Taxation (TX UK)
March / June 2021
Examiner’s report
The examining team share their observations from the
marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer
constructive advice for those sitting the exam in the
future.
Contents
General comments .............................................................. 2
Section A ............................................................................. 2
Example 1 ........................................................................ 3
Example 2 ........................................................................ 4
Example 3 ........................................................................ 4
Example 4 ........................................................................ 5
Section B ............................................................................. 6
Question 1 ........................................................................ 7
Question 2 ........................................................................ 8
Question 3 ........................................................................ 9
Question 4 ........................................................................ 9
Question 5 ...................................................................... 10
Section C ........................................................................... 11
Paul ................................................................................ 11
Requirement (a) – 10 marks....................................... 12
Alfred and Amaia............................................................ 13
Requirement (a) – 6 marks ......................................... 14
Requirement (b) – 9 marks ......................................... 14
Mooncake Ltd................................................................. 15
Requirement (a) – 2 marks ......................................... 16
Requirement (b) – 7 marks ......................................... 16
Requirement (c)(i) – 4 marks...................................... 17
Requirement (c)(ii) – 2 marks ..................................... 17
Examiner’s report – TX-UK March/June 2021
1
General comments
This examiner’s report should be used in conjunction with the published March/June
2021 sample exam which can be found on the ACCA Practice Platform.
In this report, the examining team provide constructive guidance on how to answer
the questions whilst sharing their observations from the marking process,
highlighting the strengths and weaknesses of candidates who attempted these
questions. Future candidates can use this examiner’s report as part of their exam
preparation, attempting question practice on the ACCA Practice Platform, reviewing
the published answers alongside this report.
The Taxation (TX-UK) exam is offered as a computer-based exam (CBE). The model
of delivery for the CBE exam means that candidates do not all receive the same set
of questions. In this report, the examining team share their observations from the
marking process to highlight strengths and weaknesses in candidates’ performance,
and to offer constructive advice for future candidates.
•
•
•
Section A objective test questions – four specific questions from this sitting of
the exam.
Section B objective test case questions – the key challenge areas for this
section in the exam.
Section C constructed response questions – guidance on how to complete all
published CR questions from the sample exam
Section A
Section A questions aim to provide a broad coverage of the syllabus, and future
candidates should aim to revise all areas of the TX-UK syllabus, rather than attempting
to question spot.
The following four questions are reviewed with the aim of giving future candidates an
indication of the types of questions asked, guidance on dealing with exam questions
and to provide a technical debrief on the topics covered by the specific questions
selected.
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Example 1
On 10 August 2022, Zahra submitted her income tax return electronically for the tax
year 2020-21. She paid the tax due of £8,400 on the same day.
What is the MAXIMUM penalty that can be imposed by HM Revenue and
Customs (HMRC) in respect of the late filing of Zahra's income tax return?
You are not required to consider penalties for the late payment of tax.
Answer Options:
A
£100
B
£1,000
C
£1,420
D
£1,300
This question is on syllabus area A6(a) state the penalties that can be charged.
The tax return is submitted more than six but less than twelve months late. The
penalties payable are therefore:
£100 (initial penalty)
£900 (daily penalties of £10 per day for a maximum of 90 days – this is applicable
since the return is 3 months late and outstanding for the full 90 days)
£420 (5% x £8,400 – this is applicable as the return is over 6 months late)
The correct answer is C £1,420.
The alternative, incorrect options are as follows:
A
B
90.
D
£100 being the initial penalty only
£1,000 being the initial penalty of £100 plus maximum daily penalties of £10 x
£1,300 being the initial penalty of £100 plus maximum daily penalties of £10 x
90 plus minimum tax geared penalty of £300
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Example 2
Abida ceased trading on 31 January 2021. Her recent trading profits were as follows:
£
Year ended 30 June 2019
18,400
Year ended 30 June 2020
11,200
Seven-month period ended 31 January 2021
7,300
Abida has unused overlap profits of £2,600.
What amount of trading profit will Abida be assessed on for the tax year 202021?
£ ____________
This question covers syllabus area B3(f) compute the assessable profits on cessation.
The correct answer is £15,900
The seven-month period to 31 January 2021 ends in 2020-21 which is the final tax
year. The penultimate tax year (2019-20) will be assessed on the current year basis;
ie the accounting period ending in the tax year, being the year ended 30 June 2019.
Therefore 2020-21 will catch the remaining untaxed profits less the overlap profits;
being profits for the year ended 30 June 2020 of 11,200 plus profits of the final
seven-month period of 7,300 less the overlap profits of 2,600 = 15,900
Example 3
Frances commenced trading on 1 January 2020. An analysis of her taxable supplies
for the first year of trading (spread evenly over the quarter) is as follows:
Quarter ended
£
31 March 2020
15,000
30 June 2020
20,000
30 September 2020
30,000
31 December 2020
33,000
Frances notifies HM Revenue and Customs (HMRC) of her liability to compulsorily
register for value added tax (VAT) on time.
From what date will Frances be registered for VAT?
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Answer Options:
A
30 December 2020
B
1 January 2021
C
31 January 2021
D
1 February 2021
This question covers syllabus area F1(a) recognise the circumstances in which a
person must register for VAT.
Frances’ taxable turnover exceeds £85,000 on 30 November 2020 (15,000 + 20,000
+ 30,000 + 2/3 x 33,000) = £87,000. She has 30 days to notify MH Revenue and
Customs and is registered from 1 January 2021
The correct answer is B 1 January 2021
The alternative, incorrect answer options are as follows;
A
30 December 2020 being 30 days after historic test exceeded
C
31 January 2021 being one month after quarter end when historic test
exceeded
D
1 February 2021 which would be correct if the historic test was met on 31
December 2020
Example 4
Ken died on 15 January 2021 leaving a chargeable estate valued at £245,000. He
had made gross chargeable lifetime transfers of £98,000 in October 2013 and
£118,000 in June 2017.
How much inheritance tax (IHT) is payable in respect of Ken's chargeable
estate of £245,000?
£ ____________
This Fill in the Blank question covers syllabus area D2(b) understand and compute
the tax liability on a death estate.
The correct answer is £15,200
Firstly, a review of the lifetime gifts at time of death shows that the chargeable
lifetime transfer (CLT) in October 2013 is more than seven years before death so
that falls out of consideration. The CLT in June 2017 is within seven years of death
so that will have to be reassessed on death. The NRB on death is £325,000, less the
CLT on June 2017 of £118,000, gives a remaining NRB of £207,000
Death liability is therefore the chargeable death estate of £245,000 less the
remaining NRB after reviewing the lifetime transfers of £207,000 giving a taxable
estate of £38,000 at the death rate of 40% = £15,200
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Section B
Section B tests candidates’ knowledge in more depth than Section A. There are three
case questions each made up of five objective test (OT) questions for 2 marks each.
Case questions will examine a single tax in the context of a given scenario and will
cover a variety of different aspects of that particular tax. Therefore, candidates must
be able to apply their knowledge of that tax to the specific scenario to be able to score
well.
Each question is independent of the other questions in the case and each question
will generally follow the order of the case scenario.
Example of a case scenario
Lily disposed of various assets during the tax year 2020-21, resulting in chargeable
gains.
Lily’s disposals included the following:
A copyright sold on 30 June 2020
The copyright had been purchased on 1 July 2017 for £22,000 when it had an
unexpired life of 15 years.
Four hectares of land sold on 12 August 2020
Lily had originally purchased six hectares of land on 30 May 2008 for £84,000. The
four hectares of land were sold for £140,000, and the market value of the unsold two
hectares of land at the time of sale was £60,000. Prior to the disposal, Lily spent
£14,400 clearing and levelling the four hectares of land that were sold.
A house sold on 31 December 2020
The house had been purchased on 1 January 2007, and throughout the 168 months
of ownership had been occupied by Lily as follows (periods shown chronologically):
Months
Occupied
32
Unoccupied - travelling overseas
36
Unoccupied - required to work elsewhere in the United Kingdom
60
Occupied
20
Unoccupied - travelling overseas
20
168
Throughout the period 1 January 2007 to 31 December 2020, Lily did not have any
other main residence.
Cash received following the takeover of Moon plc by Sun plc on 22 February
2021
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Lily had originally purchased her £1 ordinary shares in Moon plc on 18 July 2011 for
£27,280. Under the terms of the takeover, Lily received total cash of £19,800 and
22,000 £1 ordinary shares in Sun plc. Immediately after the takeover, Sun plc’s £1
ordinary shares were quoted at £2.20.
Lily's sister
Lily's sister has chargeable gains for the year 2020-21 of £44,200 which qualify for
business asset disposal relief and £107,400 of chargeable gains relating to the
disposal of a residential property which is not her main residence.
Lily's sister does not have any taxable income for the tax year 2020-21.
Question 1
What cost figure will have been used in calculating the chargeable gain on the
disposal of Lily's copyright?
Answer Options:
A
£22,000
B
£17,600
C
£4,400
D
£19,067
This question tests syllabus area C3(b) on the disposal of wasting assets.
The copyright is a wasting asset; a useful life of 50 years or less, and the original value
will depreciate over time.
The correct answer is B £17,600, being the cost of £22,000 proportionate to the
remaining life of the copyright. £22,000 x 12/15 = £17,600
The alternative, incorrect options are:
Option A is the original cost
Option C is the value by which the asset has depreciated; 3/15 x 22,000 = £4,400
Option D is calculated using a remaining life of 13 years; 13/15 x 22,000 = £19,067
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Question 2
What are the total deductions which will have been allowed in calculating the
chargeable gain on the disposal of Lily's four hectares of land?
Answer select from drop down list:
This tests syllabus area C2(d) Understand the allowable expenditure for a part
disposal.
The cost of the land originally purchased was for six acres but only four acres are sold.
Unlike the copyright the land is not a wasting asset, therefore the original cost must
be apportioned proportionate to the current market value. The current market value is
£200,000, being £140,000 (for the four acres sold) plus £60,000 (for the two acres not
sold). Lily is also allowed to deduct any capital costs relating to the sale of this land;
being the £14,400 for clearing and levelling those four acres.
The correct answer is the second option £73,200, being the proportion of the
original cost £84,000 x (140,000/200,00) = £58,800 plus the costs of clearing and
levelling of £14,400 = £73,200.
The alternative, incorrect answer options are;
The first option apportions the clearing and levelling costs across the six acres (84,000
+14,400)x 140,000/200,000 = £68,880
The third option apportions the cost by the number of acres and adds the capital cost
(84,000 x 4/6) + 14,400 = £70,400
The fourth option takes the correct proportion of the original cost but does not add the
capital costs (84,000 x 140,000/200,000)= £58,800
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Question 3
What is the total period of occupation (both actual and deemed) for the purposes
of calculating the private residence relief on the disposal of Lily's house?
Answer select from drop down list:
This tests syllabus area C3(c) Calculate the chargeable gain when a private residence
is disposed of.
The months of actual occupation are shown clearly as 32 + 20 = 52. The deemed
occupation must be preceded and succeeded by periods of occupation so the first
period of 36 months is covered as absence for any reason (up to three years) and the
second period of working elsewhere in the UK is covered for 48 months. The final
period of travelling is not covered as deemed occupation since there was no actual
occupation afterwards. However, nine months of the final period of ownership are
covered as deemed occupation, even if not actually occupied.
The correct answer is the first option 145 being, 32 + 20 + 36 + 48 + 9 = 145
The alternative, incorrect answer options are;
The second option 157 gives the full period of working in the UK (32 + 20 + 36 + 60 +
9) = 157
The third option 168 gives the full period of ownership
The fourth option 136 forgets the last nine months (32 +20 + 36 + 48) = 136
Question 4
What is Lily's chargeable gain in respect of the cash received following the
takeover of Moon plc by Sun plc?
Answer Options:
A
£11,880
B
£6,878
C
£19,800
D
£8,640
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This tests syllabus area C4(d) Gains on the disposal of shares and securities, explain
and apply the treatment of takeovers
The cash received on the takeover is treated as a part disposal and the original cost
is apportioned according to current market value of £19,800 cash plus £48,400
(22,000 shares at £2.20) = £68,200. Applying this to the original cost of £27,780 gives
£7,920 (£27,280 x £19,800/£68,200).
The correct answer is Option A £11,880, being proceeds of £19,800 cash, less
apportioned cost of £7,920 = £11,880
The alternative, incorrect options are;
Option B £6,878 where the shares are valued at par and not current market value
(19,800 – (27,280 x 19,800/(19,800 + 22,000)) = £6,878)
Option C is the cash received of £19,800
Option D apportions the cost by the market value of the shares only (19,800 – (27,280
x 19,800/(22,000 x 2.2) = £8,640)
Question 5
What is Lily's sister's capital gains tax liability for the tax year 2020-21?
Answer Options:
A
£34,492
B
£27,298
C
£33,262
D
£31,048
This tests syllabus area C5(a) Compute the amount of capital gains payable.
Lily’s sister has no taxable income for the year 2020/21 therefore her £37,500 basic
rate band is available. The chargeable gains (rather than taxable gains) are given and
so the annual exempt amount (AEA) is also available of £12,300. It is more beneficial
to set off the AEA against the residential gain; since residential property is subject to
tax at 18% and 28%, whereas the other gain is taxed at 10% only. However, this gain
qualifying for business asset disposal relief will use up the full basic rate band. So, this
gain will be £44,200 which will be taxed at 10% = £4,420. The residential gain will be
£107,400 less AEA of £12,300 = £95,100 which will be taxed at 28% = £26,628.
The correct answer is D £31,048, being £4,420 as above plus £26,628 as above =
£31,048.
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The alternative, incorrect options are;
Answer option A forgets about AEA and correctly taxes the gain qualifying for business
asset disposal relief (107,400 x 28% = £30,072 plus £4,420) = £34,492
Answer option B applies 18% to the £37,500 of the gain on residential property
forgetting that the other gain will use this basic rate band first (£107,400-£12,300=
£95,100 taxed as £37,500x18% = £6,750 and remaining £57,600 x28%= £16,128 plus
the gain of £44,200 at 10% = £4,420) = a total of £27,298
Answer option C applies the AEA against the gain qualifying for business asset
disposal relief rather than against the residential gain. (£107,400 x 28% + ((£44,200 £12,300) x 10%)) = £33,262
Section C
Paul
As is quite typical for the 10-mark question, the question required a decision as to
whether an individual should operate as a sole trader or a company. In the case of
Paul, however, he was currently trading via a company, Palu Ltd, and was considering
whether it would be beneficial to cease trading via Palu Ltd on 5 April 2020, and
instead run his business from 6 April 2020 onwards as a sole trader.
The question effectively provided the amount of corporation tax payable by Palu Ltd,
since it stated that all profits (after allowing for corporation tax) would be extracted and
gave figures for director’s remuneration and dividends.
Candidates were given clear guidance of what workings were required, and those
following this guidance would have had little difficulty in achieving a pass for this
question. This guidance also made it clear that full workings were required throughout,
with the working at the margin approach not relevant in this question.
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Requirement (a) – 10 marks
Corporation tax: This aspect was generally very well answered provided candidates
did not deduct dividends. Either a full computation or (the previously mentioned) shortcut approach were acceptable. Both approaches are shown in the suggested solution.
Income tax liability under the corporate option: This aspect was also generally well
answered. Given the level of income (£143,270), the personal allowance was
obviously not available so just a zero (0) should have been shown. There was no need
to justify this with a supporting calculation. The fact that the £2,000 dividend nil rate
band counts towards the basic rate threshold was often overlooked in the income tax
calculation.
NICs under the corporate option: Director’s remuneration was just £8,000, so there
were no class 1 NICs. Candidates wasted a lot of time on irrelevant calculations if they
included dividend income or used Palu Ltd’s trading profit. This is why question
practice is so important because such basic mistakes only tend to be made the once.
Income tax liability under the sole trader option: Another generally well answered
aspect. Again, it should have been obvious with a trading profit of £175,000 that the
personal allowance was not available.
NICs under the sole trader option: There were many perfect answers to this section,
although candidates should be careful with their layout. It often took some hunting
around the answer spreadsheet to find the class 2 NIC working.
One other problem sometimes encountered when marking this question was that
candidates did not always make it clear which aspect was being answered, especially
when it came to the two income tax computations. Headings are essential, and the
best approach is to answer a question in line with the guidance given. The model
answer shows the preferred layout, with none of the calculations requiring any
separate workings.
Candidates are advised to makes sure their workings are clear whether shown on the
face of the spreadsheet or within cells. Only the most basic of calculations should be
done within a cell and care should be taken to ensure the correct details are recorded
in the correct way. For example, the class 4 NIC working:
(50,000 - 9,500) x 9% = £3,645
If included within a cell, it is very easy to forget the brackets so that the answer
becomes:
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50,000 - 9,500 x 9% = £49,145
Some candidates included entire income tax or NIC workings within cells. This is not
good practice and is not recommended, since it is easy for an error to occur and
difficult for the correct elements to be deciphered for marking.
Alfred and Amaia
The income tax question was based around Alfred and Amaia, a married couple.
Alfred commenced trading as a sole trader on 1 September 2020, with draft accounts
prepared for the seven-month period ended 31 March 2021. The requirement is to
prepare a revised tax adjusted trading profit or loss taking into account pre-trading
expenditure, a premium paid to acquire a ten-year lease on a workshop, expenditure
on client entertainment and capital allowances.
Amaia is employed by Argole Ltd, and also has property income. The requirement is
to calculate the income tax payable by her for the tax year 2020-21 taking into account
a car benefit, job-related living accommodation and tax relief for finance costs.
Although the question was reasonably well answered, its straightforward nature meant
that marks really should have been higher.
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Requirement (a) – 6 marks
Candidates need to take care when it comes to using negatives in the spreadsheet.
Entering appropriate negative and positive amounts and then using the SUM function
on the spreadsheet is the most straightforward process and avoids simple errors.
Here the computation commenced with a draft trading profit of £63,000 but ended up
as a trading loss of £61,955.
The deduction for the lease premium caused problems, and in some cases was even
treated as income. One aspect which was frequently overlooked was the need to
restrict the deduction by 7/12ths because of the seven-month period of account.
The capital allowances working was generally not answered as well as would be
expected. There is a 100% annual investment allowance claim of £116,000 in respect
of plant and equipment, and an 18% writing down allowance for a motor car but
restricted to 7/12ths. Just one type of relief was often applied to both additions. Also,
the capital expenditure was sometimes adjusted for in addition to the deduction for
capital allowances.
Requirement (b) – 9 marks
Here, the two benefits surprisingly caused problems:
•
With the motor car, the amount paid of £23,500 was often used rather than the
list price of £25,000. The restriction to three months of the tax year (the motor
car was only provided from 1 January 2021) was also frequently missed.
•
With the job-related accommodation, many candidates did not appreciate that
there is no benefit. Even when the benefit was stated as zero, they still included
the rent paid by Argole Ltd of £2,500 per month.
As regards the property income, very few candidates correctly dealt with the finance
costs. The question states that Amaia made mortgage payments of £6,000, including
interest of £2,600. The capital repayments of £3,400 (£6,000 - £2,600) are completely
irrelevant, and there is a finance costs reduction of £520 (£2,600 at 20%) given against
Amaia’s income tax liability. Too many candidates were determined to do something
with the capital repayments, and the finance costs reduction was often included when
calculating property income.
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The cash basis is the default when it comes to calculating property income. This
means that:
•
The 13 months’ rent received during the tax year 2020-21 are all included.
•
Only the insurance premium actually paid of £1,250 on 1 December 2020 is
deducted as an expense. The amount paid on 1 December 2019 is not relevant.
Both points were frequently dealt with incorrectly.
Additionally, it was disappointing to note that some candidates deducted the PAYE of
£19,240 against Amaia’s salary rather than against her income tax liability.
Mooncake Ltd
The corporation tax question was generally quite well answered, although (somewhat
surprisingly) the capital allowances working in part (b) caused problems. Candidates
often ended up with a reasonably correct answer to part (c)(i), where loss relief was
claimed, but spent a lot of time on irrelevant workings in reaching that point.
One common problem seen in part (b) was the inability to deal with negatives. The
requirement was to calculate Mooncake Ltd's tax adjusted trading loss, commencing
with the operating loss figure of £93,820. This meant that the adjustments for nonallowable expenditure reduced the amount of loss, but the loss was increased by
capital allowances. As shown in the suggested solution, the easiest approach was to
start with £93,820 as a negative figure, show non-allowable expenditure as positive
figures and then include capital allowances as another negative. This is then
consistent with a profit adjustment question commencing with a profit, avoiding the
loss of some easy marks if negatives and positives are confused. The total can then
be obtained using the SUM function on the spreadsheet. Some candidates showed all
figures as positive and then tried to calculate the total within the cell on the lines of A1+A2+A3-A4. It is also very easy to make mistakes using this approach.
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The only aspect requiring a separate working was one for capital allowances. Note
how the workings for the lease expenditure are included within the suggested solution.
Requirement (a) – 2 marks
Although many candidates easily picked up the two available marks, many instead
wrote at length about available loss reliefs.
The fact that this requirement is just for 2 marks, together with the use of ‘state’ should
be a very good indication that only a short set of answers is required. This is why it is
important to make use of the model answers since candidates’ answers should,
ideally, not be any longer than those.
Candidates who mentioned loss of personal allowances or annual exempt amounts
had, worryingly, confused income and corporation taxes.
Requirement (b) – 7 marks
When answering this type of question, candidates are advised to answer in the same
order as information is presented. So here, the first item was depreciation, and that,
therefore, should have been the first adjustment. This approach makes it easier for
markers to follow a candidate’s answer, and there is less scope for missing out any of
the adjustments.
As can be seen from the suggested solution, the capital allowances working was fairly
straightforward, involving just a main pool. There were three disposal figures to deduct
from the brought forward written down value, with an 18% writing down allowance
calculated on the remaining balance. The only reason for providing the cost figures
was so that (where relevant) proceeds could be restricted to original cost. However,
many candidates included the cost figures as additions, and there were then various
permutations involving balancing adjustments. Again, this is why question practice is
so important.
It should also be noted that none of the other information (property business loss and
profit on disposal of shares) was relevant to this part of the question since the
requirement was just to calculate the tax adjusted trading loss.
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Requirement (c)(i) – 4 marks
With only losses for the year ended 31 March 2021, there was obviously no income.
However, this should have been indicated by the use of zeros (0). There was no
chargeable gain because the indexation allowance of £6,700 exceeded the gain of
£3,700. This did not create a loss, and there was no need to utilise the capital loss
brought forward from the year ended 31 March 2020. These were both common
mistakes made by candidates.
Another common mistake was to carry back the property business loss. Many
candidates assumed that the qualifying charitable donations for the year ended 31
March 2020 were wasted despite the trading loss being considerably less than income.
The suggested solution shows how it is much easier to lay out this type of answer
using a two-column approach with one column for each year.
Although most candidates did reasonably well in this part, there were not many perfect
answers.
Requirement (c)(ii) – 2 marks
Although marks were awarded based on what candidates had done in part (c)(i), the
need to carry out an overall review and see what was left appeared to be challenging
for many candidates. The correct answer was that there was an unused capital loss
from the year ended 31 March 2020, and a property business loss from the year ended
31 March 2021. For full marks, it was also necessary to show that the trading loss had
been fully utilised, and that the unused qualifying charitable donations from the year
ended 31 March 2021 were wasted. So four points for a half-mark each, and what
should have been a very short answer.
There were very few perfect answers, with many candidates picking up just one or two
half-marks and wasting time on unnecessary detailed workings.
The use of ‘calculate’ in the requirement should have indicated that no explanation
was necessary.
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