F6 TAX 2011

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ALL YOU NEED TO KNOWArticles on key examinable topics to support your studies

TECHNICAL

28 VALUE ADDED TAX: PART 2Relevant to ACCA Qualification Paper F6 (UK)

CAPITAL GAINS TAX: PARTS 1 AND 2Relevant to ACCA Qualification Paper F6 (UK)

INTRODUCTION TO ISLAMIC FINANCERelevant to ACCA Qualification Paper F9

ONLINE RESOURCESCAT qualification: www.accaglobal.com/students/catACCA Qualification: www.accaglobal.com/students/acca

FOUNDATIONS IN ACCOUNTANCYLearn more about ACCA’s new suite of entry-level qualifications – Foundations in Accountancy at www.accaglobal.com/fia

CHANGES TO THE ACCA QUALIFICATION FROM JUNE 2011Read more at www.accaglobal.com/students/student_accountant/archive/2010/108/3333957

GUIDANCE ON APPROACH TO QUESTIONS IN SECTION A OF PAPER P6 (UK)Relevant to ACCA Qualification Paper P6 (UK)

http://www.accaglobal.com/students/student_accountant/archive/2010/108/3333957

VALUE ADDED TAX – PART 2RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)Following on from David Harrowen’s first article on VAT, this article explains how VAT will be examined in the Paper F6 (UK) exams.

ACCESS RESOURCES RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)www.accaglobal.com/students/acca/exams/f6/

CAPITAL GAINS TAX – PARTS 1 AND 2RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)Question 3 of Paper F6 (UK) focuses on capital gains in either a personal or a corporate context, and a small element of capital gains might also be included in Questions 1 or 2. David Harrowven, examiner for Paper F6 (UK), describes how capital gains tax will be examined in Paper F6 (UK).

ACCESS RESOURCES RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)www.accaglobal.com/students/acca/exams/f6/

AN INTRODUCTION TO ISLAMIC FINANCERELEVANT TO ACCA QUALIFICATION PAPER F9Islamic finance has been introduced into the Paper F9 syllabus from the June 2011 exams. Read about the key elements of the topic.

ACCESS RESOURCES RELEVANT TO ACCA QUALIFICATION PAPER F9www.accaglobal.com/students/acca/exams/f9/

GUIDANCE ON APPROACH TO QUESTIONS IN SECTION A OF PAPER P6 (UK)RELEVANT TO ACCA QUALIFICATION PAPER P6 (UK)The two questions in Section A of the Paper P6 (UK) exam are important because they represent between 50% and 70% of the marks on the paper. They usually contain quite a lot of information and tend to involve a number of requirements and a combination of taxes such that they could appear to be somewhat overwhelming.

In order to be successful in the exam it is important to have a structured approach to these questions and to have practised as many of them as possible. Rory Fish, examiner for Paper P6 (UK), outlines some key advice for students.

ACCESS RESOURCES RELEVANT TO ACCA QUALIFICATION PAPER P6 (UK)www.accaglobal.com/students/acca/exams/p6/

ACCA QUALIFICATION TECHNICAL ARTICLESPAPER F1www.accaglobal.com/students/acca/exams/f1/technical_articles/

PAPER F2www.accaglobal.com/students/acca/exams/f2/technical_articles/








PAPER P1www.accaglobal.com/students/acca/exams/p1/technical_articles/


9 MARCH 2011 RELEVANT TO ACCA AND CAT QUALIFICATION STUDENTS

TECHNICAL ARTICLES

28 TECHNICAL

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www.accaglobal.com/students/acca/exams/p6/

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CAT QUALIFICATION TECHNICAL ARTICLESPAPER 1www.accaglobal.com/students/cat/exams/t1/tech_articles/

PAPER 2www.accaglobal.com/students/cat/exams/t2/tech_articles/









ACCA ONLINE STUDY RESOURCESACCA is committed to providing support to all its students. Examiner reports, examiner interviews and a wide variety of technical articles are available in a range of different media on the ACCA website at www.accaglobal.com/students/

Access the Student Accountant technical article archive at www.accaglobal.com/students/student_accountant/archive/

CHANGES TO THE ACCA QUALIFICATION FROM JUNE 2011Read more at www.accaglobal.com/students/student_accountant/archive/2010/108/3333957

FOUNDATIONS IN ACCOUNTANCYLearn more about ACCA’s suite of entry-level qualifications – Foundations in Accountancy at www.accaglobal.com/fia

RESOURCESwww.acca global.com/students/acca

www.acca global.com/ students/ cat

29STUDENT ACCOUNTANT ISSUE 05/2011






www.accaglobal.com/students/cat/exams/t1/tech_articles/










http://www.accaglobal.com/students/student_accountant/archive/

http://www.accaglobal.com/students/acca

http://www.accaglobal.com/students/cat

http://www.accaglobal.com/fia

http://www.accaglobal.com/students/student_accountant/archive/2010/108/3333957

CAT QUALIFICATIONPaper 3www.accaglobal.com/students/cat/exams/t3/examinable_documents

Paper 6www.accaglobal.com/students/cat/exams/t6/examinable_documents

Paper 8www.accaglobal.com/students/cat/exams/t8/examinable_documents

Paper 9www.accaglobal.com/students/cat/exams/t9/exam_docs

ACCA QUALIFICATIONFinancial reportingPaper F3 (International) www.accaglobal.com/pubs/students/acca/exams/f3/examinable/f3int_examdoc2011.pdf

Paper F3 (UK) www.accaglobal.com/pubs/students/acca/exams/f3/examinable/f3uk_examdoc2011.pdf

Paper F7 and P2 (International and UK) www.accaglobal.com/pubs/students/acca/exams/f3/examinable/f7p2int_examdocs2011.pdf

Paper F7 and P2 (Hong Kong) www.accaglobal.com/pubs/students/acca/exams/f3/examinable/f3f7p2hkg_examdoc2011.pdf

Paper F7 and P2 (Malaysia) www.accaglobal.com/pubs/students/acca/exams/f3/examinable/mys2011_examdoc.pdf

Paper F7 and P2 (Singapore) www.accaglobal.com/pubs/students/acca/exams/f3/examinable/sgp2011_examdoc.pdf

CBE (International)www.accaglobal.com/pubs/students/acca/exams/f3/examinable/cbe_J08examdocs.pdf

CBE (UK) www.accaglobal.com/pubs/students/acca/exams/f3/examinable/f3uk_J08examdocs.pdf

Guidance Notes for Irish Stream students www.accaglobal.com/pubs/students/acca/exams/f3/examinable/irish_notes_v2.pdf

Tax Papers F6 www.accaglobal.com/students/acca/exams/f6/exam_docs/

Paper P6www.accaglobal.com/students/acca/exams/p6/exam_docs

AuditPapers F8 and P7 (Hong Kong) www.accaglobal.com/pubs/students/acca/exams/f8/examinable/examnotesHKG2011.pdf

Papers F8 and P7 (International and UK) www.accaglobal.com/pubs/students/acca/exams/f8/examinable/IntUK2011examnotes.pdf

Papers F8 and P7 (Malaysia) www.accaglobal.com/pubs/students/acca/exams/f8/examinable/f8p7mys_examnotes.pdf

Papers F8 and P7 (Singapore) www.accaglobal.com/pubs/students/acca/exams/f8/examinable/f8p7_sgpexamdocs.pdf

Guidance Notes for Irish Stream students www.accaglobal.com/pubs/students/acca/exams/f8/examinable/irish_notes.pdf

Examinability of the Clarity Auditing Standards www.accaglobal.com/pubs/students/acca/exams/f8/examinable/clarity_audit_standards.pdf

EXAMINABLEDOCUMENTS

30 TECHNICAL

RELEVANT TO THE JUNE 2011 SESSION

http://www.accaglobal.com/students/cat/exams/t3/examinable_documents



http://www.accaglobal.com/students/cat/exams/t9/exam_docs

http://www.accaglobal.com/pubs.students/acca/exams/f3/examinable/f3int_examdoc2011.pdf

http://www.accaglobal.com/pubs.students/acca/exams/f3/examinable/f3uk_examdoc2011.pdf

http://www.accaglobal.com/pubs.students/acca/exams/f3/examinable/f7p2int_examdocs2011.pdf

http://www.accaglobal.com/pubs.students/acca/exams/f3/examinable/f3f7p2hkg_examdoc2011.pdf

http://www.accaglobal.com/pubs.students/acca/exams/f3/examinable/mys2011_examdoc.pdf

http://www.accaglobal.com/pubs.students/acca/exams/f3/examinable/sgp2011_examdoc.pdf

http://www.accaglobal.com/pubs.students/acca/exams/f3/examinable/cbe_J08examdocs.pdf

http://www.accaglobal.com/pubs.students/acca/exams/f3/examinable/f3uk_J08examdocs.pdf

http://www.accaglobal.com/pubs.students/acca/exams/f3/examinable/irish_notes_v2.pdf

http://www.accaglobal.com/pubs.students/acca/exams/f6/exam_docs/

http://www.accaglobal.com/pubs.students/acca/exams/p6/exam_docs/

http://www.accaaglobal.com/pubs/students/acca/exams/f8/examinable/examnotesHKG2011.pdf

http://www.accaaglobal.com/pubs/students/acca/exams/f8/examinable/IntUK2011examnotes.pdf

http://www.accaaglobal.com/pubs/students/acca/exams/f8/examinable/f8p7mys_examnotes.pdf

http://www.accaaglobal.com/pubs/students/acca/exams/f8/examinable/f8p7_sgpexamdocs.pdf

http://www.accaaglobal.com/pubs/students/acca/exams/f8/examinable/irish_notes.pdf

http://www.accaaglobal.com/pubs/students/acca/exams/f8/examinable/clarity_audit_standards.pdf

RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)

Studying Paper F6 Performance objectives 19 and 20 are relevant to this exam

© 2011 ACCA

Capital gains: Part 1 This two-part article is relevant to those of you taking Paper F6 (UK) in

either the June or December 2011 sittings, and is based on tax legislation as it applies to the tax year 2010–11 (Finance Acts (No 1)

and (No 2) 2010).

Question 3 of Paper F6 (UK) focuses on capital gains in either a personal or a corporate context, and will be for 15 marks. A small element of capital gains might also be included in Questions 1 (focusing

on income tax) or 2 (focusing on corporation tax).

Personal capital gains Scope of capital gains tax (CGT)

CGT is charged when there is a chargeable disposal of a chargeable asset by a chargeable person.

A chargeable disposal includes part disposals and the gift of assets. However, the transfer of an asset upon death is an exempt disposal. A

person who inherits an asset takes it over at its value at the time of death.

All forms of property are chargeable assets unless exempted. The most

important exempt assets as far as Paper F6 (UK) is concerned are: • Certain chattels (see later)

• Motor cars • UK Government securities (Gilts).

In determining whether or not an individual is chargeable to CGT it is necessary to consider their residence status.

Example 1

Explain when a person will be treated as resident or ordinarily resident in the UK for a particular tax year and state how a person’s residence

status establishes whether or not they are liable to CGT. • A person will be resident in the UK during a tax year if they are

present in the UK for 183 days or more. • A person will also be treated as resident if they make substantial

visits to the UK, with visits averaging 91 days or more over four

consecutive tax years. • Ordinary residence is not precisely defined, but a person will

normally be ordinarily resident in the UK if this is where they habitually reside.

2 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011

© 2011 ACCA

• A person is liable to CGT on the disposal of assets during any tax year in which they are either resident or ordinarily resident in the UK.

Basic computation For individuals the basic CGT computation is quite straightforward.

Example 2

Andy sold a factory on 15 February 2011 for £320,000. The factory was purchased on 24 January 1992 for £164,000, and was extended at a

cost of £37,000 during March 2002. During May 2004 the roof of the factory was replaced at a cost of £24,000 following a fire.

Andy incurred legal fees of £3,600 in connection with the purchase of

the factory, and legal fees of £5,800 in connection with the disposal.

Andy’s taxable gain for 2010–11 is as follows:

£ £

Disposal proceeds 320,000 Cost 164,000

Enhancement expenditure 37,000 Incidental costs (3,600 + 5,800) 9,400

_______ (210,400) _______ Chargeable gain 109,600

Annual exemption (10,100) _______

Taxable gain 99,500 _______

• The factory extension is enhancement expenditure as it has added to

the value of the factory. • The replacement of the roof is not enhancement expenditure, being

in the nature of a repair.

• Note that the standardised term ‘chargeable gain’ refers to the capital gain before deducting the annual exemption, whilst the term

‘taxable gain’ refers to the chargeable gain after deducting the annual exemption.

Capital losses

Capital losses are set off against any chargeable gains arising in the same tax year, even if this results in the annual exemption being wasted.

Any unrelieved capital losses are carried forward, but in future years they are only set off to the extent that the annual exemption is not wasted.


© 2011 ACCA

Example 3

For the tax year 2010–11 Nim has chargeable gains of £17,100. He has unused capital losses of £16,700 brought forward from the tax year 2009–10.

Nim’s taxable gains for 2010–11 are as follows:

£ Chargeable gains 17,100

Capital losses brought forward (7,000) ______

Chargeable gains 10,100 Annual exemption (10,100)

______ Taxable gains Nil ______

• The set off of the brought forward capital losses is restricted to

£7,000 (17,100 – 10,100) so that chargeable gains are reduced to the amount of the annual exemption.

• Nim, therefore, has capital losses carried forward of £9,700 (16,700 – 7,000).

Rates of capital gains tax The rate of CGT is linked to the level of a person’s taxable income.

Taxable gains are taxed at a lower rate of 18% where they fall within the basic rate tax band of £37,400, and at a higher rate of 28% where they

exceed this threshold. Remember that the basic rate band is extended if a person pays personal pension contributions or makes a gift aid

donation.

CGT is collected as part of the self-assessment system, and is due in one amount on 31 January following the tax year. Therefore, a CGT liability for the tax year 2010–11 will be payable on 31 January 2012.

Payments on account are not required in respect of CGT.

Example 4 For the tax year 2010–11 Adam has a salary of £39,475, and during the

year he made net personal pension contributions of £4,400. On 15 August 2010 Adam sold an antique table and this resulted in a

chargeable gain of £17,400.

For the tax year 2010–11 Bee has a trading profit of £56,475. On 20 August 2010 she sold an antique vase and this resulted in a chargeable

gain of £18,100.


© 2011 ACCA

For the tax year 2010–11 Chester has a salary of £36,475. On 25 August

2010 he sold an antique clock and this resulted in a chargeable gain of £23,800.

Adam Adam’s taxable income is £33,000 (39,475 less the personal allowance

of 6,475). His basic rate tax band is extended to £42,900 (37,400 + 5,500 (4,400 x 100/80)), of which £9,900 (42,900 – 33,000) is unused.

Adam’s taxable gain of £7,300 (17,400 less the annual exemption of

10,100) is fully within the unused basic rate tax band, so his CGT liability for 2010–11 is therefore £1,314 (7,300 at 18%).

Bee Bee’s taxable income is £50,000 (56,475 – 6,475), so all of her basic

rate tax band has been used. The CGT liability for 2010–11 on her taxable gain of £8,000 (18,100 – 10,100) is therefore £2,240 (8,000 at

28%).

Chester Chester’s taxable income is £30,000 (36,475 – 6,475), so £7,400

(37,400 – 30,000) of his basic rate tax band is unused. The CGT liability for 2010-11 on Chester’s taxable gain of £13,700 (23,800 – 10,100) is therefore calculated as follows:

£ 7,400 at 18% 1,332

6,300 at 28% 1,764 _____

3,096 _____

In each case, the CGT liability will be due on 31 January 2012.

Entrepreneurs’ relief A reduced CGT rate of 10% applies if a disposal qualifies for

entrepreneurs’ relief. This rate applies regardless of the level of a person’s taxable income. Entrepreneurs’ relief can be claimed when an

individual disposes of a business or a part of a business as follows: • A disposal of the whole or part of a business run as a sole trader.

Relief is only available in respect of chargeable gains arising from the disposal of assets in use for the purpose of the business. This will

exclude chargeable gains arising from investments. • The disposal of shares in a trading company where an individual has

at least a 5% shareholding in the company and is also an employee


© 2011 ACCA

or director of the company. Provided the limited company is a trading company, there is no restriction to the amount of relief if it

holds non-trading assets such as investments. The relief covers the first £5m of qualifying gains that a person makes

during their lifetime. Gains in excess of the £5m limit are taxed as normal at the 18% or 28% rates.

There is no age requirement in order to claim entrepreneurs’ relief, but

assets must have been owned for one year prior to the date of disposal in order to qualify.

Example 5

On 25 January 2011 Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares since 1 March 2004, and

was an employee of the company from that date until the date of disposal.

He has taxable income of £8,000 for the tax year 2010–11.

Michael’s CGT liability for 2010–11 is as follows:

£ Chargeable gain 800,000


789,900 _______

Capital gains tax: 789,900 at 10% 78,990

_______ Although chargeable gains that qualify for entrepreneurs’ relief are

always taxed at a rate of 10%, they must be taken into account when establishing which rate applies to other chargeable gains. Chargeable

gains qualifying for entrepreneurs’ relief therefore reduce the amount of any unused basic rate tax band.

The annual exemption and any capital losses should be initially

deducted from those chargeable gains that do not qualify for entrepreneurs’ relief. This approach will save CGT at either 18% or 28%,

compared to just 10% if used against chargeable gains that do qualify for relief.


© 2011 ACCA

There are several ways of presenting computations involving such a mix of gains, but the simplest approach is to keep gains qualifying for

entrepreneurs’ relief and other gains separate.

Example 6

On 30 September 2010 Mika sold a business that she had run as a sole trader since 1 January 2004. The disposal resulted in the following

chargeable gains: £

Goodwill 260,000 Freehold office building 370,000 Freehold warehouse 170,000

_______ 800,000

_______

The assets were all owned for more than one year prior to the date of disposal. The warehouse had never been used by Mika for business purposes.

Mika has taxable income of £4,000 for the tax year 2010–11. She has

unused capital losses of £28,000 brought forward from the tax year 2009–10.

Mika’s CGT liability for 2010–11 is as follows: £

Gains qualifying for entrepreneurs’ relief Goodwill 260,000

Freehold office building 370,000 _______

630,000 _______ Other gains

Freehold warehouse 170,000 Capital losses brought forward (28,000)

_______ 142,000


131,900 _______

Capital gains tax: 630,000 at 10% 63,000 131,900 at 28% 36,932

_______ Tax liability 99,932

_______


© 2011 ACCA

• The capital losses and the annual exemption are set against the

chargeable gain on the sale of the freehold warehouse as this does not qualify for entrepreneurs’ relief.

• £33,400 (37,400 – 4,000) of Mika’s basic rate tax band is unused,

but this is set against the gains qualifying for entrepreneurs’ relief of £630,000 even though this has no effect on the 10% tax rate.

Married couples

Transfers between spouses do not give rise to any chargeable gain or capital loss. The same treatment applies to transfers between same-sex

partners in a registered civil partnership.

Example 7 Bill and Cathy Dew are a married couple. They disposed of the following assets during the tax year 2010–11:

• On 10 July 2010 Bill and Cathy sold a house for £380,000. The house had been purchased on 1 December 2007 for £290,000, and

has never been occupied as their main residence. • On 5 August 2010 Bill transferred his entire shareholding of 20,000

£1 ordinary shares in Elf plc to Cathy. On that date the shares were valued at £64,000. Bill’s shareholding had been purchased on 21

September 2008 for £48,000. • On 7 October 2010 Cathy sold the 20,000 £1 ordinary shares in Elf

plc that had been transferred to her from Bill. The sale proceeds

were £70,000.

Bill and Cathy each have taxable income of £50,000 for the tax year 2010–11.

Jointly-owned property

• The chargeable gain on the house is £90,000 (380,000 – 290,000). • Bill and Cathy will each be assessed on £45,000 (90,000 x 50%) of

the chargeable gain.

Bill Dew – CGT liability 2010–11

£ House 45,000

Annual exemption (10,100) ______

34,900 ______

Capital gains tax: 34,900 at 28% 9,772 ______


© 2011 ACCA

• The transfer of the 20,000 £1 ordinary shares in Elf plc to Cathy does not give rise to any chargeable gain or capital loss, because it is a

transfer between spouses. Cathy Dew – CGT liability 2010–11

£ £ House 45,000

Ordinary shares in Elf plc

Disposal proceeds 70,000 Cost (48,000)

______ 22,000 ______

67,000 Annual exemption (10,100) ______

56,900 ______

Capital gains tax: 56,900 at 28% 15,932

______

• Bill’s original cost is used in calculating the capital gain on the disposal of the shares in Elf plc.

Part disposals When just part of an asset is disposed of then the cost must be

apportioned between the part disposed of and the part retained.

Example 8 On 16 February 2011 Furgus sold three acres of land for £285,000. He

had originally purchased four acres of land on 17 July 2009 for £220,000. The market value of the unsold acre of land as at 16 February 2011 was £90,000.

• The cost relating to the three acres of land sold is £167,200

(220,000 x 285,000/375,000 (285,000 + 90,000)). • The chargeable gain on the land is therefore £117,800 (285,000 –

167,200). • The base cost of the remaining acre of land is £52,800 (220,000 –

167,200).

Chattels Special rules apply to chattels. A chattel is tangible moveable property.


© 2011 ACCA

Example 9 On 18 August 2010 Gloria sold an antique table for £5,600 and an

antique clock for £7,200. The antique table had been purchased on 27 May 2009 for £3,200, and the antique clock had been purchased on 14 June 2009 for £3,700.

• The antique table is exempt from CGT because the gross sale

proceeds were less than £6,000. • The chargeable gain on the antique clock is restricted to £2,000

(7,200 – 6,000 = 1,200 x 5/3) as this is less than the normal gain of £3,500 (7,200 – 3,700).

Wasting assets

A wasting asset is one which has a remaining useful life of 50 years or less. The cost of such an asset must be adjusted for the expected depreciation over the life of the asset.

Example 10

On 31 March 2011 Mung sold a copyright for £9,600. The copyright had been purchased on 1 April 2006 for £10,000 when it had an unexpired

life of 20 years.

The chargeable gain on the copyright is as follows: £

Disposal proceeds 9,600 Cost (10,000 x 15/20) (7,500)

_____ 2,100

_____

• The cost of £10,000 is depreciated based on an unexpired life of 20 years at the date of acquisition and an unexpired life of 15 years at the date of disposal.

Insurance proceeds

If an asset is lost or destroyed then the receipt of insurance proceeds is treated as a normal disposal. However, rollover relief is available if the

insurance monies are used to purchase a replacement asset within a period of 12 months.

Example 11 On 20 October 2010 an antique table owned by Claude was destroyed in a fire. The table had been purchased on 23 November 2008 for £50,000. Claude received insurance proceeds of £74,000 on 6


© 2011 ACCA

December 2010 and on 18 December 2010 he paid £75,400 for a replacement table.

• The insurance proceeds of £74,000 received by Claude have been

fully reinvested in a replacement table.

• There is therefore no disposal on the receipt of the insurance proceeds.

• The gain of £24,000 (insurance proceeds of £74,000 less original cost of £50,000) is set against the cost of the replacement table, so

its base cost becomes £51,400 (75,400 – 24,000).

If an asset is damaged then the receipt of insurance proceeds is treated as a part disposal. However, if all the proceeds are used to restore the

asset then a claim can be made to ignore the part disposal rules. Example 12

On 1 October 2010 an antique carpet owned by Juliet was damaged by a flood. The carpet had been purchased on 17 November 2006 for

£69,000. Juliet received insurance proceeds of £12,000 on 12 December 2010, and she spent a total of £13,400 during December

2010 restoring the carpet. Juliet has made a claim to ignore the part disposal rules.

• The insurance proceeds of £12,000 received by Juliet have been fully

applied in restoring the carpet.

• There is therefore no disposal on the receipt of the insurance proceeds.

• The revised base cost of the carpet is £70,400 (69,000 – 12,000 + 13,400).

Principal private residences

A gain on the disposal of a principal private residence is exempt where the owner has occupied the house throughout the whole period of ownership. The final 36 months of ownership are always treated as a

period of ownership. The following periods of absence are also deemed to be periods of occupation:

• Periods up to a total of three years for any reason. • Any periods where the owner is required to live abroad due to their

employment. • Periods up to four years where the owner is required to live elsewhere

in the UK due to their work.

These deemed periods of occupation must normally be preceded and followed by actual periods of occupation.


© 2011 ACCA

Example 13 On 30 September 2010 Hue sold a house for £381,900. The house had

been purchased on 1 October 1990 for £141,900. Hue occupied the house as her main residence from the date of

purchase until 31 March 1994. The house was then unoccupied between 1 April 1994 and 31 December 1997 due to Hue being required by her

employer to work elsewhere in the UK.

From 1 January 1998 until 31 December 2004 Hue again occupied the house as her main residence. The house was then unoccupied until it

was sold on 30 September 2010.

The chargeable gain on the house is as follows: £ Disposal proceeds 381,900

Cost (141,900) _______

240,000 Principal private residence exemption (207,000)

_______ 33,000

_______

• The total period of ownership of the house is 240 months (207 + 33),

of which 207 months qualify for exemption as follows: Exempt Chargeable

months months

1 October 1990 to 31 March 1994 (occupied) 42

1 April 1994 to 31 December 1997 (working in UK) 45

1 January 1998 to 31 December 2004 (occupied) 84

1 January 2005 to 30 September 2007 (unoccupied) 33

1 October 2007 to 30 September 2010 (final 36 months) 36

___ ___

207 33

___ ___

• The unoccupied period from 1 January 2005 to 30 September 2007 is not a period of deemed occupation as it was not followed by a

period of actual occupation. • The exemption is therefore £207,000 (240,000 x 207/240).

Letting relief will extend the principal private residence exemption where a property is let out during a period that does not otherwise qualify for

exemption.


© 2011 ACCA

Example 14 Continuing with Example 13, assume that Hue let her house out during

the periods that she did not occupy it.

The chargeable gain on the house will now be as follows:

£ Disposal proceeds 381,900

Cost (141,900) _______

240,000 Principal private residence exemption (207,000)

Letting relief exemption (33,000) _______

Nil _______

The letting relief exemption is the lower of: • £40,000

• £207,000 (the amount of the gain exempt under the principal private residence rules)

• £33,000 (the amount of the non-exempt gain attributable to the period of letting (240,000 x 33/240))

Where part of a house is used exclusively for business use then the principal private residence exemption will be restricted.

Example 15 On 30 September 2010 Mae sold a house for £186,000. The house had

been purchased on 1 October 2000 for £122,000. Throughout the period of ownership the house was occupied by Mae as her main

residence, but one of the house’s eight rooms was always used exclusively for business purposes by Mae.

The chargeable gain on the house is as follows:


Cost (122,000) _______ 64,000

Principal private residence exemption (56,000) _______

8,000 _______


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• The principal private residence exemption is restricted to £56,000 (64,000 x 7/8).

The second part of the article will cover shares, reliefs, and the way in which the chargeable gains of limited companies are taxed. It also

contains some guidance for when you are answering a capital gains question in the exam.

David Harrowven is examiner for Paper F6 (UK)



© 2011 ACCA

Capital gains: Part 2 This article is relevant to those of you taking Paper F6 (UK) in either the

June or December 2011 sittings, and is based on tax legislation as it applies to the tax year 2010–11 (Finance Acts (No 1) and (No 2) 2010).

Question 3 of Paper F6 (UK) will focus on capital gains in either a personal or a corporate context, and will be for 15 marks. A small

element of capital gains might also be included in Questions 1 (focusing on income tax) or 2 (focusing on corporation tax).

PERSONAL CAPITAL GAINS (CONTINUED)

Shares The disposal of shares can create a particular problem. This is because

the shares disposed of might have been purchased at different times, and it is then difficult to identify exactly which shares have been sold. Disposals of shares are matched with purchases in the following order:

• Shares purchased on the same day as the disposal. • Shares purchased within the following 30 days.

• Shares in share pool.

The share pool aggregates all purchases made up to the day of the disposal.

Example 16 Ivy has had the following transactions in the shares of Jing plc:

1 June 2003 Purchased 4,000 shares for £6,200.

30 April 2008 Purchased 2,000 shares for £8,800 15 July 2010 Purchased 500 shares for £2,500 15 July 2010 Sold 4,500 shares for £27,000

Ivy’s chargeable gain for 2010–11 is as follows:

£ £ Purchase 15 July 2010

Disposal proceeds (27,000 x 500/4,500) 3,000 Cost (2,500)

____ 500 Share pool Disposal proceeds (27,000 x 4,000/4,500) 24,000

Cost (10,000) ______ 14,000

______ 14,500

______


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Share pool Number Cost

£ £ Purchase 1 June 2003 4,000 6,200 Purchase 30 April 2008 2,000 8,800

_____ ______ 6,000 15,000

Disposal 15 July 2010 (15,000 x 4,000/6,000) (4,000) (10,000)

_____ ______ Balance carried forward 2,000 5,000

_____ ______

• The disposal is first matched with the same day purchase and then against the share pool.

The reason that disposals are matched with shares purchased within the following 30 days is to prevent a practice known as bed and

breakfasting. A person might sell shares at the close of business one day and then buy them back at the opening of business the next day.

Previously, a chargeable gain or a capital loss could thus be established without a genuine disposal being made. The 30-day matching rule

makes bed and breakfasting much more difficult, since the subsequent purchase cannot take place within 30 days.

Example 17 Keith purchased 1,000 shares in Long plc on 5 July 2010 for £10,000.

The shares have fallen in value, so he would like to establish a capital loss. Therefore, the shares were sold on 2 December 2010 for £2,000,

and purchased back on 10 December 2010 for £1,900.

Keith’s transactions are caught by the 30-day matching rule. The disposal on 2 December 2010 will be matched with the purchase on 10 December 2010, and so for 2010–11 he will have a chargeable gain of

£100 (2,000 – 1,900).

With individuals it might be necessary to establish a market value figure where the shares are disposed of by way of a gift rather than being sold.

Example 18

Maude made a gift of her entire shareholding of 10,000 £1 ordinary shares in Night plc to her daughter. On the date of the gift the shares

were quoted at £5.10 – £5.18, with recorded bargains of £5.00, £5.15 and £5.22.


© 2011 ACCA

• The shares in Night plc are valued at the lower of the quarter up price (£5.10 + (£5.18 – £5.10) = £5.12) and the average of the

days highest and lowest bargains ((£5.00 + £5.22)/2 = £5.11). • The deemed proceeds figure is therefore £51,100 (10,000 x 5.11).

With a bonus issue there is no additional cost involved. The only thing that changes is the number of shares held.

Example 19

On 22 January 2011 Oliver sold 30,000 £1 ordinary shares in Pink plc for £140,000. Oliver had purchased 40,000 shares in Pink plc on 9

February 2009 for £96,000. On 3 April 2010 Pink plc made a 1 for 2 bonus issue.

Oliver’s chargeable gain for 2010–11 is as follows:


Cost (48,000) _______

92,000 _______

• Oliver was issued with 20,000 (40,000 x 1/2) new ordinary shares as

a result of the bonus issue.

• The cost of the shares sold is therefore £48,000 (96,000 x 30,000/(40,000 + 20,000)).

With a rights issue the new shares are paid for, and so the cost figure

will have to be adjusted.

Example 20 On 22 January 2011 Quinn sold 30,000 £1 ordinary shares in Red plc for £140,000. Quinn had purchased 40,000 shares in Red plc on 9

February 2008 for £100,000. On 3 May 2010 Red plc made a 1 for 2 rights issue. Quinn took up her allocation under the rights issue in full,

paying £3.00 for each new share issued.

Quinn’s chargeable gain for 2010–11 is as follows: £

Disposal proceeds 140,000 Cost (80,000)

______ 60,000 ______


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• Quinn was issued with 20,000 (40,000 x 1/2) new ordinary shares under the rights issue at a cost of £60,000 (20,000 x £3.00).

• The cost of the shares sold is therefore £80,000 (100,000 + 60,000 = 160,000 x 30,000/(40,000 + 20,000)).

A paper for paper takeover or reorganisation is not a chargeable disposal. The new shares simply take the place of the original shares,

and are deemed to have been purchased at the same time and for the same cost. Where more than one class of new share is acquired as a

result of the takeover, the original cost is apportioned according to the market values of the new shares immediately after the takeover.

Example 21

On 28 March 2011 Rita sold her entire holding of £1 ordinary shares in Sine plc for £55,000. Rita had originally purchased 10,000 shares in Sine plc on 5 May 2008 for £14,000. On 7 August 2009 Sine plc had a

reorganisation whereby each £1 ordinary share was exchanged for two new £1 ordinary shares and one £1 preference share. Immediately after

the reorganisation each £1 ordinary share in Sine plc was quoted at £2.50 and each £1 preference share was quoted at £1.25.

Rita’s chargeable gain for 2010–11 is as follows:

£ Disposal proceeds 55,000 Cost (11,200)

______ 43,800

______

• On the reorganisation Rita received new ordinary shares valued at £50,000 (2 x 10,000 x £2.50) and preference shares valued at

£12,500 (10,000 x £1.25). • The cost attributable to the ordinary shares is £11,200 (14,000 x

50,000/(50,000 + 12,500).

Rollover relief

Rollover relief allows a chargeable gain to be deferred (rolled over) where the disposal proceeds of the old asset are reinvested in a new

asset. The deferral is achieved by deducting the chargeable gain from the cost of the new asset.

To qualify for rollover relief both the old asset and the new asset must

be qualifying assets. The most relevant types of qualifying asset as far as Paper F6 (UK) is concerned are:


© 2011 ACCA

• Land and buildings • Fixed plant and machinery

• Goodwill. It is not necessary for the old asset and the new asset to be in the same

category.

Example 22 What are the conditions that must be met in order that rollover relief can

be claimed?

• The reinvestment must take place between one year before and three years after the date of disposal.

• The old and new assets must both be qualifying assets and be used for business purposes.

• The new asset must be brought into business use at the time that it

is acquired.

Where the disposal proceeds of the old asset are not fully reinvested in the new asset, the amount not reinvested reduces the amount of

chargeable gain that can be rolled over. Therefore, if the amount not reinvested is greater than the chargeable gain no rollover relief is

available. Where the new asset is a depreciating asset, then the gain does not

reduce the cost of the new asset but is instead held over. A depreciating asset is an asset with a predictable life of less than 60 years. The only

types of depreciating asset that you need to be aware of are fixed plant and machinery and short leaseholds.

Example 23

Violet sold a factory on 15 August 2010 for £320,000, and this resulted in a chargeable gain of £85,000. She is considering the following alternative ways of reinvesting the proceeds from the sale of her factory:

• A freehold warehouse can be purchased for £340,000. • A freehold office building can be purchased for £275,000.

• A leasehold factory on a 40-year lease can be acquired for a premium of £350,000.

The reinvestment will take place during November 2010.

Warehouse • The sale proceeds are fully reinvested, and so the whole of the

chargeable gain can be rolled over. • The base cost of the warehouse will be £255,000 (340,000 –

85,000).


© 2011 ACCA

Office building • The sale proceeds are not fully reinvested, and so £45,000 (320,000

– 275,000) of the chargeable gain cannot be rolled over. • The base cost of the office building will be £235,000 (275,000 –

(85,000 – 45,000).

Factory

• The sale proceeds are fully reinvested, and so the whole of the chargeable gain can be held over.

• The factory is a depreciating asset, and so the base cost of the factory is not adjusted.

• The chargeable gain is held over until the earlier of November 2020 (10 years from the date of acquisition), the date that the factory is

sold, or the date that it ceases to be used in the business. When the asset disposed of was not used entirely for business purposes,

then the proportion of the chargeable gain relating to the non-business use does not qualify for rollover relief.

Example 24

Willow sold a freehold factory on 8 November 2010 for £146,000, and this resulted in a chargeable gain of £74,000. The factory was

purchased on 15 January 2008. 75% of the factory had been used for business purposes by Willow as a sole trader, but the other 25% was never used for business purposes. Willow purchased a new freehold

factory on 10 November 2010 for £156,000.

Willow’s chargeable gain for 2010–11 is as follows: £

Gain 74,000 Rollover relief (74,000 – 18,500) (55,500)

______ 18,500

______

• The proportion of the chargeable gain relating to non-business use is

£18,500 (74,000 x 25%), and this amount does not qualify for rollover relief.

• The sale proceeds are fully reinvested, and so the balance of the gain can be rolled over.

• The base cost of the new factory is £100,500 (156,000 – 55,500).

Holdover relief Holdover relief allows a chargeable gain to be deferred (held over) when a gift is made of a qualifying business asset. The deferral is achieved by


© 2011 ACCA

deducting the chargeable gain of the donor who has made the gift from the base cost of the donee who has received the gift.

Holdover relief is also available when a sale is made at less than market value. In this case there will be an immediate charge to CGT where the

sale proceeds exceed the original cost of the asset.

For Paper F6 (UK) the most relevant types of qualifying business asset are as follows:

• Assets used for trade purposes by a sole trader.

• Shares in a personal company (where the individual has at least a 5% shareholding).

• Shares in unquoted trading companies. Remember that the market value of an asset is used rather than the

actual proceeds when a gift is made between family members since they will be connected persons.

Example 25

On 15 August 2010 Xia sold 10,000 £1 ordinary shares in Yukon Ltd, an unquoted trading company, to her daughter for £75,000. The market

value of the shares on that date was £110,000. The shareholding was purchased on 10 July 2009 for £38,000. Xia and her daughter have elected to hold over the gain as a gift of a business asset.

Xia’s chargeable gain for 2010–11 is as follows:

£ Deemed proceeds 110,000

Cost (38,000) _______

72,000 Holdover relief (72,000 – 37,000) (35,000)

_______

37,000 _______

• Xia and her daughter are connected persons, and therefore the

market value of the shares sold is used. • The consideration paid for the shares exceeds the allowable cost by

£37,000 (75,000 – 38,000). This amount is immediately chargeable to CGT.


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Where the disposal consists of shares in a personal company, holdover relief will be restricted if the company has chargeable non-business

assets. Example 26

On 5 October 2010 Zia made a gift of her entire holding of 20,000 £1 ordinary shares in Apple Ltd, a personal company, to her daughter. The

market value of the shares on that date was £200,000. The shares had been purchased on 1 January 2010 for £140,000. On 5 October 2010

the market value of Apple Ltd’s chargeable assets was £150,000, of which £120,000 was in respect of chargeable business assets. Zia and

her daughter have elected to hold over the gain as a gift of a business asset.

Zia’s chargeable gain for 2010–11 is as follows: £

Deemed proceeds 200,000 Cost (140,000)

_______ 60,000

Holdover relief (48,000) _______

12,000 _______

• Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), being the proportion of chargeable assets to chargeable business

assets.

The transfer of a business to a limited company Rollover relief is available when an unincorporated business is

incorporated. For relief to be available all the assets of the unincorporated business must be transferred to the new limited company in exchange for a consideration that must be wholly or partly

in the form of shares.

The deferral is achieved by deducting the chargeable gains arising on the disposal of the assets of the unincorporated business from the value

of the shares received from the new limited company.

Where some of the consideration is in the form of cash or a loan, then that proportion of the chargeable gains cannot be rolled over.


© 2011 ACCA

Example 27 On 8 August 2010 Bua incorporated a business that she had run as a

sole trader since 1 March 2006. The market value of the business on 8 August 2010 was £250,000. All of the business assets were transferred to a new limited company, with the consideration consisting of 200,000

£1 ordinary shares valued at £200,000 and £50,000 in cash. The only chargeable asset of the business was goodwill, and this was valued at

£100,000 on 8 August 2010. The goodwill had a nil cost.

Bua’s chargeable gain for 2010–11 is as follows: £

Disposal proceeds 100,000 Cost (Nil)

_______ 100,000 Rollover relief (100,000 – 20,000) (80,000)

_______ 20,000

_______

• The proportion of the chargeable gain relating to the cash consideration cannot be rolled over, so £20,000 (100,000 x

50,000/250,000) of the gain is immediately chargeable to CGT. In the exam

• A question may ask you to just calculate a person’s chargeable gains rather than their CGT liability. If this is the case then do not waste

time calculating the liability, as there will be no marks for doing so. • Make sure you identify any exempt assets so that you do not waste

time performing unnecessary calculations. • A question may tell you that a certain relief is not available for a

particular disposal. Make a careful note of such guidance or you will waste time and might also lose marks as well.

• An unincorporated business is not treated as a separate entity for

CGT purposes. Therefore, when a business is disposed of you should deal with each asset separately.

• Do not forget to deduct the annual exemption. • When dealing with shares it is important to look carefully at the dates

to see if same day or 30-day matching is applicable. • It is important to establish how much of a person’s basic rate tax

band is available. Remember that a taxable income figure is after the personal allowance has been deducted.


© 2011 ACCA

CORPORATE CAPITAL GAINS Overview

You have seen how individuals are subject to CGT. Although there are a lot of similarities in the way in which the chargeable gains of a limited company are taxed, there are also some very important differences:

• A limited company’s chargeable gains form part of the taxable total profits. They are not taxed separately.

• The annual exemption is not available. • Indexation allowance is given when calculating chargeable gains for a

limited company. • Limited companies can only benefit from rollover relief, and this is

applied after taking account of any indexation allowance. They cannot benefit from entrepreneurs’ relief, holdover relief for the gift

of business assets or for rollover relief upon incorporation. Basic computation

The basic computation for a limited company is virtually the same as for an individual. However, you may also be expected to calculate the

indexation allowance: • The indexation allowance is given from the month of acquisition up to

the month of disposal. • The indexation factor is normally rounded to three decimal places.

• The indexation allowance cannot be used to create or increase a capital loss.

• Because the indexation allowance is not available in respect of the

incidental costs of disposal, it is necessary to show these separately in the computation.

Example 28

Delta Ltd sold a factory on 15 February 2011 for £340,000. The factory was purchased on 24 October 1995 for £164,000, and was extended at

a cost of £37,000 during March 1997. Delta Ltd incurred legal fees of £3,600 in connection with the purchase

of the factory, and legal fees of £6,200 in connection with the disposal. Retail price indices (RPIs) are as follows:

October 1995 149.8

March 1997 155.4 February 2011 230.0


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£ £ Disposal proceeds 340,000

Incidental costs of disposal (6,200) _______

333,800

Cost 164,000 Incidental costs of acquisition 3,600

_______ 167,600

Enhancement expenditure 37,000 _______ (204,600)

_______ 129,200

Indexation

– Cost 167,600 x 0.535 89,666

– Enhancement 37,000 x 0.480 17,760

_______ (107,426) _______

21,774 _______

• The indexation factor for the cost is 0.535 (230.0 – 149.8)/149.8,

and for the enhancement expenditure it is 0.480 (230.0 – 155.4)/155.4.

When a limited company has a capital loss, it is first set off against any chargeable gains arising in the same accounting period. Any remaining

capital loss is then carried forward and set off against the first available chargeable gains of future accounting periods.

Although chargeable gains are included as part of a company’s taxable

total profits, capital losses are never set off against other income.

Example 29 Even Ltd has the following results:

Year ended Year ended 31 March 2010 31 March 2011

£ £ Trading profit/(loss) 56,000 (17,000)

Property business profit 4,000 10,000 Chargeable gain/(capital loss) (8,000) 85,000


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The corporation tax liability of Even Ltd for the years ended 31 March 2010 and 2011 is as follows:

Year ended Year ended

31 March 2010 31 March 2011

£ £ Trading profit 56,000 -

Property business profit 4,000 10,000 Chargeable gain - 77,000

______ ______ 60,000 87,000

Loss relief - (17,000) ______ ______

Taxable total profits 60,000 70,000 ______ ______

Corporation tax at 21% 12,600 14,700 ______ ______

• The capital loss for the year ended 31 March 2010 is carried forward,

and so the chargeable gain for the year ended 31 March 2011 is £77,000 (85,000 – 8,000).

Shares For limited companies, disposals of shares are matched with purchases

in the following order: • Shares purchased on the same day as the disposal.

• Shares purchased during the nine days prior to the disposal. • Shares in the 1985 pool.

When calculating indexation allowances for the 1985 pool, the

indexation fraction is not rounded to three decimal places. Example 30

On 15 June 2010 Fair Ltd sold 70,000 £1 ordinary shares in Gong plc for £300,000. Fair Ltd had originally purchased 40,000 shares in Gong

plc on 10 June 1995 for £110,000, and purchased a further 60,000 shares on 20 August 1999 for £180,000. Retail price indices (RPIs) are

as follows:

June 1995 149.8 August 1999 165.5

June 2010 224.0


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Chargeable gain £

Disposal proceeds 300,000 Cost (203,000) _______

97,000 Indexation allowance (285,678 – 203,000) (82,678)

_______ 14,322

_______

1985 Pool Number Cost Indexed

cost £ £ Purchase June 1995 40,000 110,000 110,000

Indexation to August 1999 110,000 x (165.5 – 149.8)/149.8 11,529

_______ 121,529

Purchase August 1999 60,000 180,000 180,000 _______ _______ _______

100,000 290,000 301,529 Indexation to June 2010 301,529 x (224.0 – 165.5)/165.5 106,583

_______ 408,112

Disposal June 2010 Cost x 70,000/100,000 (70,000) (203,000) (285,678)

_______ _______ _______ Balance carried forward 30,000 87,000 122,434

_______ _______ _______ In the exam

• Limited companies are not entitled to the annual exemption. • Chargeable gains are part of a limited company’s total taxable

profits. They are not taxed separately. • When dealing with shares it is important to look carefully at the dates

to see if same day or nine-day matching applies.




© 2011 ACCA

Value added tax (VAT): Part 2 This article is relevant to those of you taking Paper F6 (UK) in either the June

or December 2011 sittings, and is based on tax legislation as it applies to the

tax year 2010–11 (Finance Acts (No 1) and (No 2) 2010).

Paper F6 (UK) will always contain a minimum of 10 marks on VAT. These

marks will normally be included within Question 1 (focusing on income tax) or

Question 2 (focusing on corporation tax), although there might be a separate

question on VAT.

VAT returns

VAT returns are normally completed on a quarterly basis. Each return shows

the total output VAT and total input VAT for the quarter to which it relates.

A VAT return must be submitted to HM Revenue & Customs within one month

of the end of the relevant quarter. Any VAT payable is due at the same time.

However, businesses with an annual turnover of £100,000 or more (excluding

VAT), and all newly registered businesses have to file their VAT returns online

and pay any VAT that is due electronically. The deadlines for doing this are

extended by seven days.

Example 14

Jet registered for VAT on 1 January 2011. For the quarter ended 31 March

2011 she had output VAT of £12,400 and input VAT of £7,100.

• Jet, as a newly registered business, will have to file her VAT returns

online and pay the VAT that is due electronically.

• Jet’s VAT return for the quarter ended 31 March 2011 should be

submitted by 7 May 2011, being one month and seven days after the

end of the quarter.

• VAT of £5,300 (£12,400 – £7,100) is payable, and this is due on 7 May

2011 when the VAT return is submitted

Because VAT is a self-assessed tax, HM Revenue & Customs can make control

visits to VAT registered companies. The purpose of a control visit is to provide

an opportunity for HM Revenue & Customs to check the accuracy of VAT

returns.

VAT invoices

A VAT registered business will usually have to issue VAT invoices in respect of

standard rated supplies. VAT invoices must contain certain information.

Example 15

Keen Ltd registered for VAT on 1 March 2011.

The company only sells goods, and at present issues sales invoices that show

(1) the invoice date and invoice number, (2) the type of supply, (3) the quantity

2 VALUE ADDED TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011

© 2011 ACCA

and a description of the goods supplied, (4) Keen Ltd’s name and address, and

(5) the name and address of the customer. Keen Ltd does not offer any

discount for prompt payment.

The company wants to know the circumstances in which it is and is not

required to issue a VAT invoice, the period during which such an invoice should

be issued, and the additional information that it will have to show on its sales

invoices in order that these are valid for VAT purposes.

Issue of VAT invoices

• Keen Ltd must issue a VAT invoice when it makes a standard rated

supply to a VAT registered customer.

• A VAT invoice is not required if the supply is exempt, zero-rated, or if

the supply is to a non-VAT registered customer.

• A VAT invoice should be issued within 30 days of the date that the

supply of goods is treated as being made.

Additional information

The following information is required:

• Keen Ltd’s VAT registration number.

• The tax point.

• The rate of VAT for each supply.

• The VAT-exclusive amount for each supply.

• The total VAT-exclusive amount.

• The amount of VAT payable.

The default surcharge

A default occurs if a VAT return is not submitted on time or if VAT is paid late.

If the default involves the late payment of VAT then a surcharge may be

incurred.

Example 16

Li has submitted her VAT returns as follows:

Quarter ended VAT paid Submitted

£

30 September 2009 6,200 Two months late

31 December 2009 28,600 One month late

31 March 2010 4,300 On time

30 June 2010 7,600 On Time

30 September 2010 1,900 On time

31 December 2010 3,200 On time

31 March 2011 6,900 Two months late

Li always pays any VAT that is due at the same time that the related VAT

return is submitted.

• The late submission of the VAT return for the quarter ended 30

September 2009 will have resulted in HM Revenue & Customs issuing a


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surcharge liability notice specifying a surcharge period running to 30

September 2010.

• The late payment of VAT for the quarter ended 31 December 2009 will

result in a surcharge of £572 (28,600 x 2%).

• In addition, the surcharge period will have been extended to 31

December 2010.

• Li then submitted four VAT returns on time.

• The late submission of the VAT return for the quarter ended 31 March

2011 will therefore only result in a surcharge liability notice (specifying

a surcharge period running to 31 March 2012).

Errors in a VAT return

A VAT registered business that makes an error in a VAT return that results in

the underpayment of VAT can be subject to both a penalty for an incorrect

return and penalty interest.

Example 17

During March 2011 Zoo Ltd discovered that it had incorrectly claimed input

VAT on the purchase of three motor cars when completing its VAT return for

the quarter ended 31 December 2010.

• If the error is less than the higher of £10,000 or 1% of Zoo Ltd’s

turnover for the quarter ended 31 March 2011, then the error can be

voluntarily disclosed by simply entering it on the VAT return for the

quarter ended 31 March 2011.

• If the error exceeds the limit, they it can be voluntarily disclosed but

disclosure must be made separately to HM Revenue & Customs.

• There will only be penalty interest where separate disclosure is required,

but a penalty for an incorrect return might be imposed in either case.

The amount of penalty is based on the amount of VAT understated, but the

actual penalty payable is linked to a taxpayer’s behaviour.

Example 18

Continuing with Example 17

• HM Revenue & Customs will not charge a penalty if Zoo Ltd has taken

reasonable care, provided the company informs them of the error.

• However, claiming input VAT on the purchase of motor cars is more

likely to be treated as careless, since Zoo Ltd would be expected to

know that such input VAT is not recoverable.

• The maximum amount of penalty will therefore be 30% of the amount of

input VAT incorrectly claimed, but this penalty could be reduced to nil if

unprompted disclosure is made to HM Revenue & Customs.

Imports and exports

When a UK VAT registered business imports goods into the UK from outside

the European Union, then VAT has to be paid at the time of importation. This

VAT can then be reclaimed as input VAT on the VAT return for the period

during which the goods were imported.


© 2011 ACCA

Example 19

Yung Ltd is registered for VAT in the UK. The company has the choice of

purchasing goods costing £1,000 (exclusive of VAT) from either a UK supplier

or from a supplier situated outside the European Union.

• If Yung Ltd purchases the goods from a UK supplier then it will pay the

supplier £1,200 (1,000 plus VAT of 200 (1,000 x 20%)), and then

reclaim input VAT of £200.

• If the goods are instead purchased from a supplier situated outside the

European Union, then Yung Ltd will pay £1,000 to the supplier, £200 to

HM Revenue & Customs, and then reclaim input VAT of £200.

• In each case Yung Ltd has paid £1,200 and reclaimed £200.

Regular importers can defer the payment of VAT on importation by setting up

an account with HM Revenue & Customs. It is necessary to provide a bank

guarantee, but VAT is then accounted for on a monthly basis.

When a UK VAT registered business exports goods outside of the European

Union then the supply is zero-rated.

Trading within the European Union

When a UK VAT registered business acquires goods from within the European

Union, then VAT has to be accounted for according to the date of acquisition.

The date of acquisition is the earlier of the date that a VAT invoice is issued or

the 15th day of the month following the month in which the goods come into

the UK.

This VAT charge is declared on the VAT return as output VAT, but can be

reclaimed as input VAT on the same VAT return. Therefore for most businesses

there is no VAT cost as the output VAT and the corresponding input VAT contra

out. The only time that there is a VAT cost is if a business makes exempt

supplies, since an exempt business cannot reclaim any input VAT.

Example 20

Continuing with Example 19

Yung Ltd also has the option of purchasing goods from a supplier situated in

the European Union.

• Yung Ltd will pay £1,000 to the supplier. Then on its VAT return the

company will show output VAT of £200 and input VAT of £200.

• The end result is the same as with an import from outside the European

Union, but with a European Union acquisition there is no need to

actually pay the VAT subsequent to its recovery as input VAT.

When a UK VAT registered business supplies goods to another VAT registered

business within the European Union then the supply is zero-rated.


© 2011 ACCA

International services

Services supplied to a VAT registered business are generally treated as being

supplied in the country where the customer is situated. Therefore, where a UK

VAT registered business receives international services the place of supply will

be the UK.

Example 21

Wing Ltd is registered for VAT in the UK. The company receives supplies of

services from VAT registered businesses situated elsewhere within the

European Union.

• VAT will have to be accounted for according to the date of acquisition.

This is the earlier of the date that the service is completed or the date it

is paid for.

• The VAT charged at the UK VAT rate should be declared on Wing Ltd’s

VAT return as output VAT, but will then be reclaimed as input VAT on

the same VAT return.

The supply of international services by a UK VAT registered business will

generally be outside the scope of UK VAT as the place of supply will be outside

the UK.

The cash accounting, annual accounting and flat rate schemes

The cash accounting, annual accounting and flat rate schemes are all available

to small businesses. Be careful that the schemes are not confused, as they are

completely different from each other.

The cash accounting scheme enables a business to account for VAT on a cash

basis. The scheme will normally be beneficial where a period of credit is given

to customers. It also results in automatic relief for impairment losses. The

disadvantage is that input VAT will only be recovered when purchases and

expenses are paid for.

Example 22

Ming is registered for VAT. She has annual standard rated sales of £800,000.

This figure is inclusive of VAT. Ming pays her expenses on a cash basis, but

allows customers three months credit when paying for sales. Several of her

customers have recently defaulted on the payment of their debts.

• Ming can use the cash accounting scheme if her expected taxable

turnover for the next 12 months does not exceed £1,350,000 exclusive

of VAT.

• In addition, she must be up to date with her VAT returns and VAT

payments.

• Output VAT will be accounted for three months later than at present

since the scheme will result in the tax point becoming the date that

payment is received from customers.

• The recovery of input VAT on expenses will not be affected as these are

paid in cash.

• The scheme will provide automatic relief for an impairment loss should

a customer default on the payment of a debt.


© 2011 ACCA

In contrast, the advantage of the annual accounting scheme is mainly

administrative, since a business only has to submit one VAT return each year.

All eligible businesses can join the annual accounting scheme as soon as they

register for VAT.

Example 23

Newt Ltd is registered for VAT. The company has annual standard rated sales

of £950,000. This figure is inclusive of VAT. Because of bookkeeping problems

Newt Ltd has been late in submitting its recent VAT returns.

• Newt Ltd can apply to use the annual accounting scheme if its expected

taxable turnover for the next 12 months does not exceed £1,350,000

exclusive of VAT.

• In addition the company must be up to date with its VAT returns.

• Under the scheme only one VAT return is submitted each year. This is

due within two months of the end of the annual VAT period (note that an

additional seven days is not given for filing an annual VAT return online

as the deadline is already longer than normal).

• The resulting reduced administration should mean that default

surcharges are avoided in respect of the late submission of VAT returns.

• Nine monthly payments are made on account of VAT commencing in

month four of the annual VAT return period. Any balancing payment is

made with the VAT return.

• Each payment on account will be 10% of the VAT payable for the

previous year. This will improve both budgeting and possibly cash flow

where a business is expanding.

The flat rate scheme can simplify the way in which small businesses calculate

their VAT liability.

Under the flat rate scheme, a business calculates its VAT liability by simply

applying a flat rate percentage to total income. This removes the need to

calculate and record output VAT and input VAT.

The flat rate percentage is applied to the gross total income figure (including

exempt supplies) with no input VAT being recovered. The percentage varies

according to the type of trade that the business is involved in, and will be given

to you in the exam.

Example 24

Omah registered for VAT on 1 March 2011. He has annual standard rated sales

of £75,000, and these are all made to the general public. Omah has annual

standard rated expenses of £10,000. Both figures are exclusive of VAT. The

relevant flat rate scheme percentage for Omah’s trade is 13%.

• Omah can use the flat rate scheme if his expected taxable turnover for

the next 12 months does not exceed £150,000 exclusive of VAT.

• In addition, the expected total income (including VAT and exempt

supplies) for the next 12 months must not exceed £230,000.


© 2011 ACCA

• The main advantage of the scheme is the simplified VAT administration.

Omah’s customers are not VAT registered, so there will be no need to

issue VAT invoices.

• Using the normal basis of calculating the VAT liability, Omah will have

to pay annual VAT of £13,000 (75,000 – 10,000 = 65,000 x 20%).

• If he uses the flat rate scheme then Omah will pay VAT of £11,700

(75,000 + 15,000 (output VAT of 75,000 x 20%) = 90,000 x 13%),

which is an annual saving of £1,300 (13,000 – 11,700)

Conclusion

There is quite a lot to remember when studying VAT, although the subject itself

is not particularly complicated. You will normally find that several different

topics are covered within each VAT question, and so it is important that you

cover the whole subject area.


RELEVANT TO ACCA QUALIFICATION PAPER F9


© 2011 ACCA

Introduction to Islamic finance The Paper F9 syllabus now contains a section on Islamic finance (Section E3). All components of this section will be examined at intellectual level 1, knowledge and comprehension. Although the concept of Islamic finance can be traced back about 1,400 years, its recent history can be dated to the 1970s when Islamic banks in Saudi Arabia and the United Arab Emirates were launched. Bahrain and Malaysia emerged as centres of excellence in the 1990s. It is now estimated that worldwide around US $1 trillion of assets are managed under the rules of Islamic finance. Islamic finance rests on the application of Islamic law, or Shariah, whose primary sources are the Qur'an and the sayings of the Prophet Muhammad. Shariah, and very much in the context of Islamic finance, emphasises justice and partnership. The main principles of Islamic finance are that: • Wealth must be generated from legitimate trade and asset-based investment.

(The use of money for the purposes of making money is expressly forbidden.) • Investment should also have a social and an ethical benefit to wider society

beyond pure return. • Risk should be shared. • All harmful activities (haram) should be avoided. The prohibitions

The following activities are prohibited: • Charging and receiving interest (riba). The idea of a lender making a straight

interest charge, irrespective of how the underlying assets fare, transgresses the concepts of risk sharing, partnership and justice. It represents the money itself being used to make money. It also prohibits investment in companies that have too much borrowing (typically defined as having debt totalling more than 33% of the firm’s stock market value over the last 12 months).

• Investments in businesses dealing with alcohol, gambling, drugs, pork, pornography or anything else that the Shariah considers unlawful or undesirable (haram).

• Uncertainty, where transactions involve speculation, or extreme risk. This is seen as being akin to gambling. This prohibition, for example, would rule out speculating on the futures and options markets. Mutual insurance (which relates to uncertainty) is permitted if it is related to reasonable, unavoidable business risk. It is based upon the principle of shared responsibility for shared financial security, and that members contribute to a mutual fund, not for profit, but in case one of the members suffers misfortune.

• Uncertainty about the subject matter and terms of contracts – this includes a prohibition on selling something that one does not own. There are special financial techniques available for contracting to manufacture a product for a customer. This is necessary because the product does not exist, and therefore cannot be owned, before it is made. A manufacturer can promise to produce a specific product under certain agreed specifications at a

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determined price and on a fixed date. Specifically, in this case, the risk taken is by a bank which would commission the manufacture and sell the goods on to a customer at a reasonable profit for undertaking this risk. Once again the bank is exposed to considerable risk. Avoiding contractual risk in this way, means that transactions have to be explicitly defined from the outset. Therefore, complex derivative instruments and conventional short sales or sales on margin are prohibited under Islamic finance.

The permitted

As mentioned above, the receipt of interest is not allowed under Shariah. Therefore, when Islamic banks provide finance they must earn their profits by other means. This can be through a profit-share relating to the assets in which the finance is invested, or can be via a fee earned by the bank for services provided. The essential feature of Shariah is that when commercial loans are made, the lender must share in the risk. If this is not so then any amount received over the principal of the loan will be regarded as interest. There are a number of Islamic financial instruments mentioned in the Paper F9 syllabus and which can provide Shariah-compliant finance: • Murabaha is a form of trade credit for asset acquisition that avoids the

payment of interest. Instead, the bank buys the item and then sells it on to the customer on a deferred basis at a price that includes an agreed mark-up for profit. The mark-up is fixed in advance and cannot be increased, even if the client does not take the goods within the time agreed in the contract. Payment can be made by instalments. The bank is thus exposed to business risk because if its customer does not take the goods, no increase in the mark-up is allowed and the goods, belonging to the bank, might fall in value.

• Ijara is a lease finance agreement whereby the bank buys an item for a customer and then leases it back over a specific period at an agreed amount. Ownership of the asset remains with the lessor bank, which will seek to recover the capital cost of the equipment plus a profit margin out of the rentals payable.

Emirates Airlines regularly uses Ijara to finance its expansion Another example of the Ijara structure is seen in Islamic mortgages. In 2003, HSBC was the first UK clearing bank to offer mortgages in the UK designed to comply with Shariah. Under HSBC’s Islamic mortgage, the bank purchases a house then leases or rents it back to the customer. The customer makes regular payments to cover the rental for occupying or otherwise using the property, insurance premiums to safeguard the property, and also amounts to pay back the sum borrowed. At the end of the mortgage, title to the property can be transferred to the customer. The demand for Islamic mortgages in the UK has shown considerable growth. • Mudaraba is essentially like equity finance in which the bank and the

customer share any profits. The bank will provide the capital, and the borrower, using their expertise and knowledge, will invest the capital. Profits will be shared according to the finance agreement, but as with equity finance

there is no certainty that there will ever be any profits, nor is there certainty

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that the capital will ever be recovered. This exposes the bank to considerable investment risk. In practice, most Islamic banks use this is as a form of investment product on the liability side of their statement of financial position, whereby the investor or customer (as provider of capital) deposits funds with the bank, and it is the bank that acts as an investment manager (managing the funds).

• Musharaka is a joint venture or investment partnership between two parties. Both parties provide capital towards the financing of projects and both parties share the profits in agreed proportions. This allows both parties to be rewarded for their supply of capital and managerial skills. Losses would normally be shared on the basis of the equity originally contributed to the venture. Because both parties are closely involved with the ongoing project management, banks do not often use Musharaka transactions as they prefer to be more ‘hands off’.

• Sukuk is debt finance. A conventional, non-Islamic bond or debenture is a simple debt, and the bondholder’s return for providing capital to the bond issuer takes the form of interest. Islamic bonds, or sukuk, cannot bear interest. So that the sukuk are Shariah-compliant, the sukuk holders must have a proprietary interest in the assets which are being financed. The sukuk holders’ return for providing finance is a share of the income generated by the assets. Most sukuk, are ‘asset-based’, not ‘asset-backed’, giving investors ownership of the cash flows but not of the assets themselves. Asset-based is obviously more risky than asset backed in the event of a default.

There are a number of ways of structuring sukuk, the most common of which are partnership (Musharaka) or lease (Ijara) structures. Typically, an issuer of the sukuk would acquire property and the property will generally be leased to tenants to generate income. The sukuk, or certificates, are issued by the issuer to the sukuk holders, who thereby acquire a proprietary interest in the assets of the issuer. The issuer collects the income and distributes it to the sukuk holders. This entitlement to a share of the income generated by the assets can make the arrangement Shariah compliant. The cash flows under some of the approaches described above might be the same as they would have been for the standard western practice paying of interest on loan finance. However, the key difference is that the rate of return is based on the asset transaction and not based on interest on money loaned. The difference is in the approach and not necessarily on the financial impact. In Islamic finance the intention is to avoid injustice, asymmetric risk and moral hazard (where the party who causes a problem does not suffer its consequences), and unfair enrichment at the expense of another party. Advocates of Islamic finance claim that it avoided much of the recent financial turmoil because of its prohibitions on speculation and uncertainty, and its emphasis on risk sharing and justice. That does not mean, of course, that the system is free from all risk (nothing is), but if you are more exposed to a risk you are likely to behave more prudently.

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The Shariah board

The Shariah board is a key part of an Islamic financial institution. It has the responsibility for ensuring that all products and services offered by that institution are compliant with the principles of Shariah law. Boards are made up of a committee of Islamic scholars and different institutions can have different boards. An institution’s Shariah board will review and oversee all new product offerings before they are launched. It can also be asked to deliver judgments on individual cases referred to it, such as whether a specific customer’s business proposals are Shariah-compliant. The demand for Shariah-compliant financial services is growing rapidly and the Shariah board can also play an important role in helping to develop new financial instruments and products to help the institution to adapt to new developments, industry trends, and customers’ requirements. The ability of scholars to make pronouncements using their own expertise and based on Shariah, highlights the fact that Islamic finance remains innovative and able to evolve, while crucially remaining within the bounds of core principles. Developments

Perhaps the main current problem is the absence of a single, worldwide body to set standards for Shariah compliance, meaning that there is no ultimate authority for Shariah compliance. Each Islamic bank’s adherence to the principles of Shariah law is governed by its own Shariah board. Some financial aspects of Shariah law, and, therefore, the legitimacy of the financial instruments used can be open to interpretation, with the result that some Islamic banks may agree transactions that would be rejected by other banks. Therefore, a contract might unexpectedly be declared incompatible with Shariah law and thus be invalid. In Malaysia, the world’s biggest market for sukuk, the Shariah advisory council, ensures consistency to help creating certainty across the market. Some industry bodies, notably the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in Bahrain, have also been working towards common standards. To quote the AAOFI website: ‘AAOIFI is supported by institutional members (200 members from 45 countries, so far) including central banks, Islamic financial institutions, and other participants from the international Islamic banking and finance industry, worldwide. AAOIFI has gained assuring support for the implementation of its standards, which are now adopted in the Kingdom of Bahrain, Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria. The relevant authorities in Australia, Indonesia, Malaysia, Pakistan, Kingdom of Saudi Arabia, and South Africa have issued guidelines that are based on AAOIFI’s standards and pronouncements.’ However, despite these movements towards consistency, some differences between national jurisdictions are likely to remain.

Ken Garrett is a freelance author and lecturer

RELEVANT TO ACCA QUALIFICATION PAPER P6 (UK)

Studying Paper P6 Performance objectives 19 and 20 are relevant to this exam

© 2011 ACCA

Guidance on approach to questions in Section A of Paper P6 (UK) The two questions in Section A of the Paper P6 (UK) exam are important

because they represent between 50% and 70% of the marks on the paper.

They usually contain quite a lot of information and tend to involve a number of

requirements and a combination of taxes such that they could appear to be

somewhat overwhelming. In order to be successful in the exam it is important

to have a structured approach to these questions and to have practised as

many of them as possible.

This guidance is likely to be similar to that provided by lecturers on revision

courses and so is particularly aimed at those of you who are unable or have

chosen not to attend such a course.

This article is about exam technique as opposed to technical knowledge.

However, it must be emphasised that you will not be able to pass the exam on

the basis of good exam technique alone; strong technical knowledge, across

the whole of the syllabus, is the vital foundation on which to build your exam

success.

Initial reading time

You have 15 minutes of reading time available at the start of the exam; you

should have a clear idea before you go into the exam as to how you intend to

use this time. There is guidance on the ACCA website, in the August 2007

issue of Student Accountant magazine, and your tutors will also have ideas for

you.

It would certainly seem to make sense to use the time to review the three

Section B questions and determine which ones you intend to do. You could

then use the remaining time to read through the first question that you intend

to answer; this will depend on whether you intend to start with Section A or

Section B.

Time management

Depending on the number of marks, the time available to answer the Section A

questions will be between one and a half and just over two of the three hours

available in the exam. The management of this significant period of time is

likely to be crucial to your exam success or failure.

Time management in the exam is more than simply moving on to the next

question when the time allowed for the current question has elapsed. It is

about getting to the end of each question in the correct amount of time. This

requires you to manage your time throughout the question and not just at the

end; to be aware of how much time has elapsed and how much time remains

for each particular part of each question and to tailor your answers

accordingly.

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If you start a 34-mark question with the thought that it needs to be finished in

just over an hour you are in danger of being too expansive at the start of the

question (when there is a whole hour to go) such that you may find yourself

rushing the final parts of the question or missing them out entirely. In order to

avoid this potential problem, you need to identify the tasks that need to be

performed, the time available for each task and then manage the time to

ensure that all of the tasks are carried out.

You should approach the first task in a question with the aim of finishing it in

the appropriate amount of time before moving on to the next task and so on.

This can only be achieved if you monitor the time continually throughout the

question whilst recognising what still needs to be done in order to complete

the particular task. This monitoring should prevent you from spending too long

on a particular point thus ensuring that all of the tasks are carried out in the

time available.

However, this is not easy to do. Accordingly, you should practise this approach

such that, by the time you come to sit the exam, you are confident in your

ability to start and finish a question in the correct amount of time.

The requirements

Marks are awarded in the exam for satisfying the requirements and not for

other information (regardless of how interesting or technically accurate it may

be). Accordingly, it is vital to identify and then address the particular

requirements in the correct amount of time.

The formal requirements at the end of a Section A question usually consist of a

broad overview of what needs to be done together with a reference to the

documents provided in the question where the detailed requirements can be

found. However, the formal requirements are still important as they indicate

the number of marks available (and thus the time available) for each of the

broad areas of the question.

The detailed requirements should be seen as a list of tasks, all of which need

to be performed. You may find it useful to number these tasks so that you can

ensure that you address all of them. Where there are a number of tasks within

a particular area of the question, some initial thought will be required to

determine the time available for each task. This requires you to identify the

relative size of each of the tasks by thinking about what needs to be done to

carry them out.

When planning what needs to be done to carry out a task you should take into

account:

• any guidance provided by ‘the manager’ in the question; and

• the verb(s) used in the requirement.

The guidance from the manager may suggest a particular approach to take, a

good place to start or simply point out matters that do not need to be

addressed. This guidance is intended to help you carry out the tasks within the

time available.

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The verb(s) used in the requirement have been carefully chosen. They provide

an indication of the level of detail required. For example, ‘state’ requires no

explanatory detail, ‘outline’ is asking for something brief, whereas ‘describe in

detail’ expects, not unsurprisingly, a detailed description. ‘Calculate’ requires

calculations in order to arrive at a figure; it does not require explanations

unless they are asked for separately. The verb used in the requirement is

another way of providing you with guidance to help you complete the answer in

the time available.

Before starting to answer part of a question, you should have determined the

amount of time available for that part and an approximate split of that time

between the various tasks.

Illustration – Question 1(i) from the June 2010 exam

• There are 11 marks available. Bearing in mind that you would have had

to spend some time reading the question you are likely to have had

around 17 minutes to complete this requirement.

• The detailed requirement is in the email from Maya: ‘Please let me know the budgeted total corporation tax liability for the three subsidiaries’.

• There is detailed guidance in the email from the manager: ‘When

calculating the total corporation tax liability of the three subsidiaries as

requested by Maya I want you to …’ followed by two tasks.

• The verb in the first task is ‘calculate’

• The verb in the second task is ‘explain’

• You are also told to ‘take advantage of any opportunities available to reduce the total corporation tax liability of the companies’.

• The split of the requirement into two tasks is important. The first task is

intended to establish the position prior to the recognition of the

additional expenditure. The second task requires an explanation of the

effect of the additional expenditure. Many candidates did not score as

many marks as they could have done because they treated the two tasks

as one and simply calculated the tax liability having already taken the additional expenditure into account.

• The first task required a number of corporation tax computations. This is

not a difficult task at this level but there was also the need to identify any

group planning opportunities available to reduce the total liability.

Accordingly, some thought was needed before preparing the calculations.

By practising questions you should have a good idea as to how long this

task should take, probably no more than 10 minutes, ie slightly over half

of the time available.

• The second task required explanations of two issues; the relief available

in respect of research and development costs and expenditure on manufacturing equipment.

• In order to complete both tasks in the time available it would have been

necessary to:

• think before starting the calculations so that group planning opportunities were identified

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• perform the first task briskly and accurately in about half of the total time

available

• spend the remaining time on the second task recognising that there were

two aspects to it and carrying out both of them.

Suggested approach to a Section A question

The following is a suggested series of steps to carry out in order to complete a

Section A question in the correct amount of time such that you will maximise

the number of marks obtained. You should practise questions and adapt this

approach until you find a series of steps that works for you.

1. Use the total number of marks to determine the number of minutes

available and write down the time at which you must have completed your

answer to the question.

2. Read the formal requirements at the end of the question. The formal

requirements may include information that you will find useful when you

come to read the question relating to the nature of the documents to be

prepared and the taxes involved.

3. Read the question from the beginning. Make a note (ideally only one or two

words) in the margin by each paragraph to remind you of what the

paragraph is about and highlight key figures and dates. This will help you

find the information you need in the question when you come to write your answer.

4. Once you have read the question, calculate how much time you have

remaining. This will enable you to determine how much time to spend on

each part of the question. For example, if the question is for 34 marks

(61.2 minutes) and seven minutes have elapsed so far, then you have 54.2

minutes to complete your answer. This equates to 1.6 (54.2/34) minutes per mark.

5. So, if Part (a) is for 11 marks, it will need to be completed in 17.6

minutes. Think about how you will carry out the tasks in Part (a) in that

time. Identify the relative size of the tasks, split the time between them

and get them done in the time. Keep looking at your watch to push yourself

along.

6. Repeat step 5 for the remaining parts of the question such that you finish

it in the time.

Calculations

Section A questions usually require a combination of explanations and

calculations. Calculations are time consuming, so it is important that you do

not waste time performing any that turn out to be unnecessary. Think before

you start; identify the calculations that you will need to perform and the most

efficient way of carrying them out.

Brief explanations of some of the techniques that you may find useful in the

exam are set out below.

Working at the margin

The question may tell you (or provide you with the information to work out) the

taxpayer’s marginal rate of tax. The marginal rate of tax enables the tax saved

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or payable in respect of different strategies to be calculated by simply applying

the rate to the change in the level of income without the need to prepare full

tax computations. Accordingly, if you know the marginal rate of tax it is

important that you use it as it will save you time.

Examples of this type of question include Question 2(a) from the December

2009 exam and Question 2(i) from the June 2010 exam.

Calculating a person’s cash position

Taxpayers are often more interested in their final cash position as opposed to

their tax liability and the questions in the exam may reflect this. Calculating a

person’s cash position requires calculations of cash receipts and cash

payments (one or more of which will be tax). A person’s tax liability may be

affected by non-cash items, for example the original cost of an asset sold or

benefits from employment; these items must be taken into account when

calculating the person’s tax payable but excluded from the calculations of the

person’s cash position.

Examples of this type of question include Question 2(a)(ii) from the December

2009 exam and Question 2(i) from the June 2010 exam.

Finding a missing figure

Rather than requiring you to calculate tax or cash, a question may require you

to find a missing figure, for example, the number of shares that should be sold

or the minimum fee that should be charged in order to achieve a particular

objective. In order to do this you will need to understand the relevant tax

principles involved and then identify a method to solve the problem.

Example 1

Problem – How much group relief can be surrendered to a particular company

without wasting double tax relief?

Tax principle – Double tax relief is the lower of the UK tax and the overseas tax

on the overseas income. In order not to waste double tax relief, the UK tax on

the overseas income must equal the overseas tax.

Solution – The amount of overseas income that must remain subject to UK tax

is the overseas tax divided by the UK tax rate. For example, if the overseas tax

is £15,000 and the UK tax rate is 28%, the amount of overseas income that

must remain subject to UK tax is £53,571 (£15,000/28%). The amount of

group relief to surrender to the company is its taxable total profits less

£53,571. The group relief will relieve all of the company’s UK income and

gains together with an amount of its overseas income such that its taxable

total profits equal £53,571, all of which is overseas income.

See Question 1(a) from the Pilot Paper for an example of this type of question.

Example 2

Problem – How many shares should the taxpayer sell in order to realise a

capital gain of a particular amount (for example, an amount equal to the

annual exemption)?

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Tax principles – The capital gain will equal sales proceeds less acquisition

costs and costs of disposal. It may be necessary to consider gift relief or

incorporation relief when the shares were acquired in order to determine the

base cost of the shares. There may also be capital losses to take into account.

Solution – Calculate the gain that would arise on the sale of a single share. The

number of shares to be sold is the total gain that the taxpayer wishes to realise

divided by the gain in respect of a single share. An alternative approach would

be to calculate the gain on the sale of all of the shares. The proportion of that

gain that the taxpayer wishes to realise will provide the proportion of the

shareholding and therefore the number of shares that need to be sold.

The importance of question practice

The more questions you practise, the more confident you will be that you have

an approach that works for you and the better you will perform in the exam.

You will also become more familiar with the way in which the information is

presented and the sort of tasks you will be expected to perform.

When practising questions:

• work them to time; and

• do not look at the answer until you have finished the whole question.

It is very tempting to have a quick look at the answer while doing a question,

just to check that you are progressing in the right direction. However, if you do

you will never obtain full confidence in your own abilities; you will be reliant on

that ‘quick look’ to give you the encouragement you need to keep going. The

problem is of course, once you are in the exam, that encouragement will not be

available.

Once you have finished the question ask yourself the following questions before

you look at the answer:

• Did you manage your time successfully?

• Did you focus on the verb(s) in each requirement and follow any specific

advice that was given?

• Were there any particular technical areas where your knowledge let you

down?

When you come to review the answer, don’t be too hard on yourself. You will be

awarded marks for everything you do that is correct, provided it relates to the

requirement, even if you have made mistakes prior to that point. So start by

recognising where your answer is correct or where it would be were it not for

earlier mistakes. Then make a note of the mistakes that you made and the

areas where your knowledge was weak and study those technical areas to

improve your performance.

Rory Fish is examiner for Paper P6 (UK)

F6 TAX 2011

Documents

Transcript of F6 TAX 2011