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Outdoor Dreams Limited's Adoption of Model Articles

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To: Simon Dexter (Simon.Dexter@ulaws.com)

From: [-----]

Sent: 5 January 2021

Subject: Outdoor Dreams Limited (ref 15962.45)

Dear Simon,

As Outdoor Dreams Limited is a company that has adopted the model articles, the Companies Law Act 2006, and the Model Articles for Private Companies Limited By Shares as set out in Schedule 1 to the Companies (Model Articles) Regulations 2008/3229 provide the applicable law in this case. As per this, the answers to the first question, that is, the resolutions to the passed for effecting the decision, are provided in point I below. The answers to the second question, that is, applicable GST is provided in point II below as per the relevant taxation laws in the UK at this time.

  1. Resolutions to be passed for effecting the relevant decisions:
  2. Resolutions to buy Celia Vickers’ business, Radagast Woodcarvery (‘RW’):

    For the purpose of purchasing RW, resolution needs to be passed approving the decision of the Board to acquire the business by the members’ meeting as the decision is adopted in the directors’ meeting and needs to be approved by the members. This decision can be taken by the directors as per the Article 3 of the Model Articles as per the decisions taken for the management of the company’s business. For the purpose of taking this decision, the directors can call a board meeting and the decision to purchase the new business can be taken if the majority of the directors agree to make the purchase. Article 15 of the Model Articles require that such a decision should be recorded and the record of the decision should be kept for a minimum of 10 years. An ordinary resolution can be passed to approve of this decision by the directors

    Whatsapp Resolutions for offering Celia 25,000 ordinary £1 shares (each worth £5) and 5,000 £5 cumulative non-participating 5% preference shares, in return for the business:

    The authority to allot new shares is vested with the directors; however, shareholder authority is required in some cases under Section 549 of the Companies Act 2006. Such authority is needed in case of private companies with more than one class of shares as per Section 551. This action would also require the amending the articles of association to reflect the offering of multiple share classes to Celia where she is offered both ordinary shares and preference shares. The Model Articles do not support multiple share classes, although the Model Articles permits the company to issue multiple classes of shares as per Article 2. If the company having Model Articles seeks to issue any classes of shares other than ‘ordinary’ shares, this needs to be reflected in the articles of association for which it has to be altered to reflect that change. Finally, there is also the case of pre-emption rights that is to be considered under Sections 560–577 if articles contain provisions on the same. For this purpose as well, shareholder approval is required if such rights are mentioned in the articles. In case of private company with only one class of shares (as is the case in this situation), articles or a special resolution may allow the directors to allot shares while disapplying the statutory provisions as per Section 569. In this case, there are no provisions of pre-emption in the articles. Therefore, special resolution is required only for the purpose of allotting different classes of shares. For this purpose, alteration is required as Section 21 of the Companies Act 2006 states that a companies’ Articles of Association can only be amended by a special resolution. For the purpose of alteration of articles of association, the company is required to adopt the decision in a members’ meeting with a special resolution which is explained in section 283 of the Companies Act 2006 as a resolution by 75 percent of the members.

  3. Celia’s CGT bill if she sells RW to the Company, or if she sells her shares in the Company at a later date:
  4. Celia will be required to pay CGT without the option of rollover relief. She can however, claim some relief in the form of Business Asset Disposal Relief. The reasons for this assessment are provided in this section. With regard to rollover relief, this is applicable under TCGA 1992 and it is in the form of deferral of liability to pay CGT. The ‘rollover’ relief allows the rolling over of the gain from the disposal of one asset to another by removing the gain from the sale price of the first asset and applying it to the purchase price of another. Therefore, the rollover relief applies only when one asset is sold, and proceeds are used to buy another asset. There are certain conditions to be fulfilled for the application of the rollover relief and it is important that these conditions are met for the person to have relief under the capital gains tax regime. The person claiming the relief should be carrying on a trade as a sole trader and can be carrying out a profession, vocation, office or employment. As Celia offers wood carving tuition in her business, this comes within the definition of trading. According to Section 989 of the Income Tax Act 2007, trade is defined as any venture in the nature of trade. Section 158(1) of TCGA 1992 extends this to include profession, vocation, office or employment. This condition is met with. However, another condition is not met with in this situation, which is under Section 155 TCGA 1992, which requires that rollover relief can be applied only where both the old asset and the new asset are qualifying assets. Qualifying assets includes land and buildings, fixed plant and machinery, goodwill. The key point for the application of the rollover relief is that it is available when both assets, which are disposed assets and reinvested assets are used for trading purposes. Shares do not come within the scope of this definition of trading purposes assets. However, in case of purchase of trading stock, rollover relief can be claimed for asset appropriated to trading or where a capital sum is derived from an asset as per Section 161 of the TCGA 1992. This may be appropriate when shares are being sold to buy trading assets and not vice versa. In other words, purchase of shares by Celia in return of sale of her business assets in RG will not qualify for rollover relief. In this case, Celia is selling her business as a sole trader which she set up 5 years ago. RW is valued at £150,000 and Celia is purchasing shares of the company with 25,000 ordinary £1 shares (each worth £5) and 5,000 £5 cumulative non-participating 5% preference shares. The purchase of shares will not qualify for the relief. However, some relief may be provided in another form discussed below.

    Entrepreneurs can also claim some relief from capital gains tax when selling their business, in the form of Business Asset Disposal Relief, which applies to pay a lower rate of capital gains tax at 10% on the first £1 million of gains. Entrepreneurs can be eligible for this relief if they own their business as sole trader, have been in the been in ownership for at least two years, sell their assets within three years after selling it and the main activities of the business are in trading.

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    A sole trader is required to pay capital gains tax on the sale of each chargeable asset of the business when they are selling a business. Chargeable assets include premises, factory items, machinery sold for more than their original price, patents, trademarks and goodwill. The capital gain is calculated by deducting the costs of buying, selling and improving an asset from the sale proceeds. Any gains above £12,300 are subject to capital gains tax and the rate of this tax is based on the tax band that the sole trader falls into as an individuals.

    With respect to CGT payable on sale of shares at a future date, as per the TCGA, an individual holding shares for more than 2 years in a company where their holding is at least 5% of the shares and with voting rights is liable to pay only 10% of the Capital Gains Tax. This is known as a ‘personal company’ for the individual as per Section 169S(3) of the Companies Act 2006.

    I hope that these responses clarify the situation for Outdoor Dreams Limited.

    Kind regards,


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