In order to comply with tax laws and regulations, a good understanding of the Federal tax law, its sources and purposes, and the relation with the accounting profession must be achieved.
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A new client called Dangerous Sports Plc (DSP). DSP is the parent company in a group of companies which specialises in offering risky sporting events to travellers in the UK.
DSP provides all the administrative support for the group and it receives most of the profits from the group's subsidiaries. David Matthews is the Managing Director of DSP and runs the group.
DSP holds all of the shares in two wholly-owned subsidiaries in the UK and one wholly-owned subsidiary in New Zealand. The two UK subsidiaries are Wildfire Rafting Ltd (WRL) and Courageous Caving Ltd (CCL). The New Zealand subsidiary is called Barmy Bungee Ltd (BBL).
The following is a series of excerpts from the initial interview with David Matthews.
DM: I don't know what to do. It feels like all my hard work with this group is starting to fall apart.
Let me tell you the worst news first. There was a terrible accident at BBL - a party of six British tourists were all injured by a faulty bungee rope. I blame the temporary staff which BBL had hired, for not checking the bungee rope, but the tourists are proceeding with an action against DSP in the UK. Can they do this? Me and the DSP team have been on some trips to see the operation of BBL, and we have given them some advice in the past, but they were pretty much running the company independently of us. So why are the British tourists bringing an action against DSP?
Also, I am worried about a long-standing matter connected to WRL.
A young man called James was hurt in a white water rafting accident due to the negligence of some staff of WRL who were acting under the authority of the then Managing Director of WRL, Richard. James brought a successful action against WRL, but it turned out that WRL had no assets by this point. Richard had been trying to run WRL down, because he knew that the claim would break the company and he told me that he didn't want to give James the satisfaction of taking WRL's money. He transferred some of the money to another company which Richard's wife owns, called Active Breaks Ltd. And the rest of the money was transferred to DSP (which we were happy about as DSP was having some cash-flow problems at the time). I've heard that James is taking further legal advice and now I'm worried that DSP might suffer because of Richard's actions.
Finally, we have bad news from CCL. We recently found out that CCL has been put into insolvent liquidation. During the months before its liquidation, the Managing Director of the company, Linda, had been making increasingly bizarre attempts to keep the company afloat, including spending huge sums on advertising. She also made some outrageous claims about the company's ability to fulfil some large contracts for holiday companies, and as a result secured several large deals which were then breached by CCL. We are wondering whether the liquidator or the holiday companies could place any of the blame on her, as she has loads of cash and DSP is still hoping to recover some of CCL's assets after all the creditors have been paid.
Please prepare some written advice for David Matthews.
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Company Law Reform Act
‘It is the case that the UK still has not had a thorough review of the relationship between limited liability and unlimited liability legal forms for small firms and that the LLP’s role for small firms has not been properly addressed. Nevertheless, the need for a special limited liability company regime for owner-managed firms has been reviewed and rejected for clear and convincing reasons. The temptation to create a new legal form because other jurisdictions have something of this type has been resisted, rightly.’
In the light of this statement, evaluate the comparative treatment of the small firm and the reasons why the UK Company Law Review (CLR) rejected the creation of specialist legal forms for closely held companies.