.
     b) There is tax on the capital element of any loan repayment
        programme at 22% or 40% for the purchaser.
       NB: This can be mitigated by using a cash commutation on a
       pension to fund the debt repayment with an interest only facility.
     c) There is a possible tax on the profit on disposal. This would require
        the value to grow in excess of inflation and unused personal capital
        gains tax allowance.
     d) Purchase by a parallel limited company still removes the building
        from the trading risks (note marginal relief rules with multiple
        owned companies by same shareholder/directors).

NB: See Property Partnership Option under Irish Prospective.


Many hands-on business owners believe they work harder and longer, for
less income and with more risk than a manager would in a multinational
company with the same level of responsibility,
   The shareholding director can ensure that he has fringe benefit
equivalence, i.e., to have what he would have had in terms of fringe
benefits if he worked for someone else in a post with a similar level of
responsibility and leave him no worse off. He may also make extra
provision due to the risks of being in business.

For non-director employees earning less than £8,500 pa (including value
of any benefit) there normally isn't a tax liability for a company car. For
any director or other employee, there is a chargeable benefit which will be
a percentage of the car’s list price linked to the CO2 emissions for cars
registered after 31 December 1997. For car’s registered after before 1
January 1998 the benefit depends only on the engine size. The maximum
benefit chargeable is 35% of the vehicle for both petrol and diesel.
   The price for the purpose of calculating the annual charge is the list
price at the time when the car was first registered/ including VAT and car
tax, delivery charges and the list price of any accessory fitted before you
get the car.
   Where there is no list price you have to agree a 'price' with the revenue.
For classic cars which are more than 15 years old with a market value of
£15,000 or more the open market value on the last day of the tax year the
car is used.
   If you make a capital contribution towards the purchase price of the car
or it's accessories up to a limit of £5,000 this will reduce the price of the car.

Additionally there are fuel charges when the company pays for private
use so you can’t get a reduction from the money you pay for private fuel
unless the company is reimbursed for all the private fuel used and the
Journey from home to work counts as private use.


   The amount of fuel charges for the tax year from 6 April 2003 are based
on the following table of CO2 emissions: -

       CO2 emissions (grams per Kilometre)            Tax % of car price

        2003/04                    2004/05
          155                        145                      16
          160                        150                      16
          165                        155                      17
          170                        160                      18
          175                        165                      19
          180                        170                      20
          185                        175                      21
          190                        180                      22
          195                        185                      23
          200                        190                      24
          205                        195                      25
          210                        200                      26
          215                        205                      27
          220                        210                      28
          225                        215                      29
          230                        220                      30
          235                        225                      31
          240                        230                      32
          245                        235                      33
          250                        240                      34
          255                        245                      35

Diesel cars will be subject to a 3% surcharge; the maximum charge for
petrol and diesel cars is 35%.
   Where the company pays for business fuel, repairs and insurance for
the company car this does not increase the taxable benefit.
    There is no tax to pay if you use a pool car but in order to qualify the
car must be made available and actually used by more than one employee.
It is better if the vehicle is not kept overnight near an employee’s home
and any private use must be incidental to business use.
   If you use your own car for business purposes and the company
reimburses expenses you can claim tax relief on the running costs of the
cars by submitting form P87 to the Inland Revenue.

                                                           FRINGE BENEFITS

   Alternatively you can use approved mileage allowance scheme you
will receive tax relief at a rate per mile for the first 10,000 miles of business
travel and then at a lower rate for any additional business mileage. You
pay tax only on the difference on the amount the company reimburses
you and the tax free allowance, the rate per mile is shown in the table

                                            1                      2
            Vehicle used         First 10,000 business   Each mile over 10,000
                                     miles in year           miles in year

           Cars and vans                 40p                      25p

            Motor cycles                 24p                      24p

               Cycles                    20p                      20p

   If you buy a vehicle which is used for business any interest on the loan
used to buy the car qualifies for relief but only to the proportion that
relates to the business use.
        100% first year allowances for cars with low CO2 emissions
        A business can claim 100% first-year allowances on a car provided that:
        The car is new and first registered on or after 17 April 2002
        Has CO2 emissions of not more than 120gm per kilometre driven, or
        Is an electric car.
        The expenditure is incurred between 17 April 2002 and 31 March 2008.
   The rules relating to cars costing more than £12,000 do not apply to cars
with low CO2 emissions

Many large companies provide death in service for their employees and
this is often written as part of the pension arrangements.

1   R


   Although described as death in service, normally death from any
reason is covered, while the individual is an employee and Inland
   Revenue limits prescribe that a maximum of four times total
emoluments available to be paid as a tax free sum on death with the
balance being paid as an annuity. Tax relief is normally available to the
company in respect of premiums on such schemes and where there are a
large enough number of participants it is often possible to arrange a no
medical cover limit.
   If dividends are taken in lieu of salary by shareholder-directors then
this reduces the amount of benefit which is payable as a tax free lump sum
and it is therefore recommended in these circumstances, alternative
insurance arrangements are made to ensure that the full benefit is
available as a capital sum.
   In any event the four times salary limit may not be a sufficient sum in
the event of death to provide adequate protection for the dependants of
the deceased particularly if there are significant family obligations. In this
case it is recommended that sufficient term insurance is purchased to
provide adequate cover .
   Often a final salary pension scheme will provide that in the event of
death in service in addition to the lump sum outlined there will also be
payable the pension that the individual would have been entitled to had
he reached normal retirement age. This could be as much as one half or
two thirds of salary. In looking for comparable fringe benefits account
needs to be taken of this very valuable benefit often provided by large

In the event of long term sickness of an employee many large companies
provide an income on disability comparable to what the pension would
have been had the individual retired at time of disability. This can be as
much as one half to two thirds of pre disability earnings. A person who
requires a long-term income of this kind because of sickness or disability
will need to cover up to age 60 or 65, i.e. until such time as the pension
arrangements would normally start .

                                                               FRINGE BENEFITS

   There are a number of permanent health insurance schemes available
on the market which can provide this benefit. Costs will depend on
existing health record, the length deferment before benefit starts, the type
of benefit required and the age to which benefit will continue.
   The most expensive would be for a person in a perceived high risk
occupation wanting a short deferment of four weeks or less with benefits
running to age 65 with index linking . The lowest cost would be for a
person in a low risk occupation requiring benefits to cease at age 50 with
a deferment period of 52 weeks or even 104 weeks.
   Where benefits are indexed linked it is important to ensure that the
escalation of premiums based on age at entry not at age at increment as
the cost of permanent health insurance increases significantly with older
lives. 1
   It is also important to check the terms and conditions of permanent
health insurance policies since what appears to be a better value product
may in fact have restrictive benefits, but some policies require not only
that the individual is not carrying out his usual occupation but is unable
to carry out any occupation, which could prevent a claim in some cases.
  An important feature about permanent health insurance is that it is
normally non cancellable by the insurance company once a claim is
made so that if the individual has a recurrent problem it would be
possible for a claim to be made on successive occasions.
   Additionally it is important to enquire about the premium review
clause, if any, which is contained in the policy. Some policies allow the
insurers to increase premiums in the event that they have a bad claims
experience and often offer cheaper premiums at the outset to reflect this.
There is nothing wrong with this since it provides an opportunity for a
lower cost in the initial years but clearly the risk of increased premiums at
later times is a real one with this type of scheme.
  It is often possible for an employer to arrange for a group permanent
health insurance to apply to all employees and favourable medical limits
and the savings of a collective scheme can often prove an attractive

1   My own premium went up from £82 per month to over double that at a review.


  There are inland revenue rules to prevent a person being able to claim
more whilst sick from permanent health insurance than he or she would
have been able to claim if they continued working.

Personal Accident Policies may cover sickness or accident and pay a
weekly or monthly income to individuals who are unable to work
through sickness or accident.
   The main difference between this and permanent health insurance is
that the benefits are normally limited to 52 or 104 weeks and it is
sometimes possible for a lump sum to be paid in the event of loss of a limb
or sight or hearing. It is usually much cheaper to buy personal accident
insurance than permanent health insurance because of the relatively short
term exposure which the insurance company has the risk and after a claim
has been made these policies are not guaranteed to be renewable as
permanent health insurance normally is.
   Sometimes it is possible to write a personal accident policy in
conjunction with a permanent health insurance policy with the personal
health insurance benefits commencing once the personal accident
insurance benefits have ceased. This has the advantage of considerably
reducing the cost of the permanent health insurance because of the long
deferment period under that contract.

                                                     FRINGE BENEFITS

Many people are well satisfied with the National Health Service in so far
as it's emergency treatment provision is concerned and the local doctor
service. However for what are described as non essential operations there
can be a considerable waiting time before such medical procedures can be
completed and private health insurance can provide the individual with
an option to get earlier treatment than would otherwise have been the
case . Private Health Insurance would normally ensure that such
operations are completed as quickly as possible
In many business situations there is institutional debt to provide capital
for the business or to provide for it's expansion, so this would include
bank loans, overdrafts, finance company loans etc. It is recommended that
protection cover is taken as a minimum to cover amounts personally
guaranteed and ideally to cover the whole of such sums against death,
critical illness or disability.
This operates similarly to term insurance with the company paying the
premiums and the funds being made available to the estate of the
individual in order to settle any personal guarantee obligations.
Where a person is disabled and perhaps unable to continue to run a
business the payment of the debts of the business would clearly provide
immediate financial relief and remove a lot of worries associated with the
disability. There are many schemes on the market now which provide for
a lump sum on permanent total disability at reasonable cost.
Critical Illness policies are relatively new and provide for a lump sum to
be paid in the event of a critical illness such as heart attack , stroke,
coronary artery surgery, cancer, kidney failure ,major organ transplant,
and terminal illness.
   The individual may also wish to include these benefits to cover any
private debts including for example house mortgages.


   If the business pays the premiums on such policies and accepts the
benefit in kind then the proceeds can be paid tax free and a trust is
recommended to direct the funds to the correct beneficiary which may
also have the advantage of saving inheritance tax.

There is often confusion between key man insurance and shareholders
protection insurance but the purpose of these two arrangements is quite
   A keyman policy is often taken out by an employer on the life of a key
person in the organisation to compensate that organisation for the loss of
the employee through death and to provide them with financial
recompense in seeking to find a replacement . Often the tax relief is
claimed on the premiums and the benefits are treated as a trading receipt
by the company in the year in which they are received. The company must
demonstrate an insurable interest in the individual up to the amount of
the sum assured. Insurable interest need only exist at time of proposal not
time of claim.
   Where keyman insurance is appropriate for a hands on shareholder
director in a business situation, it may be better to write the policy as a
term assurance policy with benefits being paid outside of the company.
Funds received by the company as part of the proceeds of a keyman
insurance are taxable in the company's hands as any residue builds up the
company which may then be exposed to a second layer of taxation when
they are distributed to the shareholders.

Where an individual works for a large organisation, it is common for the
organisation to operate a superannuation scheme which provides
retirement benefits to its members.
   There are two types of scheme, the first is a money purchase type and
the other is a defined benefit scheme. Often the individual would
subscribe between 4 & 6% of earnings (although some schemes are non-
contributory), while the employer would pay as much again at least, and
some schemes are funded with a very generous contribution from the

                                                       FRINGE BENEFITS

For a money purchase company scheme the benefits which the individual
receives at the end will depend upon the value of the fund.
   Mostly money purchase arrangements are run by insurance companies
and are either of the traditional non-profit/with profit variety, or of the
unit-linked kind. The main difference between these two types is that the
traditional non profit or with profit arrangement provides for a
guaranteed annuity upon receipt by the insurance company of certain
sums from the investor, with a prospect for bonuses, which provided the
contract is paid in full will accrue to the policy irrespective of investment
   The unit linked varieties are where the investor takes the risk as far as
the fund value is concerned at the end, and the value will be the
prevailing price of the investments bought at the time of retirement.
These unit linked schemes are predominantly equity based, but there is
normally an arrangement to allow for a phased transfer into a more stable
type of investment as retirement approaches.
   Historically fixed interest investments performance have been poorer
than equity based investments over time.
   With money purchase arrangements the risk of the accrued fund size
being smaller or larger than anticipated fall on the individual investor,
with a non-profit annuity being the lowest risk, and a unit linked pure
equity based fund being a higher risk.
   Insurance companies operate many unit linked investment funds and
often offer a variety of options including split investments, with
reallocation and deposit based funds.
   An insurer may offer an equity fund in the UK or overseas e.g.,
America, Europe or the Far East. Additionally they may offer property
funds which can invest in commercial property or gilt funds which invest
in government securities.
   A managed fund incorporates a mixture of equity property and fixed
interest is normally available to provide investment spread.


   Company schemes may be insured, self administered or hybrid.
Insured schemes are where the life insurance company manages the assets
of the scheme which are paid over to them as regular or special
contributions. They obtain approval from the scheme from the Inland
Revenue and provide the actuarial services required.
   With a fully self administered scheme trustees are appointed to hold
the assets. One of the trustees is usually an actuary who perform actuarial
function which is normally completed by the Insurance Company under
an insured scheme arrangement.
   Hybrid schemes allow the scheme holder to participate in investment
decisions of the scheme while the assets are under the control of an
insurance company to reduce initial set up costs.
   Generally, the larger the fund the more cost effective it is to have a self
administered scheme since costs are based on time spent and not amounts
under management and funding levels which is the common method by
reference to which insurance companies charge.
A final salary arrangement is one whereby the individual pays a
percentage of salary (or the scheme may be non-contributory) and is
guaranteed to receive, at retirement, a proportion of pre-retirement
earnings based on length of service with an option to commute part of the
benefits. The advantage of this arrangement for the individual is that the
investment risk is shifted from the individual to the trustees of the scheme
who have an obligation to provide the benefit promised, and if necessary
increase the company's contribution towards the cost of funding the
anticipated liabilities in the event of a poor fund performance, an influx of
older members of statutorily imposed increased benefits.
   Additionally a final salary pension of this type will provide the
individual with an opportunity for his best years earnings, which are
usually his last, to be used as the basis for calculating his pension, even
though the contributions may have been levied on a somewhat lower
salaries during an earlier part of his career.

                                                      FRINGE BENEFITS

   These schemes seem to favour those who stay with the employer
throughout a lifetime rather than those who chop and change.
Understandably the trustees focus of responsibility is primarily to those
who stay with the scheme to the end rather than those who leave early.
   An early leaver in a final salary scheme may find a fairly modest
actuarial transfer value is available to him, as compared with a money
purchase arrangement.
  An employer can no longer compel pension scheme membership as
part of a contract of employment.
    Whilst a large number of final salary type schemes were marketed for
small companies during the 1980's, the effect of changes in legislation
together with the Barber decision in the European court, have made these
schemes less attractive for employers since their future funding levels can
now be difficult to predict. Consequently many companies, both for the
directors and staff, would prefer a money purchase arrangement, because
this allows them to guarantee what the costs are going to be. From the
employees point of view there is easy port ability, usually without penalty
if the scheme is continued in some form. This is especially important to
employees at a time when few people retire with the employer with
whom they started at the beginning of their working career.
   The tax advantages of pension schemes is that the contributions are
normally tax deductible, both for the company and for the individual at
the highest rate of tax which they pay and the investments grow in a tax
free environment.

The major difference in tax treatment between pensions and individual
savings accounts is that there is no tax relief on the contributions
originally subscribed. The tax treatment of the funds is the same and the
individual has the choice with ISA’s of a relatively few investment
restrictions, no annuity or ASP to consider.


These may be part of the main scheme or a pre-standing additional or
voluntary contribution arrangement
   The main advantage is that tax deduction at point of entry for the
individual and the tax free roll up of the fund. Since ‘A’ Day it is now
possible to commute monies held in these schemes

A qualified independent financial advisor can provide the individual and
his company with a wide range of the investment options available which
could also include Building Society investments, Bonds and Tracker
   Since the commercial viability of a particular business can rarely be
absolutely guaranteed into the future, it is important that shareholder
directors make independent provision from their business for later years.
   Depending upon age at commencement an actuary may require
upwards of 14% of earnings in order to secure a suitable replacement
income at normal retirement age. It is recommended that funding is
found from within the company to provide an equivalent benefit for
hands on business owners. Whilst tax planning is obviously an important
consideration in any investment, it is important not to let the tax tail wag
the commercial dog. Sometimes the strings which are attached to schemes
which will allow a tax deduction are outweighed by their inflexibility,
charges or other restrictions, and often a mix is the best strategy.
   It is possible for companies to make a contribution to their company
pension scheme, and then for the company to borrow a proportion of it
back in order to invest in the company. This can have the attraction of
providing a simultaneous tax deduction for the year in question with a
relatively modest net cost. Up to 1⁄4 of the fund value may be borrowed
back for the company's use as an unsecured loan.
Problems of Annuity
   Money purchased pension products have been heavily promoted by
UK pension providers and their intermediaries as a way of building up
funds to secure an income for retirement.

                                                        FRINGE BENEFITS

   Whilst it is true that up to a 1⁄4 of personal pension plans may be
commuted as a tax free lump sum from the age of 50 onwards (becoming
55), the balance of the sum may be either taken as an annuity or the draw-
down arrangement entered into which merely defers the date at which the
annuity is purchased until ages 75.
   The rates at which the Insurance Companies can offer in connection
with annuities are related to three criteria:
1. Interest rates generally
2. Mortality tables which are used by Insurance Companies, i.e. how long
   do they expect the annuitant to live.
3. Availability of long term Gilts.
   At the moment interest rates are historically low and with European
harmonisation there is no significantly increase in interest rates overall
expected and with improved healthcare, diet and other factors people are
living longer and longer. It is not uncommon now for people to live into
their 80’s and 90’s. Government Debt replacement has reduced Gilt
   The combination of these three factors often means that the rates which
insurance companies can offer, especially on joint annuities which have
inflation protection are very low, typically 4% per annum or less.
   As a result, it is now often possible to achieve a better rate of return in
interest on money held on deposit than it is than purchasing an annuity.
    The Capital Forfeiture aspect of annuity was always the least attractive
feature but previously the conversation was that there would at least be a
good annuity rate, ie significantly above what was otherwise achievable
in terms of interest on money deposited to compensate for this capital loss
but this is now no longer the case.
   Additionally where self administered funds have been set-up which
comprise property investments, the investor is often left with the
necessity of converting income bearing appreciated asset in property,
perhaps yielding up the 10% per annum into annuity with capital
forfeiture in returns below 4%.


   In Southern Ireland the pensions regime as so much as other Irish
legislation has been built around the UK model and the rules for
individual pension to the UK up to ‘A’ Day 2006.
   However, under legislation introduced by the individual at retirement
now has the option to invest his pension monies in an approved
retirement fund.
   The approved retirement fund may be any approved financial
institution in Europe. Income and gains are protected, i.e. the roll up is
similar to pensions in the pre-retirement phase but there are important
1. There is no requirement to take any income at all – now 3% from 2009
2. Income that is taken will be taxable for the recipient. for the recipient
3. Most importantly there is no annuity obligation at any time except the
   first £50,000 (Irish) under limited circumstances.
   For many years there has been a facility to allow individuals to transfer
their funds from the United Kingdom.
   A UK investor with significantly should consider the Irish route

UK money purchase pension position.
     i) that there is no pre “A” Day enhancement,
     ii) that the relinquished capital option is not taken.

   The highest annuity 1 figure is obviously payable for the lowest risk to
which would be single life, annual in arrears with no guarantee. The
lowest rate of annuity payable is joint life, 100% spouse indexed linked,
monthly in advance, with 10 year guarantee. At the time of writing this is
approximately 3.75% per annum.

1An annuity is a contract between an insurance company and an individual thereby
return for a capital sum, the insurer guarantees an income to the annuitant and spouse
on an agreed basis.
                                                       FRINGE BENEFITS

   If the annuity is not purchased, the assured pension route may be taken
where the individual is entitled to draw from the fund to aged 75, the
annuity rate for a 75 year old. Unfortunately at aged 75, the maximum
amount that can be drawn is now the annuity rate for a 70 year old level
annuity also with no inflation increases and this reduces the income at age
75 by approximately 40% based on current annuity rates.
   On the second death there is a 40% Inheritance Tax charge with the
balance going into the pension fund for children when they reach aged 55.
Should investments grow and the fund size exceeds the then cap,
currently £1.5m, there is a 55% tax charge on any excess.

ASP Tax Position
    The Chartered Institute of Taxation asked HMRC how tax would work
on alternative secured pensions? Where the pension is passed to a relative
dependant such as spouse, no Inheritance Tax due at that point, instead it
is calculated on the cessation of the dependant’s pension benefits as the
top slice of the estate of the late scheme members by reference to rates of
Inheritance Tax applied at that time. If the left over funds on the
dependant’s death are paid to a charity, then no tax is payable.
   The following examples are given of an individual who dies in 2006
with an estate of £450,000. He has an alternative secured pension worth
£100,000 all of which was paid to his spouse. At the date of the scheme
member’s death, the Inheritance Tax threshold was £285,000 and the tax
rate 40% and when dependant died in 2010, the left over fund was worth
£80,000 and the Inheritance Tax threshold was £325,000 and the rate was

Example 1
   Assuming that the scheme member had left the whole estate to his
spouse, the estate would have qualified for spouse/civil partner
exemption and the chargeable value would have been nil.
   On the dependant’s death, £80,000 is added to nil. As this is below the
tax threshold (on the dependant’s death) of £325,000, there is no tax to pay.


Example 2
Assuming that the scheme member had left £220,000 to his children and
the remainder to his spouse, the chargeable value on his death would
have been £220,000. On the dependant’s death, £80,000 is added to
£220,000 totalling £300,000. Again as this is below the tax threshold of
£325,000 there is no tax to pay.

Example 3
Assume that the scheme member had left £300,000 to his children with the
remainder to his spouse. The chargeable value on his death would have
been £300,000 and tax of £6,000 would have been paid on the £15,000 over
the tax-free threshold (i.e. £300,000 less £285,000). On the dependant’s
death, £80,000 is added to £300,000 = £380,000. After deduction of the
(then current) tax threshold of £325,000 tax of £22,000 would be due, as
opposed to £32,000 had the rates of tax in force at the scheme member’s
death applied.

Example 4
Assume that the scheme member had left £250,000 to his children with the
remainder to his spouse. The chargeable value on his death would have
been £250,000 and no tax would have been paid. On the dependant’s
death, £80,000 is added to £250,000 making £333,000. After deduction of
the tax threshold of £325,000 tax on £5,000 would be due.

The conclusion is that assuming;
     i. the nil rate band is used elsewhere,
     ii. the pension fund remains intact at 1st death levels.
     iii. Inheritance Tax free band increases by the rate of inflation assumed
          at 3%, and
     iv. Inheritance Tax remains at 40%, there is effectively an increased tax
         of £3,500 for each between the first and second deaths.

                                                      FRINGE BENEFITS

Irish Pension Options
When Charles McCreevy, was Finance Minister (Chancellor of the
Exchequer equivalent in Ireland), he was lobbied successfully to remove
the Annuity Rule, and with various amendments including those up to
and including December 2005, the Irish position on money purchase
pensions is as follows:
  1. There is a maximum fund size of 5m euros, which at £3.4m is over
     double the UK limit. On retirement, apart from 63,000 (50,000
     Irish punts since the legislation was pre the Irish economy joining
     the Euro), which must be put to one side to age 75 in order to fund
     an annuity and (even that need not be used for this purpose,
     providing the individual has sufficient income from other sources),
     the residue can be put into an approved retirement fund, where
     which there is almost complete freedom of investment and to which
     the annuity or UK ASP rules do not apply.
  2. Generally with 20% Withholding Tax applies and this is offsetable
     against UK tax liability, it seems it may be possible for payments to
     be made gross.
     As in the UK up to 25% of the fund may be commuted tax free. The
     individual, may, if he wishes, empty the whole fund with a 40% tax
     charge on the income received, ie 70% total.
     From 2009, there is a minimum 3% annual draw (or tax thereon)
     from the approved retirement fund. On death of the individual or
     spouse, we are advised that the residue would form part of the
     estate of the deceased person suffering 40% Inheritance Tax charge,
     but the residual value being available immediately to the estate of
     the deceased person.
     The Irish options, should therefore be considered as an alternative
     because of the following useful features;
     i. The availability to take the whole of the fund, albeit with a tax
     ii. A cap of £3.4m as against £1.5m.
     iii. Much greater investment flexibility in the fund.


        iv. Availability of the residue immediately on death of the funds
            instead of being retained in a potentially tax inefficient structure
            until the retirement age of the children.
        v. On death there is the savings of the extra Inheritance Tax charge
           currently leviable on the increase in the nil rate band between the
           first and second death, assuming fund size remains the same.
    It is not necessary to live in Ireland in order to take advantage of the
Irish Pension rules since these options are now available to European
citizens by virtue of Treaty obligations.
   In Southern Ireland the pensions regime as so much other Irish
legislation has been built around the UK model and the rules for
retirement annuity and company pension schemes are extremely similar
to the pre ‘A’ Day position in the UK.
  However, new legislation allows the individual not to purchase an
annuity and to invest monies in an approved retirement fund.
   The approved retirement fund may be run by any suitable financial
institution in Europe. Income and gains are protected from tax, i.e. the roll
up is similar to pensions in the pre-retirement phase but there are
important differences:
     1. Until December 2005 there was no requirement to take any income
        at all but now in the RAF phase from 2009, 3% per year must be
        taken or the tax paid on 3% with transitional positions between now
        and then.
     2. Income that is taken will be taxed at the highest marginal rate for the
        individual recipient.
     3. There is no annuity obligation in respect of the first 63,000, even
        that requirement is relaxed if there is sufficient income from other
  For many years there has been a facility to transfer the funds from the
United Kingdom to Southern Island and the rules have been relaxed
somewhat from ‘A’ Day, ie. April 2006.

                                                       FRINGE BENEFITS

Some of the wealthiest individuals in the United Kingdom have a fortune
founded on the ownership of large amounts of property which can be an
attractive investment over a longer term as an income bearing investment.
Apart from shares and fixed interest, property is the other main

The major problem with commercial property as an investment is finding
a suitable tenant and making sure that the property does not go vacant. In
many parts of the UK it is normally possible to buy a commercial premises
for between 7 - 10 times the annual rent providing one does not insist on
a primary position. If a third deposit is put into the purchase of such a
property then the net rentals would cover the repayment of a loan taken
to buy the property over approximately ten years.
   When looking to buy such a property, one would normally try to
ensure it is currently occupied by a tenant whose covenant is considered
adequate, or alternatively a back to back arrangement be set up whereby
on completion of the purchase the lease commences immediately. This
will ensure sufficient income for the individual to cover the obligations to
the lender as well as having a residue to cover tax liability.
   Most leases have rent review clauses which over the long haul will
provide for increases in line with inflation. Since the value of investment
property is a multiple of the rents achieved this will put up the value of
the property by that amount. A well chosen investment property can
provide the owner with both an appreciating asset and a reducing bank
loan balance. Once the loan is paid the income is available to the owner
for his own use and the yields obtainable compare favourably with other
types of investment.
   The key to successful investment in commercial property is a good


   Commercial property rented out to a business whose activities would
qualify for the business taper relief also means that the landlord owing the
property qualifies for the relief. This means that a 5% interest or more in
the property owned for more than 2 years would allow 75% relief,
reducing the maximum tax liability to 10%.
   Additionally there is a 50% relief for Inheritance Tax purposes on the
value of such investments.

The purchase and management of domestic properties can be more akin
to a business than to the investment, since there is active participation
required by the owner or his agent to ensure that repairs are seen to
promptly, and the tenant pays his rent.
   Yields can commonly be higher from domestic properties than
commercial ones in some parts of the country, but out of the apparently
higher gross returns, needs to come a much greater amount to cover
management costs, repairs and voids.
   Sometimes it is possible for housing benefit to be paid directly from a
local authority to a landlord or his agents, with a tenant who is entitled to
this payment. This reduces the uncertainty of being paid.
   Since there is usually a greater demand for rented accommodation than
there is rented accommodation available, the key to successful ownership
of domestic properties is good management.
   Some property agents will provide a guaranteed income albeit at a
more modest level to ensure the property owner a return during the
course of his property ownership and these guarantees are as good as a
property agent.
  Most people are aware that the principle private residence qualifies for
Capital Gains Tax relief fund, there is no tax on sale of such properties.
   It is possible to claim principle private residence relief for a period up
to 3 years simultaneously in respect of two properties and this period
may be extended to 5 years if the property is rented out.
     Properties need not be in the United Kingdom for this relief.


   In the famous book Animal Farm there was a notice: “All animals are
equal, but some animals are more equal than others.” In company law a
good solvency margin may ensure that all creditors are paid, but on
insolvency some are certainly more equal than others.
  On liquidation a companies assets are distributed as follows:
  1.   Fixed Mortgage Creditors
  2.   Fixed Mortgage Debenture Creditors
  3.   Preferred Creditors
  4.   Floating Charge Creditors
  5.   Ordinary Creditors
  6.   Shareholders
This can be a Bank lending money to a company to buy premises secured
by legal mortgage, or a loan by a Finance Company to the company for it
to buy plant and equipment with the security being the asset bought.
   Goods on hire purchase are strictly speaking not owned by the
company, but by the Finance Company. The purchaser enjoys bailment of
the goods during the contractual period with an option to purchase at the
end and title does not pass to the purchaser until all the payments have
been made. By convention hire purchase debts are included in the bailee
company’s balance sheets and to this extent a hire purchase creditor has
quasi fixed mortgagee remedies.
   Leased equipment is owned by the lessor during the term. On
liquidation the goods usually go back to the lessor with little or nil
compensation to the lessee. By accountancy convention these are “off
balance sheet items” and such lease agreements are often entered into for
this very reason.
   Where a fixed mortgage creditor or quasi-fixed mortgage creditor has
insufficient realisation of funds from the assets that he was relying
for repayment, then he may prove as an ordinary creditor in the
liquidation or enforce any collateral security, e.g.: personal guarantees
from directors.


   It is a well established principle that the secured creditor can rely on his
security. If there is a power of sale in the mortgage1 the mortgagee can sell
the asset without the use of a licensed insolvency practitioner.
   It seems from recent cases that there can be a quasi-fixed mortgage on
book debts. Where this arises the creditor has priority over all the other
creditors apart from fixed mortgage creditors.
   E.g: a Finance Company lends 75% of the value of the book debts and
is paid when the company is paid by its debtor.
     E.g. Bank overdraft secured by book debts
    The importance of the distinction between a fixed and floating charge
is that the preferred creditors are paid after the fixed mortgage creditors,
but before the floating charge creditors. Obviously a creditor would prefer
to have the higher priority.
   How can one tell whether the security is of a fixed or floating variety?
With the exception of book debt debentures the test seems to be whether
on disposal in the normal course of business the security ‘bites’ the
proceeds. A floating charge is where the security does not’ bite’ until the
appointment of a receiver.
.£      wages per employee including holiday pay

1Law of Property Act 1925 S101
2The Government has recently relinquished its right to be a preferred creditor in respect
of Corporation Tax and VAT
                                               PRIORITY OF INSOLVENCY

The floating part of a security which is expressed to be a fixed and floating
charge, i.e.. a secured creditor whose security falls short of being a legal
mortgage or debenture
Trade creditors or secured creditors whose security has been sold leaving
a deficit, or a preferred creditor out of time.
Strictly speaking not a creditor at all. Within the shareholders as a group
there may be priority given by the Articles of Association in favour of
specific shareholders, e.g.: preference shareholders.
It can be seen from this list that the shareholders and unsecured creditors
are least likely to receive a payment where there is an insolvent
   A slight insolvency in the company’s balance sheet at the date of the
liquidation can be transformed into a massive deficit once the costs of the
liquidation are included together with interest running in favour of the
secured creditors and the loss which is invariably suffered when selling
assets on a forced sale basis. Additionally there may be other contingent
liabilities which are not included in the company’s balance sheet during
the course of it’s trade, eg: penalties under leases or redundancy pay for
long-serving employees.
   Where there are insufficient funds to pay all the creditors in a particular
group, then within that group the funds that are available are split pari
passu - e.g. if there are £50,000 of assets to pay £200,000 of liabilities, then
each of the creditors would receive 25p in the £.


 TAX SCHDULE               E                D                  F

                   SALARY            PROFIT             RENT

                   WAGE                                 INTEREST

                   BONUS                                DIVIDEND

NIC EMPLOYER       12.8%             NIL                NIL

NIC EMPLOYEE       11%+1%            8%+1%              NIL

TAX                22% to 40%        22% to 40%         19%


   As can be seen from the above chart the lowest rate of tax and
combined Government levies is dividends with the highest levy for a
basic rate tax payer being on salaries wages or bonuses which have a
combined levy of 44.8% within the middle-bad range of basic rate tax
payers and 53.8% for distribution up in the highest rate threshold with
distributions under Schedule D being somewhere between the two.
Historically there have been three tax schedules.

Schedule E
For rewards for employment which is where HMRC do not perceive there
to be a risk in connection with the reward from employment, the levies are
at the highest.

Schedule D
Until recently a sole trader or partner or an individual receiving
remuneration from following a vocation would be undertaking a risk of
some kind. If in business as a sole trader these are the normal commercial
risks and if partnership the extra risks associated with carrying on
business with others.

                                                     DIRECTORS DUTIES

Schedule F As It Was
This is regarded as an investment income, e.g rent, interest and dividends
as a return on capital invested and the tax treatment falls differently.
  The justification therefore of the difference between a higher levies on
employment income as compared with trade or investment.
   In recent years, a number of events have blurred the distinction
between the tax schedules and it is possible for an individual to
commercially restructure his affairs in order to minimise the liability. In
the famous words of Lord Clyde in the Case, the tax payer is not under
the slightest obligations so to arrange his affairs to allow the Revenue to
put the largest shovel into his doors.
   Some years ago, the introduction of LLP’s allowed individuals who are
running a trade to have the protection of limited liability thereby almost
eliminating the risk. If the business failed, it was the business that failed
and not the partners personal liability.
   A few years ago, the Chancellor encouraged thousands of businesses to
convert from sole trader or partnership status into limited companies by
introducing a £10,000 tax free band for companies which are incorporated.
    Although we appear now to be back where we were before this new
legislation was introduced, a window cleaner by way of example, earns
£25,000 per year through his one man band limited company and pays it
all out as a dividend, is not really receiving a return on capital

While some expenses can be claimed for individuals who receive income
under Schedule E, the test to satisfy is that the expense must be incurred
wholly, exclusively and necessarily in connection with the employment.
  Under Schedule D the only test which needs to be satisfied is that the
expenses has been incurred wholly and exclusively.


   An example is to look at an employed person who does some work
from home as compared with a self employed person, i.e comparing
Schedule E with Schedule D.
   The Schedule E tax payer will be unlikely to be able to claim travel
expenses to and from work, whereas the Schedule D tax payer can claim
travel between two work places.
  The usual argument used by HMRC in connection with an employee
not being able to claim travel costs to work, is that it is not necessary for
him to live any distance from where he works. He could live in the house
opposite the work premises and walk.
   The necessary test is not required to be satisfied under Schedule D and
therefore the regime is very much more generous.
   In setting up a business, consider a low salary just above the the lower
earnings limit or certainly one with a small amount of NIC being paid,
provides all of the benefits which come from paying Class 1 National
Insurance Contributions, including a full flat rate, old age pension,
sickness benefit, disability benefit and Job Seekers Allowance.
   In addition to this there is now the uplifted Second State Pension
payable to individuals who are contracted in which gives them a second
state pension based on £12,400.00 a year even though little or no
contributions may actually be being paid.
  The balance of remuneration could be taken as dividend on shares
owned in the company.
   A Partnership or LLP with of a Corporate Partner, and part of the
profits going to the Corporate Partner will ensure that dividends could be
distributed from the Corporate Partner to take advantage of the Schedule
F Schedule, ensure that sufficient income be retained in the partnership to
allow appropriate expenses to be claimed and the residue be taken as
Schedule D Case 1 income with the lower rates of NIC.

                                                     DIRECTORS DUTIES

What are the options?
1. For the car to be bought and paid for by the sponsoring employer.
   Under this regime, the individual pays the scale charge at 22% or 40%
   based on the Benefit in Kind as calculated. Additionally there is a fuel
   charge in connection with this benefit if it is taken.
   The sponsoring employer also pays Class 1 National Insurance
   Contributions at 12.8% on the Benefit in Kind.
2. For the car to be owned by the individual for him to claim the fixed
   profit car scheme rate of 40p for the first 10,000 miles and 25p per mile
   above that.
3. A company secretary or individual whose salary, together with the
   taxable value of the car does not exceed £8,500.00 per year does not pay
   tax on the car and the Class 1A rate does not apply.
4. For the vehicle to be provided in a context of a partnership in which
   case the total car costs are calculated and apportioned between private
   and business mileage. Business miles can include travelling between
   work places if an individual performs some duties at home. This
   makes, what would otherwise be personal travel a business expense.

Payment to Spouses
It has become common practise in recent years for spouses to receive
salary in order to make the husband not a higher rate tax payer. Unless
real commercial value is provided by the spouse, there is a risk that either
the Corporation Tax deduction will be disallowed or the income be
regarded as the income of the husband under the settlement legislation.

Dividends to Spouses
At the time of writing The Arctic Case is working its way to the House
of Lords, and it is likely that whatever the outcome is, the matter will go
to Europe. So far the tax payer has won in a Court of Appeal and
relatively large dividends paid on a low value share in a computer
consultancy company to the spouse with small salary been taken by the
husband for the work done by him as a computer consultant were not
regarded as a settlement.


     I. If The Revenue were finally to win, because the effect of judicial
        decisions is declaratory, dividends paid in such a structure, (which
        would not include all dividends to spouses), could be caught and
        then maybe a substantial tax liability in respect of these payments.
     II. If the tax payer wins the Case, it may be that the Chancellor will
         introduce retrospective legislation, (which he has been in the habit
         of doing) to impose a liability retrospectively.
     III.Care needs to be taken with spouse dividends to see if alternative
        structures can be found to deal with this.

                                                    DIRECTORS DUTIES

A company director has many duties and responsibilities. There are over
250 different offences for which a company director may be liable.
  A good part of this depressing list is included at the back of the
Companies Act 1985.

A private limited company needs to have at least one director and a
company secretary who may not be the same person.
   One may be a director of the company if one looks after the company's
business affairs, irrespective of formal appointment . Very similar
obligations are imposed upon "shadow director's". These are persons
defined as those " in accordance with whose instructions the company is
accustomed to act ."
  A director may resign at any time by giving written notice and the
company will then inform the Registrar of Companies. Resignation does
not prevent responsibility for actions taken whilst a director.
  1Under   a standard Articles of Association a director can be removed
from office by a resolution passed by 51% of the voting shares. This right
of the company does not prevent the removed director claiming wrongful
or unfair dismissal, and under certain circumstances may give rise to a
claim against his former shareholder directors under the quasi
partnership rules.

The Articles of Association may specify that a Chairman is elected to
conduct meetings who may have a casting vote if there is a tie.
   The Managing Director is normally the most senior director and there
is often provision in the Articles of Association to allow for alternate
   There is a legal presumption in favour of an outsider dealing with the
company, through it's director' that the director has the power to bind the
company through the doctrine of apparent authority, whether that
authority actually exists or not.


A company secretary's responsibility normally includes administrative
matters such as notices and proceedings of company meetings, keeping of
minutes and maintenance of statutory records and filing of returns to
companies house.

Recent legislation and court decisions have increased the burden on
auditors to verify the accuracy of the information in accounts of
companies they audit. The new rules which dispensed with the audit
requirements for certain companies are now more important since the cost
of an audit can be a significant item.
   Subject to certain exceptions and particular types of business an audit
is not required if a company's turnover does not exceed £5.5 .
  Dormant companies are in a position to exempt themselves from the
audit requirement.

A director has a significant number of responsibilities towards his
company, breach of which can lead to both civil and criminal liability.
Broadly breaches may be imposed by statute or arise out of the common
law obligations of directors in connection with their fiduciary duty to act
honestly and in good faith as well as having an obligation to exercise due
care and skill.
     In practice the main points are:-
1. to act in good faith for what is the best interests of the company, which
   means a balance between employees, creditors and shareholders
2. to use powers only for the purposes for which they were granted,
3. not to make a personal gain from their position as a director . This
   fiduciary duty can lead to a recovery by the company of any secret
   profit made.
4. To avoid a conflict between personal interests and those of the

                                                    DIRECTORS DUTIES

   A director needs to exercise reasonable care and skill, which appears to
mean that a person who has a particular professional or business skill will
be required to perform to a higher standard than one who does not.
   Powers of the Company are generally outlined in the Memorandum
and Articles of Association of the company. The old ultra vires rule is all
but extinct due to a number of changes and outsiders can assume that a
director acting within the powers for and on behalf of the company.
   In addition to the corporate liability a director may also be personally
liable on a contract if:-
1. the cheque payment for goods is not made out in the full and correct
   name of the company,
2. the contract was made on behalf of the company before it has been
3. a contract is made where the company's interest is not stated. If a
   director makes a contract which is beyond his actual authority on
   behalf of the company, there may not be liability on the contract itself
   but liability can arise for breach of implied warranty of authority.

Often the law governing transactions with directors also applies to
connected persons who would include a director's spouse, child , or step-
child below the age of 18, a corporate body with which the director is
connected or the trustee of a trust whose beneficiary includes the director
or any of the above. The rules also apply to a partner of a director or any
of the above persons.
    Additionally if a director has an interest in a contract with the
company it is voidable at the company's instance but only if he has failed
to disclose it to the board of directors. Criminal penalties arise from a
failure to disclose the interest.
   Shareholders may need to agree to major transactions which involve
the purchase or sale of assets.


These are generally prohibited by the Companies Act being unlawful in
the case of private companies and illegal in the case of public companies.
This status of loans may ironically make them irrecoverable by the
company. The rules extend to connected persons and shadow directors.
   A company may not make loans to a director of it's holding company
or connected persons.
     There are certain statutory exceptions:-
1) if the company is a money lending company then it can lend up to
   £100,000 on normal commercial terms,
2) inter group loans are allowed,
3) funds may be lent to meet business expenditure up to £20,000,
4) loans up to £5,000 are allowed.
   Particulars of loans need to be disclosed in the company's financial
statements, and may incur tax liability.
   The rules which apply to loan prohibition also apply to securities given
by the company in connection with loans or financial accommodation to

As a company director there is no automatic right to remuneration, it
needs to be approved in general meetings.
   There are also rules to prevent service contracts exceeding five years
without agreement of the members in general meeting.

A director may generally call a board meeting at any time. Some Articles
of Association provide for a quorum and for the minutes to be signed.
   Apparently under the Companies Act it is possible to have a meeting
of one person in a sole director company.

                                                     DIRECTORS DUTIES

Subject to the Elective Resolution rules a general meeting of a company
will be held annually to discuss the following matters:-
1) Approval of financial statements.
2) Appointment of Auditors.
3) Re-election of directors.
4) Declaration of a dividend.
   Where the elective resolution procedure is used to dispense with the
requirement to hold annual general meetings, details need to be sent to all
members of the company. Auditors and all members must vote in favour.

All meetings other than annual general meetings are extraordinary and
there are minimum notice requirements for such meetings, which may be
waived by 90% of voting shareholders in writing.

There are four types of shareholders resolutions; ordinary, special,
extraordinary and elective. Copies must be sent to the Registrar of
Companies when any special, extraordinary or elective resolutions are

These may be passed by an ordinary majority of the company subject to
any variation in the Articles.
   There is usually no special notice period for ordinary resolutions

This is often required to make major changes in the company and
standard Articles of Association require at least 75% of votes cast in order
to pass a special resolution although this may be waived if 90% of the
shareholders agree.


These are generally used in connection with a liquidation of a company
and require 75% of the votes cast.

These are used to dispense with shareholder protection mechanisms
including the requirement to appoint auditors and present accounts.
Elective resolutions can be superseded by an ordinary resolution.

A company is required to keep certain information at it's registered office:-
1) A register of members.
   This register of members lists the shareholders for the company and
needs to include, name, address, number of shares or stock, class of
shares, amount paid up on the shares, the date of registration of member
or the date of ceasing to be a member .
2) Register of directors interests.
   Directors and connected persons must disclose ,in writing, any
interests which he has in the shares of the company or debenture in the
company and any changes thereto.
3) Register of directors and secretaries
   This register needs to contain the following information for each
director/secretary; name, address, nationality, occupation, details of other
directorships held and date of birth for public companies.
4) Register of charges
  Where a company charges or mortgages it's assets the following details
need to be kept:-
     i.   date of creation of the charge,
     ii. details of the creditor,
     iii. amount
     iv. description of property charged

                                                     DIRECTORS DUTIES

   Form 395 or 400 would normally be submitted to Companies House at
the time of creation of the charge.
A directors responsibility is to ensure that the company keeps adequate
accounting records and this is not statutorily defined. The records need to
be kept for three years for companies house purposes, but it is prudent to
keep records for at least six years because of tax legislation. The directors
are also responsible for the maintenance and retention of the companies
Pay as You Earn, VAT. and Corporation Tax records and if this task is
delegated the responsibility still rests with the directors.
   A list of the financial statements is included in schedule 4 and 4A of the
Companies Act 1985. The most important requirement is that the financial
statement give a true and fair view of the company's activities.
Within nine months of incorporation a company must notify the Registrar
of the date to which the companies financial statements will be prepared
and this is known as the accounting reference date.
Every company has an obligation to submit an annual return which must
contain the following minimum information:-
1.  the company's name and registered number,
2.  the date to which the return is completed
3.  the address of the registered office
4.  the company's principal business activities
5.  the location of the register of members and debenture holders (if these
    are not held at the registered office)
6. the type of company
7. details of company's directors and secretary
8. details of company's issued share capital
9. details of past and present members, a full list is required every three
10. any elective resolutions in force.


The main taxes which affect a company director are Corporation tax, VAT,
and PAYE. UK companies are subject to corporation tax on their profits
and chargeable gains at a rate depending on the profit earned by the
company. For profits of less than £ 300,000 there is the small company rate,
currently 19%.
   Effectively now there is 19% under £300,000 profits with 30% tax above
£1.5m and a marginal rate of rate of 32.75% in the middle.
   There is usually a difference between the profit and loss account profit
and the taxable profit because some expenses are disallowed for tax
purposes and the treatment of depreciation in the profit and loss account
will be different from the amount allowable on capital allowance
calculations. If the company's year end is not the 31st March, then the
liability will spread across more than one tax year.

A company now has a responsibility to pay it's corporation tax within
nine months of the end of the accounting period. There are penalties for
not filing the requisite return on time or for filing an incorrect return. The
return needs to include a copy of the financial statements of the period,
the auditors report and the directors report. Also required are schedules
showing how the tax was calculated from the figures in the financial

                                                     DIRECTORS DUTIES

The rules on tax losses are complicated but generally speaking they may
be carried forward for six years and back three years and also losses
within a group can be used to offset tax liability on profits made in
another part of group.

If a company makes a chargeable gain it is liable for corporation tax on
that gain.

Subject to certain exemptions suppliers must register for VAT. if their
turnover for the relevant service is supplied or goods supplied exceeds
approximately £54,000 p.a.
   There is a penalty for failing to register for VAT. once turnover exceeds
the VAT. limit and there are numerous penalties for failures to comply
with the various rules in connection with VAT.

PAY AS YOU EARN (Nicknamed pay all you earn !)
Directors are responsible for administering PAYE payments for their
employees and the rules now include penalties for late payments.
    The obligation is on the company to register with the Inland Revenue
if there are employees. There are numerous rules in connection with the
operation of a PAYE scheme as well as the operation of the statutory sick
pay and the statutory maternity pay arrangements.


    A new employee would normally have a P45 from his previous job
which needs to be sent to the tax office so that they can take into account
the tax already paid in the tax year to date . When an employee leaves it
is important that he is supplied with a P45 in order to show the employees
paid to date in the current tax year and the tax deducted.

Any employee whose emoluments exceeds £8,500 (which includes the
value of the benefits listed) per year, is also taxed on these benefits. The
following is a non-exclusive list;
     use of a company car
     private medical insurance
     loans with the beneficial interest rates
     luncheon vouchers
     use of a company credit card
     living accommodation
     mobile phone
     goods and services provided free or below market value
     entertaining or free or subsidised drinks
     travel expenses

The company must submit form P35, the employers annual statement and
declaration certificate and P14, end of year return, together with P11 D
benefits and expense payments.

An employer must not discriminate on grounds of race, sex or marital
  If more than twenty people are employed there are rules to have a
quota of disabled people.

                                                    DIRECTORS DUTIES

   A spent criminal conviction cannot be grounds to refuse to employ an
  Although there is no legislative requirement for a written contract of
employment an employer must give an employee evidence of terms of
employment in a written statement within two months of the start. This
needs to include details of the employment.

Except for unusual circumstances most employee are entitled by law to a
minimum period of notice after the first month of service which is one
weeks notice for each year up to a maximum of twelve weeks .

Generally an employee with more than two years continuous service is
entitled to redundancy pay on dismissal which does not apply to
employees below the age of 18 or over age 60 or 65.

Employees who are pregnant have additional rights which include:-
  maternity leave
  maternity pay
  time off for ante-natal care
  to be offered suitable alternative work during pregnancy
  able to return to work after pregnancy.

Generally employees with two or more years of employment have a
statutory right not to be unfairly dismissed. The rules are complicated but
an important consideration for the employer is that not only must the
reason for the dismissal be fair but the method by which it is carried out
be seen to be fair as well. There are normal warning procedures required
in order for the employer to successfully avoid being liable for unfair
dismissal even if the reason for the dismissal itself was fair.


A company may not refuse to employ someone or terminate the
employment of someone who joins a trade union or refuses to join a trade
Directors are responsible for providing a safe system of work for their
staff and if there are more than five employees there is a requirement to
provide a written statement of the company's health and safety policy.
   Office and shop premises need to be registered with the local authority
who will be notified of any serious accident which occurs on the premises.
The place of employment needs also to comply with certain minimum
requirements which include:-
1) at least 40 square feet of space per person
2) adequate toilet and washing facilities
3) weekly cleaning
4) adequate lighting, heating and ventilation
5) a first aid box, first aid facilities and staff with first aid training.
Additionally places of employment need to comply with fire regulations
and a certificate from the fire authority is required if there are more than
twenty staff.
Some forms of insurance are required by law, e.g. employers liability,
public liability and third party injury liability in respect of motor vehicles.
   It may also be prudent to insure against product liability, property
liability and insurance against consequential loss.
If a company keeps personal data, computer, it is subject to the Data
Protection Act and must register.
     The following principles apply:-
1) data must be obtained fairly and processed lawfully

                                                    DIRECTORS DUTIES

2) personal data must only be held for specific and lawful purposes
3) personal data must not be used or disclosed in any way except for the
   purpose for which it is held
4) the amount of the data which is held should be adequate, relevant for
   it's purpose but not excessive
5) the data must be accurate and up to date
6) the data must only be held for as long as it is required
7) an individual has a right to be told of data about him to have access


Usually the reason why business men trade as a limited company rather
than some other business format is because they wish to protect their
personal assets from their business obligations. A limited company
properly run will normally achieve this, but there are still many situations
where a director, sometimes irrespective of any shareholding he may hold
in the company, may be held accountable in whole or in part for the
company’s debts and other obligations.
   It is important for shareholder/directors to be aware of these
    The following are examples of where personal liability can arise and
it is not an exhaustive list.
   1) If the directors deal with outsiders and do not make it clear to those
outsiders that they are acting for the company they may incur personal
liability. This is also true if they contract in the company’s name, but act
in excess of their authority to represent the company .
    When discussing contracts with outsiders the Director needs to make
it clear to the other party that the contract will be entered into by the
company, not by the director personally. If this is not done and the other
party believes that he is contracting with a director and not the company
the contract will be a personal one and so will any liability under it.
   From a practical point of view the way to avoid this is for all
discussions to be followed up by a letter on the company’s notepaper
stating that the individual is acting for and on behalf of the company.
   2) Where there is a bill of exchange, or a cheque from a clearing bank
signed by the director, it needs to be clear that such an instrument is being
signed by the director in his capacity as director for the company. There is
case law to suggest that a director may be liable on a bill of exchange
where the wording on the Bill of exchange is not exactly that which
appears of the certificate of incorporation of the company. Where there is
a discrepancy it may also expose the officers of the company to criminal
liability and a daily fine.

                                                   DIRECTORS LIABILITIES

   To avoid this difficulty it is only necessary to ensure that Bills of
Exchange i.e. cheques, and other documents are in the identical format as
that on the certificate of incorporation and that bills of exchange or
cheques have in addition the words “per pro” or “for and on behalf of”
the name of the company.
    If an officer of the company or a person acting on its behalf signs or
authorises1 a signature on a bill of exchange, policy note, cheque or order
for money or goods in which the name of the company is then not set out
in full, he commits an offence punishable by fine, but he is also personally
liable unless it is paid by the company.
   In these circumstances, personal liabilities arise not only for the
signatory, but also by the person who authorises the signatory.
    3) A director may also be liable on a contract personally where breach
of warranty of authority arises. This situation is where although the
contract is expressed in the company’s name he does not have the
authority of the company to enter into the agreement as its agent. If
proved the liability is not on the contract itself, but the claim is against the
director for damage for breach of this implied warranty of authority and
the amount recoverable is the value which the contract would have been
if it had been binding on the company.
   A safer route for a director is to ensure that where obligations are
entered into that there are appropriately minuted resolutions agreeing to
the proposed arrangements as between the directors
   4) There may be directors liability on liquidation of the company by
virtue of section 2 (13) of the Insolvency Action 1986 if in the course of
winding up a company, whether by order of the court or voluntarily, it
appears to the court that the company’s business has been carried on with
an intent to defraud creditors. The court may declare a person liable to
make such contributions to the deficiencies of the company as the court
thinks proper without any limitation of liability.
   This covers fraudulent liability and not losses arising through
mismanagement. This is not a problem for companies whose business is
conducted honestly.

1   Companies Act 1985 S349


      5) A greater trap for the unwary are liabilities for wrongful trading.
   A court may now order directors, former directors or shadow
directors2 of an insolvent company to contribute to the losses when it is
wound up.
      Wrongful trading arises where
a) the assets of the company at the commencement of its liquidation were
   insufficient to pay debts and other liabilities and cost of liquidation in
   full and
b) it is shown at some time before the winding up commenced while he
   was a director of the company he knew or ought to have realised that
   there was no reasonable prospect of the company was going to avoid
   going into insolvent liquidation.
   In these circumstances, directors must show and can prove, after
having discovered that the company would go into an insolvent
liquidation, he took every step with a view to minimising the loss to the
company’s creditors which he ought to have done.
   It seems that this liability can arise not only there is a negative balance
sheet at the company’s year end, but also where current assets are
exceeded by current liabilities even if the company is solvent overall.
   Up to date accountancy information is vital to identify this situation
early. A decision can then be taken whether to continue trading. It may be
possible to capitalise a loan account or inject further cash into the
company to remedy the position.
    Another option is for the shareholder/director in this situation is to
inject funds into the company to remedy the position. More share capital
is a possible route. A director's loan repayment on demand may not help
since it is a liability, but a long term loan may help as this is not a current
    6) The opportunity for individuals to commit a breach of the
Company’s Act is considerable. Schedule 24 of the Company’s Act 1985
lists two hundred offences, but the practice has been to abstain from
prosecution except in flagrant cases or where the offence has resulted in
damage to others or resulted in fraud.

2   A person in accordance with whose instructions a company is accustomed to act

                                                  DIRECTORS LIABILITIES

Apart from statutory liabilities a director may also incur personal liability
by agreeing to support with a personal guarantee or other collateral
security a transaction entered into by the company. The effect of this is
that if the company does not perform the obligation which is the subject
of the guarantee, then the director may find himself liable. The most usual
situation is where the company borrows money or where it enters into a
lease and the collateral support is required.
   Where the company leases land and the directors provide a personal
guarantee (which is usually an indemnity to enhance the lessors position)
then consideration needs to be given as to whether the lease would be
better taken personally. The reason for this is since the director is
personally liable on the lease if the company does not perform, he might
as well take the lease personally and at least enjoy the benefit of
possession. If a limited company enters into a lease which is guaranteed
by the shareholder/director and the company goes into liquidation, then
the lessor can still claim against the guarantor under the lease, but the
guarantor has no right to occupy the premises and neither may the
company if this lease is disclaimed by the liquidator. In these
circumstances there is a good case for personal ownership of the lease
since at least there is the opportunity for the guarantor to take a personal
benefit should the company fail. In the meantime the company can be
allowed to occupy the premises with the consent of the lessee. It is rare for
the landlord to object to this arrangement.
    As previously outlined, where there is a bank facility with a personal
guarantee, it is important that the bank are given the opportunity to make
a full recovery against the company first with reliance on the guarantee
being a secondary security. In this connection, completion of the registration
formalities with regard to the debenture is important and it is in the interest
of the shareholder/director to ensure that this is correctly done.
   Where liabilities are joint and several with others the creditor can claim
all against one and it would be better to have in place some formal
arrangements as to the split of liability in the event of such a claim being
   With regard to hire purchase or lease for company vehicles, the same
rules apply. Where the company is the purchaser, then it is the company
which has the rights to the vehicle during bailment, in accordance with
the terms of the agreement.


If the company fails, then normally the finance company can reclaim the
vehicle, sell it and claim unpaid rentals from the guarantor. It is
sometimes possible for the vehicle to be purchased personally and for the
limited company to be charged a monthly sum to cover costs. This has
advantages in that if the company fails it does not affect the transaction
between the finance company and the director borrower.
   Personal ownership does not give rise to a benefit in kind charge levied
on the director as an employee of the company nor to the company for
Class 1 A National Insurance Contributions. However, the director may
not be able to make a full recovery of his costs in connection with the
asset, so it is a balanced judgement in each case and a full appraisal is
advisable to ensure that the optimum decision is taken.


Much of what has been said about the UK also applies in Ireland. 1
    It is important that in tax planning that the tax tail does not wag the
lifestyle dog.
   Additionally because of general anti-avoidance legislation for Tax in
Ireland of a general nature, planning needs to be done ahead of time.
   It is possible for businesses to be passed on to specified family
members under circumstances where no tax is payable providing certain
conditions are fulfilled in terms of duration of ownership of the business
after the succession has taken place. This option can usually be explored
as it relies upon settled principles which are well established.
      Options on retirement from a business include;
   Becoming a “PT” A perpetual traveller, a person who for tax purposes
is not resident anywhere. This is easier for Irish than for UK residents
because of the residency test. A person in Ireland, for 183 days in a
calendar year, the defining point being where are you at midnight, is
regarded as an Irish resident for that calendar year. Additionally, a person
who is in the Republic of Ireland at midnight for 280 nights in any 2 year
period will also be regarded as an Irish resident. It follows, therefore that
a person who is in Ireland for periods shorter than this is not resident for
Income Tax purposes.
   A much longer period away is required in order to avoid taxation
liability in Ireland in respect of gains and this is true in the UK.
   For most of the European countries like Spain and Portugal for
example, require 183 days of residence before a person can become
residence for tax purposes.
   A person will not be regarded as resident in the UK for tax purposes if
he is in the UK less than 183 days based on the tax year running from
April to April or an average of 90 days per annum over a four year period.
   The person therefore, whose lifestyle fits spending time say in Ireland
for 135 midnights, Spain or the Canaries for 170 days and the rest
somewhere else, which could include the UK, would not be regarded as
tax resident in any of those places for income tax.

1   To be absolutely clear this applies to the Republic of Ireland


  With the growth of low cost travel and cheap internet communications,
many parts of the business can be run from anywhere and this is an option
which some clients have taken up over the last few years.
   An Irish company which pays a dividend to one of the countries with
whom Ireland has a double tax treaty, can pay such dividends gross
without Withholding Tax. The liability to income tax then depends upon
the income tax position where the person is resident. e.g., Canada has a
feature to encourage immigration that new residents are not liable for
income that arises outside of Canada for the first 5 years of residence and
so does Spain for employment income.
   In Europe there are four countries for whom there can be no income
tax. These places are Sark, Andorra, Monaco and Gibraltar. Under the
Gibraltar High Net Worth Scheme, a fixed fee is paid to the Gibraltar
Government and there is a minimum annual residence requirement of 30
days and property ownership or rental in designated areas

   A person therefore who is Irish resident and whose holding company
sells its subsidiary, may not incur a tax charge on that disposal by the
holding company.
   A dividend distributed from the company under circumstances where
there is no withholding tax may also make such a payment without
incurring local income tax as can be seen. Such an arrangement may
convert what would otherwise have been tax liability on the disposal of
shares of the business direct into one where a gain is effectively converted
into an income payment of dividend.
   A person using the holding company route of disposal of the business
therefore, may shorten the period that needs to be spent overseas in order
to avoid Capital Gains Tax on the disposal from over 5 years with some
uncertainty with that to 2 years with certainty.
   Consider becoming a non resident permanently or at least for two
years to facilitate the tax free disposal of a business.

                                                      IRISH PROSPECTIVE

It is often not appreciated in Ireland, how generous the pensions regime
is for money purchase schemes as compared with the rest of Europe.
   In most jurisdictions, there is either a requirement for the fund to be
used to buy an annuity which invariably involves capital forfeiture on
death or there is a 40% death tax with significant strings of how the
residue of the fund can be used.
   Although there was some tightening up of the rules in December 2005,
with particular reference to a maximum cap of ¤5m euros per person and
a minimum draw of when the pension is in the approved retirement fund
phase of 3% per annum from 2009. It is certainly better for example than
the U.K., where even after ‘A’ Day April 2006 the rules changed and
better than any other European countries which still have the annuity
   A self administered Irish Pension Scheme can now invest in property
and borrow up to 70% on a non recourse basis for a maximum of 15 years.
There is a tax allowance for the pension contributions made and there is
no income tax or Capital Gains Tax on disposals in the fund.
   Up to 25% of the value of the fund may be withdrawn tax free and the
residue can be invested in a very wide range of investments.
   For Irish based Approved Retirement Funds (ARF) providers, there is
a 20% Withholding Tax on payments made to beneficiaries.
   On death there is a 20% overall tax payable in connection with the
residue of the fund which is half the UK rate and again there is no Capital
forfeiture as there would be with an annuity.
   It is unclear whether an ARF provider outside of Ireland is required to
deduct Withholding Tax where payments are made to non residents. If
this is the case and a person becomes non resident as outlined above,
could have no Irish liability to tax in respect of distributions from the ARF.

Unlike Irish companies, there is no Withholding Tax on dividends.
 It follows, therefore that an Irish business owner who sells his business


and becomes non resident for income tax purposes and moves to a place
where there is no local income tax liability for him, could distribute the
whole of the reserves of the holding company as a dividend without a tax
charge and empty the ARF on the same basis,

A UK small administered pension scheme has 3 investment features
available to it which are not available in Ireland.
     i. The pension fund can rent to the sponsoring company or connected
        party, property in the fund.
     ii. The pension fund may lend up to a 1⁄4 of its value on a secured or
         Unsecured basis to the sponsoring company.
     iii. The pension fund may take an equity position from the sponsoring
          company. This relief is more useful in Ireland than in the UK since UK
          residents may pay as little as 51⁄2 % Capital Gains Tax on disposal of
          their interest in business trading concerns, whereas the Irish rate is 20%.
   There is a treaty between UK and Ireland to allow English pension
schemes to be transferred to Ireland and these rules have become more
relaxed since A Day in the UK, i.e. April 2006.
Use a UK scheme as above and export to Ireland later.

Rules in Ireland prevent individuals using Irish companies to receive
investment income, e.g. rent, and being taxed at the lower rate as
compared with the higher personal rate of 42% i.e surcharge.
   In the UK the Corporation Tax rate for smaller companies profit, i.e. up
to £300,000 per year is 19% but there is no surcharge.
   Property, land and buildings bought in an Irish company would likely
pay 20% tax on disposal, (possibly 25%), and the residue on distribution
to the shareholder director can either be by way of dividend, bonus or
windup, a windup being a popular route if possible due to the tax being
restricted to a further 20%.

                                                    IRISH PROSPECTIVE

  An alternative to avoid this double taxation, is for the property to be
owned personally.
   Although there is a full tax deduction for interest in connection with
borrowings to purchase the property, any capital repayments would
suffer a combined tax and PRSI costs of 47%. 1

Suppose a partnership were setup to buy an Irish or other property, the
capital of the partnership is stated to be 80%/20% to the individual and
UK company respectively.
   The revenue of the partnership is stated to be 20% in favour of the
individual and 80% in favour of the company.
On normal partnership principles, the revenues are apportioned before
the application of tax. This means that 80% of the rents are apportioned
to the company whose tax rate is only 19%.
   If the loan to purchase the property is taken in the name of the UK
company then to the extent of the debt reduction this is taxed at only 19%
instead of 47%.
   At the end of the venture, the individual can buy out the UK company
share of the property but the partnership enters into an arrangement to
sell in the usual way.
   A 1m Euro loan, fully repaid on the above mechanism, could have a
tax reduction from 47% to 19%, i.e. from 470,000 to 190,000 which is a
significant saving.

Where a new venture is being considered, a separate company for this
may well be a better mechanism.
After a period of time, if the value of the company can be substantiated, it
can be sold to the original company with a 20% tax charge. If this figure
were a 1m Euro this would mean that there is 200,000 of euros of Capital
Gains tax but the residue of 800,000 can be withdrawn over a period of
years, tax paid in lieu of what might otherwise have been 47% combined tax
and PRSI cost for a shareholder director extracting funds of salary.

1   R


   Because of the new rules introduce in 2004, an Irish company which
sells another trading company does not pay tax on the proceeds providing
certain modest criteria is satisfied.
   There is, however, a provision to this exemption where there is a
substantial value attributable to Irish property in the company being
disposed of.
     This restriction does not apply to UK Holding companies.
Strategy 1
Hive-up property from trading company to holding company in order
that disposal continues to qualify for exemption.
Strategy 2
If acquiring a business or developing a new business or product consider
setting this up in a separate company, initially with a view to later
disposal to take advantage of the above rule.

As in the UK, the Irish Revenue Commissioners allow certain approved
share schemes to be implemented. It is felt that a wider share ownership
amongst employees would encourage a more positive work contribution
from employees and a mechanism can be introduced to assist in
recruitment and retention of key employees which is often so important
to the success of any growing business.
   Shares provided can be free of income tax and PRSI and later disposed
of on normal Capital Gains Tax principles.

A director shareholder is often in difficulty with loans because of the
following four rules.
     1. The loan is unlawful because it is breach of fiduciary.
     2. There is a Corporation Tax charge in connection with the loan made
        by a close company, which is not repaid nine months after the year
        end. 1

1A close company is a company which is defined as having 5 or fewer participators or
where all the shareholders are directors.

                                                    IRISH PROSPECTIVE

  3. There is a Benefit in Kind Charge on the notional interest at the very
     high rate of 11% for most loans.
  4. Taking loans which exceed 10% of the value of the company can be
     a criminal offence for the borrower.

    It is possible to construct an arrangement whereby an advance is made
without breaching any of these four rules, i.e. tax charge of effectively
121⁄2% .

Consider such a loan as an alternative mechanism to extract funds from
the company other than normal remuneration

The use of tax treaties can often avoid a tax liability which would
otherwise arise.
   Whilst the famous case of the Irish tax payer who avoided tax on a
  250m disposal at 20%, i.e. 50m, partly because of the Irish Portuguese
Tax Treaty at the time, together with the fact that there was no kitchen in
his house, has been blocked by anti-avoidance legislation, there are other
opportunities which make use of tax treaties.
   The main advantage of tax treaties for Irish residents is that being
international law supersedes national regulation and will overrule any
internal statute in relation to tax avoidance.
  Sometimes a lower tax rate is more achievable than none.
   A UK resident for tax purposes, making a disposal of an Irish business,
would have a maximum tax charge after 2 years of ownership of the
shares of 10%, which if the numbers are large might make a worthwhile
savings particular since the value of Irish land can be included in this.


A company is a separate legal entity from the members and as such has
the capacity to enter into contracts, sue and be sued, in its own name. This
is quite different from a partnership. For the avoidance of doubt if three
people share a joint business venture trading as a limited liability
company, there are, in law, four persons, three natural and one corporate.
It is the corporate person in the corporate name which trades with
customers and the contracts made for the supply of goods and services are
between the corporate person and the outsiders.
   The case which clearly established the independent legal personality of
the Company was Salomon v A. Salomon and Co. Ltd. 1897.
   The facts: Mr A Salomon had been in business as a leather merchant
and boot manufacturer for some years when he decided to form a limited
company to purchase his business. He wanted to ensure that the business
remained under his control so after the company was formed, he and six
other members of his family took a share each, whilst he and two of his
sons were appointed as the directors.
   The new limited company then purchased the existing business from
Mr A. Salomon for £39,000 (approx.). This exceeded the balance sheet
asset value of Mr Salomon’s business by approximately £8,000.
   The company issued 20,000 £1 shares to Salomon, paid him £9,000 in
cash and provided a debenture to Salomon for £10,000 being the balance
of the purchase price.
   A year later the limited company went into an insolvent liquidation
with a deficiency of £11,000 and the question had to be decided as who
would take priority.
     1. Could Mr Salomon rely on his debenture and claim that he be
        repaid first as a secured creditor?
     2. Would the unsecured creditors succeed in having the debenture set
        aside because as the liquidator had claimed he sold the business to
        the company or was an undisclosed principal?

                                                              SOLOMON CASE

    3. Should Salomon be ordered to indemnify the company, or that sums
       due to him be postponed until the companies other creditors were
The trial judge held that the subscribers to the Memorandum and
Articles of Association held their shares as nominees for Solomon and
    “It seems to me, however, that when on considers the fact that these
shareholders were mere nominees of Mr Salomon and he took the whole
of the profits and his intention was to take the profits without running the
risk of debts and expenses, one must also consider the position of the
unsecured trading creditors whose debts amount to some £11,000. As I
have said, the company was a mere nominee of Mr Salomon and therefore
I wish if I can to deal with the case exactly on the basis that I should do if
the nominee and so the company had been some servant or agent of Mr
Salomon to whom he had purported to sell his business.”
The Court of Appeal on hearing the case held:
   “The company’s acts were intended to prefer the privilege of limited
liability only in the case where there were genuine independent
shareholders who had combined their capital to enable the business to be
started and not upon an individual who was the real sole owner of the
business and merely found six nominees to join with him in going
through the formalities of incorporating the company.”
In the words of on judge:
   “It was never intended that the company to be constituted would
consist of one substantial person and six dummies and the nominees of
that person without any real interest in the company. The Act
contemplated the incorporation of seven1 independent bona fide members
who had a mind and a will of their own and were not merely puppets of
the individual who adopting the machinery of the act carried on his old
business in the same way as before when he was a sole trader.

1Seven shareholders were then needed for this company. A sole shareholder company is
now allowed.


   It followed from this that the company’s creditors were entitled to
relief by requiring Solomon to indemnify the company against its
liabilities and contribute to the company’s assets with a sum sufficient to
enable it to meet its liabilities in full. This, of course, goes further than
merely saying that the debenture is invalid. It actually imposes a further
liability on the shareholder to indemnify the company against all of the
debts of the business.
However, another judge in the case said:
   “I do not go so far as to say that the creditors of the company should
sue Solomon personally. In my opinion they could only reach him
through the company.
   One of Mr Solomon’s liabilities is to indemnify the company and this
was is in my view the legal consequence of the formation of the company
in order to attain a result not permitted by law. The liability does not arise
simply from the fact that he holds nearly all the shares of the company.
His liability rests on the purpose for which the company was formed and
the way it was formed and the use which he made of it.”
   The House of Lords unanimously reversed the decisions of the High
Court and Court of Appeal and decided that Solomon was under no
liability to the company or its creditors, i.e. that the principle of separate
legal identity was properly established and further that providing his
debentures had been validly issued as was the case, then he was entitled
to benefit from the security that they provided. The arguments put
forward by the judges in the Court of Appeal and High Court were
overruled. The actual judgement of the House of Lords is reprinted here.
   NB: The effect of the decisions of the court of first instance and the
Court of Appeal was to make A. Solomon personally bankrupt. After
winning his battle in the House of Lords with the benefits of a paupers
petition he died intestate.
   The message of this is that being morally or legally right does not
necessarily prevent financial catastrophe as the author knows to his
personal cost.


Company ABC Ltd has made regular profits and the shareholder/director
takes £20,000 per year as a salary.
   In Table A the profits have been allowed to build up in the company as
reserves. In Table B the profits have been declared as a dividend to the
extent of £100,000 net over the period.
   Since the dividend was shared between the director and his wife and
neither are higher rate tax payers there is no further tax liability for them
in respect of these dividends.
  The company deducts Advanced Corporation Tax from the dividend
and offsets this against mainstream Corporation Tax and therefore is no
worse off except having to pay Corporation Tax in advance by nine months.
   In Table B the directors loan account now has £100,000 more in it than
the directors loan account in Table A.
These funds:-
   1. may be withdrawn, tax paid, at any time the company can afford it.
   2. may be secured by mortgage/ debenture in favour of the director/
   3. may, if the business is sold by the company, be drawn out tax paid
      instead of being treated as a distribution for tax purposes at that
   The advantages of the dividend strategy are:-
   1. Protection of a debenture in the event of financial misfortune to the
   2. The ability to make full use of personal allowances on a year by year
      basis to reduce the tax burden for the shareholder/director and
   Where a business is sold and the purchaser buys the business from the
company (as opposed to the shares in the company from the vendor) a
maximum dividend strategy as outlined will minimise tax liability for the
shareholder/director when funds are distributed after sale.
   NB: Prospective business purchasers often prefer to buy the assets (as
opposed to shares) so as to avoid any problems with vendor company in
terms of unknown financial antecedents.


ABC LIMITED          Turnover £2,000,000 per annum (excluding VAT)
Balance Sheet as at 31.03.06 (with explanatory note)
Building                                                       250,000
Plant and Vehicles                                             100,000
Debtors                                     350,000
Work in Progress and Stock                   50,000
Trade creditors                             260,000
Wages including holiday pay                  30,000
Bank overdraft                               75,000
                                            365,000             35,000
Finance Company (loan for building)         150,000
Directors Loan Account (funds put in
initially and undrawn dividends)             20,000
Pension Fund Loan                            80,000            250,000
Shares 10,000 x £1                           10,000
Profit & Loss Account                                          135,000

NB The Shareholder/Directors have £235,000 invested in the company
directly and indirectly, i.e.
Shareholder Funds                           135,000
Director Loan Account                        20,000
Pension Fund Loan                            80,000

                                   TAX AND PROTECTION STRATEGY

ABC LIMITED          Turnover £2,000,000 per annum (excluding VAT)
Balance Sheet as at 31.03.06 (with explanatory note)
Building                                                       250,000
Plant and Vehicles                                             100,000
Debtors                                     350,000
Work in Progress and Stock                   50,000
Trade creditors                             260,000
Wages including holiday pay                  30,000
Bank overdraft                               75,000
                                            365,000             35,000
Finance Company (loan for building)         150,000
Directors Loan Account (funds put in
initially and undrawn dividends)            120,000
Pension Fund Loan                                              350,000
Shares 10,000 x £1                           10,000
Profit & Loss Account                        25,000             35,000

NB The Shareholder/Directors have £235,000 invested in the company
directly and indirectly, i.e.
Shareholder Funds                            35,000
Director Loan Account                       120,000
Pension Fund Loan                            80,000


It is useful to compare the recovery made by shareholder/directors on
insolvency of a company where the funds are involved:
     a)   Mostly as loans
     b)   Mostly as secured loans
Supposing ABC Ltd experiences a bad debt of £50,000, and is trading
   It is now technically insolvent in that it’s current assets are exceeded by
its current liabilities and there is no reasonable hope of the position
   The directors, in order to prevent being liable personally for wrongful
trading in the event of a subsequent liquidation, decide to put the
company into voluntary liquidation.
   It is assumed that an above average recovery is made on disposal of
assets in that liquidator realised in the following:
     70% of fixed assets
     60% of book debt
     20% of stock
The liquidators costs are                                           25,000
30% loss on fixed assets                                           105,000
40% loss on book debts + £50,000 bad debts                         180,000
80% loss on stock and work in progress                              40,000
Shareholders funds                                                  35,000
Overall deficiency                                              £(315,000)

Fixed 70% (Building + Plant)                                       245,000
Current Debtors 60% (excluding bad debts)                          180,000
Stock and work in progress 20%                                      10,000

                                          INSOLVENCY COMPARISONS

                                £000          £000
Available for distribution                                    435,000
Less: liquidation costs                                        25,000
Bank                                          75,000
Finance Company                              150,000
Wages                                         30,000
VAT                                                            30,000
Less: redundancy costs                        20,000
Lease prepayments on plant                    24,000
Amount available for ordinary creditors                       111,000
Directors loan account                       120,000
Pension Fund loan                             80,000
Trade Creditors                              260,000

Ordinary Creditors therefore get approximately 24p in the £

Shareholder /Directors suffer losses of
Share Capital                                 10,000
Profit & Loss Account                         25,000
Directors Loan Account                        91,200
Pension Fund                                  60,800
A recovery of £48,000 out of £235,000


                                           £000               £000
Total available for distribution                          £435,000
Liquidators expenses                                        25,000
Less: Bank overdraft                      75,000
Finance Company                          150,000

Lease prepayments                                           24,000

Secured Directors Loan
Account and Secured Pension Fund Loan                      200,000

Loss on loan recovery                                     £(39,000)

Nil for preferred creditors
Nil for the ordinary creditors
Nil for the shareholders

A recovery of £161,000 out of £235,000

NB Assumes Directors Loan Account and Pension Fund Loan are secured
by fixed mortgage


For the most part rewards in life belong to the conscientious goal setters.

Consider the following question which can usually be answered once
every 6 months:

“If we were to meet here today in three years time, what has to have
happened in your business and personal life for you to be comfortable
about your progress”?
It is important not to confuse ideals with goals. The goal is measurable
and one can put a time limit on it.
Ideals are used to motivate and sustain ones through difficult periods.
It has been said that there are no realistic goals, merely unrealistic time-
Top performers in some of the highest paid activities, e.g. entertainment
and sports have a coach, someone with whom you can meet or talk on a
regular basis and keep you on track with your chosen goals.
I have been involved in the Strategic Coach programme, visiting the USA,
once every 90 days for the last 13 years, but more recently the programme
is now available in London starting in 2006. Information about the
programme is available on the Strategic Coach Website.
Dan Sullivan, the founder of the Strategic Coach has some useful products
and two of my favourites are called the Gap and the Ten Times Mind
These knowledge products are available for purchase.




(as was)

Income type

Employment under E, Trade is under D and Investment is under F. eg
under E we have got salary wage bonus, D we have got profit and F we
have got rent interest dividends.
First column, NIC employer/ NIC employee tax and expenses.

Down the colums under schedule E we have got 12.8%, 11% plus 1%.
PEN 22 and 40%, expenses sum

Under D we have got nil 8% plus 1%, 10 and 22 and 40% best.

                            BUSINESS AND PERSONAL REVIEW


Dr K Cooper:                  Any book with Aerobics in the Title.
Dr Herbert Benson:            The Relaxation Response
Dr Hamer:                     Vitamin C and Your Heart
Dr. R. Reiter                 Melatonin
Dr. R Atkin                   New Diet Revolution (Not Ideal Shape)
Dr. R. Atkin                  Age Defying Diet (Ideal Shape)
Chris Crowely & Henry Lodge Younger Next Year

Dr M. Csikszentmihalyi:       Flow- The Psychology of Optimal
Dr David Viscot:              Risking
Dr Albert Ellis:              A New Guide to Rational Living
Dr Albert Ellis:              How to stubbornly Refuse to make
                              yourself Miserable about anything
                              business Related

Michael Apter:                The Dangerous Edge (The psychology of
Joel Kurtzman:                The Death of Money
Dan Sullivan:                 The Great Cross Over (416 5317399)

For anyone whose business involves sales or marketing, one of the Aaron
Hemsley Programmes would be beneficial, e.g. The Psychology of
Maximum Sales Performance or Assertive Selling (714 8326109)


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