ACCA - Association of Chartered Certified Accountants Taxation Principles and Regulations Questions and Answers — Questions and Answers
Question 1: A UK-based retail company's sales for the quarter consist of £100,000 from children's clothing, £50,000 from books, and £20,000 from facilitating lottery ticket sales. How should the company account for VAT on these supplies?
- Children's clothing is standard-rated; books are zero-rated; lottery sales are exempt.
- All supplies are standard-rated as the business is profit-making.
- Children's clothing and books are zero-rated; lottery ticket sales are exempt. (Correct answer)
- Children's clothing is zero-rated; books and lottery sales are standard-rated.
Correct answer: Children's clothing and books are zero-rated; lottery ticket sales are exempt.
In the UK, certain goods and services receive specific VAT treatment. Supplies of children's clothing and books are zero-rated, meaning VAT is charged at 0%. The sale of lottery tickets is an activity that is exempt from VAT. Zero-rated supplies are technically taxable (at 0%), allowing the business to recover input VAT related to them, whereas exempt supplies are non-taxable, restricting input VAT recovery.
Question 2: An individual is employed with an annual salary of £60,000. Her employer provides her with a company car for both business and private use. The car has a list price of £30,000 and CO2 emissions of 120g/km. Using the appropriate percentage of 29% for this emissions level, what is the taxable benefit in kind for the company car that must be added to her employment income?
- £6,000
- £8,700 (Correct answer)
- £30,000
- £5,800
Correct answer: £8,700
The taxable benefit for a company car is calculated by multiplying the car's list price by a percentage that is determined by its CO2 emissions. The calculation is: List Price × Appropriate Percentage = £30,000 × 29% = £8,700. This amount is added to her salary to determine her total taxable employment income for the year.
Question 3: A UK limited company, which is not part of a group, incurs £1,350,000 of expenditure on new qualifying plant and machinery in its 12-month accounting period. The Annual Investment Allowance (AIA) limit for the period is £1,000,000. What is the maximum amount of capital allowances the company can claim for this expenditure in the current period, assuming it wants to maximize the claim?
- £1,350,000 under the AIA as it is all new machinery.
- £1,000,000 under the AIA only.
- Only a Writing Down Allowance (WDA) on the full £1,350,000.
- £1,000,000 under the AIA plus a Writing Down Allowance on the remaining £350,000. (Correct answer)
Correct answer: £1,000,000 under the AIA plus a Writing Down Allowance on the remaining £350,000.
A company can claim 100% relief on qualifying expenditure up to the Annual Investment Allowance (AIA) limit, which is £1,000,000. The expenditure exceeding this limit (£1,350,000 - £1,000,000 = £350,000) is then added to the appropriate capital allowances pool (e.g., the main pool) and is eligible for the Writing Down Allowance (WDA) at the relevant rate (e.g., 18%). Therefore, the maximum claim is the full AIA of £1,000,000 plus the WDA on the excess.
Question 4: When calculating a chargeable gain for Capital Gains Tax (CGT) purposes on the disposal of an asset, which of the following is NOT an allowable cost?
- The cost of repairing a leaking roof on a property to maintain its original state. (Correct answer)
- Stamp Duty Land Tax (SDLT) paid on the initial purchase of a property.
- Legal fees incurred for the sale of the asset.
- The cost of building an extension that enhances the value of a property.
Correct answer: The cost of repairing a leaking roof on a property to maintain its original state.
For CGT purposes, allowable costs include the initial acquisition cost, incidental costs of acquisition and disposal (like SDLT and legal fees), and capital expenditure that enhances the asset's value (like an extension). Normal repair and maintenance costs, which merely maintain the asset's existing state rather than improving it, are considered revenue expenditure and are not deductible when calculating a capital gain.
Question 5: A chartered certified accountant, acting as a tax agent, discovers a material error in a client's tax return from a previous year which has already been submitted. The error resulted in a significant understatement of tax. According to professional and ethical guidelines, what is the accountant's immediate primary responsibility?
- Immediately inform the tax authorities of the error to protect their own professional standing.
- Correct the error in the current year's tax return without mentioning the prior year.
- Advise the client of the error, explain the need for disclosure to the tax authorities, and seek the client's consent to correct it. (Correct answer)
- Terminate the engagement with the client immediately to avoid any association with non-compliance.
Correct answer: Advise the client of the error, explain the need for disclosure to the tax authorities, and seek the client's consent to correct it.
Professional ethics guidelines require the accountant to uphold client confidentiality while also not being associated with misleading information. The primary step is to inform the client of the error and advise them of the consequences and legal requirement to correct it. The accountant must recommend that the client makes a voluntary disclosure and should seek their permission before contacting the tax authorities. If the client refuses to correct the error, the accountant must then consider their position, which may include ceasing to act and notifying the authorities that they have done so.
Question 6: Which of the following statements best describes a Potentially Exempt Transfer (PET) for UK Inheritance Tax (IHT) purposes?
- A gift into a discretionary trust, which is subject to an immediate lifetime IHT charge.
- A transfer that is immediately chargeable to IHT at a lifetime rate of 20% when it is made.
- A gift made to a spouse or civil partner, which is always fully exempt from IHT.
- A lifetime gift from one individual to another that becomes fully exempt from IHT if the donor survives for seven years after making the gift. (Correct answer)
Correct answer: A lifetime gift from one individual to another that becomes fully exempt from IHT if the donor survives for seven years after making the gift.
A Potentially Exempt Transfer (PET) is a lifetime gift made by an individual to another individual (or into certain specific types of trust). It is 'potentially' exempt because no IHT is due when the gift is made. If the person making the gift (the donor) survives for seven years from the date of the gift, its value becomes fully exempt and falls outside their estate for IHT purposes. If the donor dies within seven years, the gift becomes a chargeable transfer and may be subject to IHT.
ACCA - Association of Chartered Certified Accountants Taxation Principles and Regulations Questions and Answers
A UK-based retail company's sales for the quarter consist of £100,000 from children's clothing, £50,000 from books, and £20,000 from facilitating lottery ticket sales.
How should the company account for VAT on these supplies?