§SQEpractice

FLK1, Session 1 · Free practice questions

SQE1 Business Law and Practice practice questions

5 single best answer questions on Business Law and Practice, written to the SRA specification. Pick an answer, then open the explanation: the correct option, why each of the others fails, and the authority behind it. No sign-up.

Start with question 1

Business Law and Practice in SQE1

Choosing and running a business vehicle — sole trader, partnership, LLP, private and unlisted public company — and the steps to form one; company decision-making, directors' duties and shareholders' rights; finance by shares and loans; corporate and personal insolvency; and the tax a business and its owners pay: income tax, capital gains tax, corporation tax, VAT and inheritance tax.

Most questions put you in a live transaction and ask what must happen next, which resolution is needed or by when something must be filed. Thresholds, notice periods and deadlines are tested precisely.

Question 1

Business and organisational characteristics (sole trader/partnership/LLP/private and unlisted public companies)Medium

Three individuals carry on a bakery business in partnership. They never signed the draft partnership agreement sent to them, so nothing has been agreed about capital, interest or profit shares. One contributed capital of £60,000, one £30,000 and one £10,000. On 1 April, the partner who contributed £30,000 also paid £20,000 into the firm's bank account as an advance beyond her agreed capital, to buy new ovens. For the year ended 31 March following, the firm's profit, before any interest on that advance, was £91,000.

What total sum is the partner who contributed £30,000 of capital entitled to receive in respect of that year?

Show the answer and explanation
B

Correct answer

£31,000

With no agreement, the statutory defaults apply: 5% interest on the advance beyond capital, then equal shares of the remaining profit.

£20,000 advance × 5% = £1,000 interest; £91,000 − £1,000 = £90,000 shared equally = £30,000; total £31,000.

Interest at 5% on the £20,000 advance for the year is £1,000; the remaining £90,000 is shared equally, giving £30,000, so she receives £31,000.

  • Partnership Act 1890, s 24(1) — Partners share equally in profits in the absence of contrary agreement.
  • Partnership Act 1890, s 24(3) — Interest at 5% per annum is payable on a payment or advance beyond agreed capital.
  • Partnership Act 1890, s 24(4) — No interest on capital subscribed before ascertainment of profits.

Rule card

Partnership Act 1890 defaults: profits and losses shared equally; 5% interest on advances beyond capital; no interest on capital subscribed.

Why the other options fail

  • A
    Surface readingClosest alternative

    £30,000

    This is the equal share of the £90,000 balance but omits the £1,000 of interest due to her on the advance.

    Ruled out by: The £1,000 interest on the advance is payable to this partner, because it was she who paid the £20,000 in beyond her agreed capital.

    • Partnership Act 1890, s 24(3) — The interest on the advance is payable to the partner who made it.
  • C
    Adjacent rule

    £31,500

    This adds 5% of her £30,000 capital; no interest is payable on capital subscribed before profits are ascertained.

    • Partnership Act 1890, s 24(4) — A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him.
  • D
    Civil-law intuition

    £28,000

    This divides the £90,000 balance in capital proportions (30/100) and adds the £1,000 interest; the statutory default is equal shares, not shares by capital.

    • Partnership Act 1890, s 24(1) — Partners are entitled to share equally in the capital and profits of the business.
  • E
    Surface reading

    £30,333

    This divides £91,000 equally and ignores the 5% interest payable on the advance beyond capital.

    • Partnership Act 1890, s 24(3) — Interest at 5% is payable on advances beyond agreed capital.

Question 2

Companies House filing requirementsMedium

A private company limited by shares was incorporated on 3 February. Its two subscribers each took 50 ordinary shares and were appointed the first directors. In March the company's business expands quickly. On 4 March the board resolves to appoint a third director, who is the company's finance manager, with effect from that date. On 5 March the board allots 200 further ordinary shares to an investor, who pays cash in full. On 10 March the members pass a special resolution altering the articles so as to remove the pre-emption provisions on the transfer of shares. On 12 March the board resolves to move the company's registered office from rented offices to premises which the company has bought, and instructs the company's accountants to update the company's stationery. The trainee solicitor dealing with the file is asked about the obligations arising at Companies House from these events.

Which of the following statements correctly describes one of the company's filing obligations at Companies House?

Show the answer and explanation
A

Correct answer

A copy of the special resolution must be delivered to the Registrar within 15 days of it being passed.

Of the five statements, only the 15-day period for forwarding a special resolution to the Registrar is correctly stated.

The members passed a special resolution altering the articles on 10 March; a copy must reach the Registrar within 15 days, along with the amended articles.

Special resolutions must be forwarded to the Registrar within 15 days, and amended articles must also be delivered following an alteration.

  • Companies Act 2006 — A copy of every special resolution must be forwarded to the Registrar within 15 days of being passed.

Rule card

Key periods: special resolutions — 15 days; director appointments, changes and registered office notices — 14 days; return of allotment — one month; private company accounts — nine months from the accounting reference date.

Why the other options fail

  • B
    Right outcome, wrong reason

    The change of registered office is ineffective unless the members first approve it by special resolution and the resolution is filed.

    A change of registered office within the same part of the United Kingdom is a board decision notified to the Registrar; no special resolution is needed.

    • Companies Act 2006 — A company may change its registered office by giving notice to the Registrar, the change taking effect on registration of the notice.
  • C
    Adjacent ruleClosest alternative

    The allotment of shares must be notified to the Registrar within 14 days.

    A return of allotment must be delivered within one month of the allotment; 14 days is the period for notifying changes such as a new director or registered office.

    Ruled out by: The 14-day period does not apply to allotments: the return of allotment of the 200 shares allotted on 5 March is due within one month.

    • Companies Act 2006 — A company must deliver a return of allotment of shares to the Registrar within one month of the allotment.
  • D
    Adjacent rule

    The appointment of the new director must be notified to the Registrar within one month of the appointment taking effect.

    Notice of the appointment of a director must be given within 14 days, not one month; the one-month period applies to a return of allotment.

    • Companies Act 2006 — Notice of the appointment of a director must be given to the Registrar within 14 days.
  • E
    Adjacent rule

    The company's first confirmation statement must be delivered within nine months of the end of its first accounting reference period.

    Nine months from the accounting reference date is the accounts filing deadline for a private company; the confirmation statement is tied to the end of the company's review period, not to the accounts.

    • Companies Act 2006 — A private company must file its annual accounts within nine months of the end of the relevant accounting reference period; the confirmation statement obligation runs from the end of each review period.

Question 3

Procedures and authority under the Partnership Act 1890Medium

Three individuals are partners in an accountancy practice. Their written partnership agreement limits each partner to commitments of £5,000 or less without the others' consent. One partner, writing on the firm's headed notepaper and describing himself as a partner in the practice, agrees to buy a racehorse for £40,000 from a breeder, telling the breeder that the firm is investing in bloodstock. The breeder knows nothing of the practice's internal arrangements.

Which of the following best describes whether the firm is bound by the agreement to buy the racehorse?

Show the answer and explanation
A

Correct answer

It is not bound, because buying a racehorse is not carrying on, in the usual way, business of the kind carried on by the firm.

Buying a racehorse is not business of the kind carried on by an accountancy practice, so the partner's act does not bind the firm.

A partner's acts bind the firm only where the act is done for carrying on in the usual way business of the kind carried on by the firm. Purchasing bloodstock for £40,000 is no part of an accountancy practice, however the partner described himself and whatever notepaper he used, so the question of the breeder's knowledge of internal limits never arises.

Section 5 binds the firm only where the partner's act is for carrying on in the usual way business of the kind the firm carries on; buying bloodstock is no part of an accountancy practice.

  • Partnership Act 1890, s 5 — Acts of a partner for carrying on in the usual way business of the kind carried on by the firm bind the firm, unless the partner had no authority and the third party knew this or did not know or believe him to be a partner.

Rule card

Section 5 has two stages: (1) was the act in the usual way of business of the kind the firm carries on? If not, the firm is not bound. (2) If it was, the firm escapes only if the third party knew of the want of authority or did not know or believe him to be a partner.

Why the other options fail

  • B
    Right outcome, wrong reason

    It is not bound, because the partnership agreement limited the partner to commitments of £5,000 or less, and the breeder is fixed with notice of that restriction.

    Right outcome, wrong basis: an internal limit does not protect the firm against a third party who is unaware of it, and a third party is not deemed to know a firm's internal terms.

    • Partnership Act 1890, s 5 — Want of actual authority avails the firm only where the third party knows of it or does not know or believe the actor to be a partner.
  • C
    Right outcome, wrong reason

    It is bound, but the partner who signed must indemnify his fellow partners for the breach of the limit in the partnership agreement, since the firm's liability to the breeder is unaffected.

    Breach of an internal limit does give rise to liability between partners, but the prior question is whether the act bound the firm at all, and it did not.

    • Partnership Act 1890, s 5 — Whether the firm is bound depends on the act being done in carrying on the firm's usual business.
  • D
    Surface reading

    It is bound, because every partner is an agent of the firm and of the other partners.

    The agency in s 5 is for the purpose of the business of the partnership; it does not extend to acts outside the kind of business the firm carries on.

    • Partnership Act 1890, s 5 — Every partner is an agent of the firm for the purpose of the business of the partnership.
  • E
    Adjacent ruleClosest alternative

    It is bound, because the breeder neither knew of nor was told of any limit on the partner's authority to contract.

    The proviso about the third party's knowledge only matters once the act is shown to be in the usual way of the firm's kind of business, which this was not.

    Ruled out by: The purchase of a racehorse is not business of the kind carried on by an accountancy practice, so the breeder's ignorance of any limit on authority is beside the point.

    • Partnership Act 1890, s 5 — The third party's knowledge of a want of authority is relevant only to acts done in carrying on the firm's usual business.

Question 4

Basis of charge (types of income/main reliefs and exemptions)Medium

A man carries on business as a sole trader landscape gardener. In the tax year 2025/26 he received trading profits of £30,000 after deduction of all business expenses, bank interest of £1,500 on an ordinary deposit account, interest of £400 on a cash ISA, and dividends of £2,000 on shares in a listed company. During the year he paid £1,000 of interest on a qualifying loan, which is an allowable relief. He is single and is entitled to a personal allowance of £12,570. For 2025/26 the basic rate of 20% applies to the first £37,700 of taxable income and the higher rate of 40% applies above that; his personal savings allowance is £1,000 and savings income within it is taxed at 0%; the dividend allowance is £500, dividend income within it being taxed at 0%, and dividend income above it within the basic rate band is taxed at 8.75%. Interest on a cash ISA is exempt from income tax.

What is the man's income tax liability for 2025/26?

Show the answer and explanation
A

Correct answer

£3,517.25

Total income is £33,500; deducting the £1,000 relief gives net income of £32,500, and deducting the £12,570 personal allowance gives taxable income of £19,930, resulting in a total tax liability of £3,517.25.

Cash ISA interest of £400 is exempt. Under s.23 of the Income Tax Act 2007: Step 1 totals income at £33,500 (£30,000 trading + £1,500 bank interest + £2,000 dividends). Step 2 deducts allowable relief of £1,000 (qualifying loan interest) from non-savings income, leaving net income of £32,500 (£29,000 non-savings + £1,500 savings + £2,000 dividends). Step 3 deducts the personal allowance of £12,570 from non-savings income, leaving taxable income of £19,930 (£16,430 non-savings + £1,500 savings + £2,000 dividends). Step 4 applies the rates: non-savings £16,430 at 20% = £3,286; savings £1,000 at 0% = £0, remaining £500 at 20% = £100; dividends £500 at 0% = £0, remaining £1,500 at 8.75% = £131.25. Total liability is £3,286 + £100 + £131.25 = £3,517.25.

Non-savings income of £16,430 at 20% is £3,286; savings income of £500 above the personal savings allowance at 20% is £100; dividends of £1,500 above the dividend allowance at 8.75% are £131.25, giving a total liability of £3,517.25.

  • Income Tax Act 2007, s.23 — Liability is calculated by finding total income, deducting allowable reliefs to find net income, deducting personal allowances, and applying tax rates to the remaining components.

Rule card

Calculation steps (ITA 2007, s.23): Step 1 (total income) → Step 2 (deduct allowable reliefs to find net income) → Step 3 (deduct personal allowance to find taxable income) → Step 4 (tax non-savings, savings and dividends at applicable rates, utilizing 0% allowances).

Why the other options fail

  • B
    Right outcome, wrong reasonClosest alternative

    £3,717.25

    This figure results from failing to deduct the £1,000 qualifying loan interest relief at Step 2, which overstates taxable non-savings income by £1,000 and adds £200 in tax.

    Ruled out by: Qualifying loan interest is an allowable relief deducted at Step 2 before applying the personal allowance, so failing to deduct it overstates liability by £200.

    • Income Tax Act 2007, s.23 — Step 2 requires reliefs to which the taxpayer is entitled to be deducted from the components of total income.
  • C
    Surface reading

    £3,761.00

    This figure results from ignoring the 0% rates on the £1,000 personal savings allowance and the £500 dividend allowance, taxing all £1,500 of savings at 20% (£300) and £2,000 of dividends at 8.75% (£175).

    • Income Tax Act 2007, s.23 — Tax is calculated at each applicable rate, which includes rates of 0% applying to savings and dividend income.
  • D
    Surface reading

    £3,986.00

    This figure results from applying the 20% basic rate across all taxable income of £19,930, failing to tax dividend income at 8.75% and ignoring the 0% allowances.

    • Income Tax Act 2007, s.23 — Step 4 requires tax to be calculated at each applicable rate on the components left after deduction of allowances.
  • E
    Adjacent rule

    £3,597.25

    This figure results from wrongly treating the £400 cash ISA interest as taxable savings income, causing an extra £400 of savings income to be taxed at 20% (£80).

    • Income Tax Act 2007, s.23 — Step 1 identifies only the amounts of income on which the taxpayer is charged to income tax.

Question 5

Registration requirements and issue of VAT invoicesMedium

A solicitor acts for a company which owns three blocks of flats and whose only business is letting them to private tenants on residential tenancies. Its rental income for the last 12 months was £250,000. It paid £30,000 of VAT on invoices from maintenance contractors, whose invoices are addressed to the company's managing agent. The company's accountant has described the rents as 'zero-rated' and has told the director that some businesses register for VAT voluntarily simply so that they can recover input tax.

Which of the following best describes the company's VAT position?

Show the answer and explanation
E

Correct answer

The company cannot register for VAT, because it makes only exempt supplies, so the £30,000 is not recoverable.

A business making only exempt supplies cannot register for VAT and cannot recover input tax.

Residential letting is an exempt supply, so the company makes no taxable supplies whatever the level of its rents. It therefore cannot register, voluntarily or otherwise, and the £30,000 of VAT charged by its contractors is irrecoverable.

Residential lettings are exempt supplies; a person making only exempt supplies cannot register and cannot reclaim any input tax.

  • Value Added Tax Act 1994, s.4(2) — A taxable supply is a supply other than an exempt supply, and supplies of residential land are exempt.
  • Value Added Tax Act 1994, s.4(1) — VAT is charged only on taxable supplies made by a taxable person in the course or furtherance of business.

Rule card

Exempt supply: no output tax, no registration, no input tax recovery. Zero-rated supply: no VAT charged to customer but input tax recoverable. Voluntary registration only for those making taxable supplies below £90,000.

Why the other options fail

  • A
    Surface reading

    The company must register and charge VAT on the rents, because its supplies in the last 12 months exceeded the £90,000 registration threshold.

    The threshold is measured by taxable supplies. Residential letting is exempt, so nothing counts towards the threshold and no output tax is chargeable.

    • Value Added Tax Act 1994, s.4(2) — A taxable supply is a supply other than an exempt supply; supplies of residential land are exempt.
  • B
    Adjacent ruleClosest alternative

    The company may register voluntarily, as any business may do, and then recover the £30,000 of input tax.

    Voluntary registration is available to a person whose taxable supplies are below the threshold. A person making only exempt supplies cannot register at all.

    Ruled out by: The company's only business is residential letting, an exempt supply, so it makes no taxable supplies and voluntary registration is not open to it.

    • Value Added Tax Act 1994, s.4(2) — Only supplies other than exempt supplies are taxable supplies; a person making only exempt supplies makes no taxable supplies.
  • C
    Right outcome, wrong reason

    The £30,000 is not recoverable unless the contractors issue VAT invoices addressed to the company rather than to its managing agent.

    Correcting the invoices would not help: the company makes only exempt supplies, so it cannot register and cannot reclaim input tax at all.

    • Value Added Tax Act 1994, s.4(2) — A person making only exempt supplies makes no taxable supplies and so is not a taxable person.
  • D
    Adjacent rule

    The rents are zero-rated, so the company may register and recover the £30,000 it has paid.

    Residential lettings are exempt, not zero-rated. The distinction matters precisely because a zero-rated supplier can reclaim input tax and an exempt supplier cannot.

    • Value Added Tax Act 1994, s.4(2) — Exempt supplies, which include supplies of residential land, are not taxable supplies, unlike zero-rated supplies.

Where candidates lose marks in Business Law and Practice

  • A special resolution needs 75% of the votes cast at a meeting, but a written special resolution needs 75% of the votes of all eligible members — those who never reply count against it (Companies Act 2006, s 283).
  • A dividend may only be paid out of profits available for distribution (Companies Act 2006, s 830). A board that wants to pay one must check the relevant accounts first, whatever the bank balance says.
  • A partner who retires stays liable for later debts to anyone who dealt with the firm before and was not given notice of the retirement (Partnership Act 1890, s 36).

Read with these questions