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TECHNICAL
ALL YOU NEED TO KNOW
Articles on key examinable topics to support your studies

28 VALUE ADDED TAX: PART 2

Relevant to ACCA Qualification Paper F6 (UK)

CAPITAL GAINS TAX: PARTS 1 AND 2

Relevant to ACCA Qualification Paper F6 (UK)

INTRODUCTION TO ISLAMIC FINANCE

Relevant to ACCA Qualification Paper F9

GUIDANCE ON APPROACH TO QUESTIONS IN SECTION A OF PAPER P6 (UK)

Relevant to ACCA Qualification Paper P6 (UK)

ONLINE RESOURCES

CAT qualification: www.accaglobal.com/students/cat ACCA Qualification: www.accaglobal.com/students/acca

FOUNDATIONS IN ACCOUNTANCY

Learn more about ACCAs new suite of entry-level qualifications Foundations in Accountancy at www.accaglobal.com/fia

CHANGES TO THE ACCA QUALIFICATION FROM JUNE 2011

Read more at www.accaglobal.com/students/student_accountant/ archive/2010/108/3333957

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TECHNICAL

TECHNICAL ARTICLES
9 MARCH 2011 RELEVANT TO ACCA AND CAT QUALIFICATION STUDENTS
AN INTRODUCTION TO ISLAMIC FINANCE ACCA QUALIFICATION TECHNICAL ARTICLES VALUE ADDED TAX PART 2
RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK) Following on from David Harrowens 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/ RELEVANT TO ACCA QUALIFICATION PAPER F9 Islamic 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 F9 www.accaglobal.com/students/acca/ exams/f9/ PAPER F1 www.accaglobal.com/students/acca/ exams/f1/technical_articles/ PAPER F2 www.accaglobal.com/students/acca/ exams/f2/technical_articles/ PAPER F3 www.accaglobal.com/students/acca/ exams/f3/technical_articles/ PAPER F4 www.accaglobal.com/students/acca/ exams/f4/technical_articles/ PAPER F5 www.accaglobal.com/students/acca/ exams/f5/technical_articles/ PAPER F6 www.accaglobal.com/students/acca/ exams/f6/technical_articles/ PAPER F7 www.accaglobal.com/students/acca/ exams/f7/technical_articles/ PAPER F8 www.accaglobal.com/students/acca/ exams/f8/technical_articles/ PAPER F9 www.accaglobal.com/students/acca/ exams/f9/technical_articles/ PAPER P1 www.accaglobal.com/students/acca/ exams/p1/technical_articles/ PAPER P2 www.accaglobal.com/students/acca/ exams/p2/technical_articles/

CAPITAL GAINS TAX PARTS 1 AND 2

RELEVANT 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/

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/

GUIDANCE ON APPROACH TO QUESTIONS IN SECTION A OF PAPER P6 (UK)

STUDENT ACCOUNTANT ISSUE 05/2011

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PAPER P3 www.accaglobal.com/students/acca/ exams/p3/technical_articles/ PAPER P4 www.accaglobal.com/students/acca/ exams/p4/technical_articles/ PAPER P5 www.accaglobal.com/students/acca/ exams/p5/technical_articles/ PAPER P6 www.accaglobal.com/students/acca/ exams/p6/technical_articles/ PAPER P7 www.accaglobal.com/students/acca/ exams/p7/technical_articles/

PAPER 3 www.accaglobal.com/students/cat/ exams/t3/tech_articles/ PAPER 4 www.accaglobal.com/students/cat/ exams/t4/tech_articles/ PAPER 5 www.accaglobal.com/students/cat/ exams/t5/tech_articles/ PAPER 6 www.accaglobal.com/students/cat/ exams/t6/tech_articles/ PAPER 7 www.accaglobal.com/students/cat/ exams/t7/tech_articles/ PAPER 8 www.accaglobal.com/students/cat/ exams/t8/tech_articles/ PAPER 9 www.accaglobal.com/students/cat/ exams/t9/tech_articles/ PAPER 10 www.accaglobal.com/students/cat/ exams/t10/tech_articles/

CHANGES TO THE ACCA QUALIFICATION FROM JUNE 2011

Read more at www. accaglobal.com/students/ student_accountant/ archive/2010/108/3333957

FOUNDATIONS IN ACCOUNTANCY

CAT QUALIFICATION TECHNICAL ARTICLES

PAPER 1 www.accaglobal.com/students/cat/ exams/t1/tech_articles/ PAPER 2 www.accaglobal.com/students/cat/ exams/t2/tech_articles/

Learn more about ACCAs suite of entry-level qualifications Foundations in Accountancy at www.accaglobal. com/fia

RESOURCES
www.acca global.com/ students/acca www.acca global.com/ students/ cat

ACCA 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/

ACCA ONLINE STUDY RESOURCES

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TECHNICAL

EXAMINABLE DOCUMENTS
RELEVANT TO THE JUNE 2011 SESSION
CAT QUALIFICATION Paper 3 www.accaglobal.com/students/cat/ exams/t3/examinable_documents Paper 6 www.accaglobal.com/students/cat/ exams/t6/examinable_documents Paper 8 www.accaglobal.com/students/cat/ exams/t8/examinable_documents Paper 9 www.accaglobal.com/students/cat/ exams/t9/exam_docs ACCA QUALIFICATION Financial reporting Paper 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 P6 www.accaglobal.com/students/acca/ exams/p6/exam_docs Audit Papers 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

RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)

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

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 201011 (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 persons 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.

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2 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 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. Andys taxable gain for 201011 is as follows: Disposal proceeds Cost Enhancement expenditure Incidental costs (3,600 + 5,800) Chargeable gain Annual exemption Taxable gain 164,000 37,000 9,400 _______ 320,000

(210,400) _______ 109,600 (10,100) _______ 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

3 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 Example 3 For the tax year 201011 Nim has chargeable gains of 17,100. He has unused capital losses of 16,700 brought forward from the tax year 200910. Nims taxable gains for 201011 are as follows: Chargeable gains Capital losses brought forward Chargeable gains Annual exemption Taxable gains 17,100 (7,000) ______ 10,100 (10,100) ______ 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 persons 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 201011 will be payable on 31 January 2012. Payments on account are not required in respect of CGT. Example 4 For the tax year 201011 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 201011 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

4 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 For the tax year 201011 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 Adams 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. Adams 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 201011 is therefore 1,314 (7,300 at 18%). Bee Bees taxable income is 50,000 (56,475 6,475), so all of her basic rate tax band has been used. The CGT liability for 201011 on her taxable gain of 8,000 (18,100 10,100) is therefore 2,240 (8,000 at 28%). Chester Chesters 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 Chesters 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 persons 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

5 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 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 201011. Michaels CGT liability for 201011 is as follows: Chargeable gain Annual exemption 800,000 (10,100) _______ 789,900 _______ 78,990 _______

Capital gains tax: 789,900 at 10%

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

6 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 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 201011. She has unused capital losses of 28,000 brought forward from the tax year 200910. Mikas CGT liability for 201011 is as follows: Gains qualifying for entrepreneurs relief Goodwill Freehold office building 260,000 370,000 _______ 630,000 _______ 170,000 (28,000) _______ 142,000 (10,100) _______ 131,900 _______ 63,000 36,932 _______ 99,932 _______

Other gains Freehold warehouse Capital losses brought forward Annual exemption

Capital gains tax: 630,000 at 10% 131,900 at 28% Tax liability

2011 ACCA

7 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 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 Mikas 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 201011: 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. Bills 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 201011. 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 201011 House Annual exemption 45,000 (10,100) ______ 34,900 ______ 9,772 ______

Capital gains tax: 34,900 at 28%

2011 ACCA

8 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 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. 45,000

Cathy Dew CGT liability 201011 House Ordinary shares in Elf plc Disposal proceeds Cost

70,000 (48,000) ______

Annual exemption

22,000 ______ 67,000 (10,100) ______ 56,900 ______ 15,932 ______

Capital gains tax: 56,900 at 28%

Bills 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

9 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 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 Cost (10,000 x 15/20) 9,600 (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

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

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11 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 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 Cost Principal private residence exemption 381,900 (141,900) _______ 240,000 (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 1 1 1 1 October 1990 to 31 March 1994 (occupied) April 1994 to 31 December 1997 (working in UK) January 1998 to 31 December 2004 (occupied) January 2005 to 30 September 2007 (unoccupied) October 2007 to 30 September 2010 (final 36 months) 42 45 84 33 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.

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12 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011 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 houses eight rooms was always used exclusively for business purposes by Mae. The chargeable gain on the house is as follows: Disposal proceeds Cost Principal private residence exemption 186,000 (122,000) _______ 64,000 (56,000) _______ 8,000 _______

2011 ACCA

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

RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)

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

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 201011 (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 30 April 2008 15 July 2010 15 July 2010 Purchased 4,000 shares for 6,200. Purchased 2,000 shares for 8,800 Purchased 500 shares for 2,500 Sold 4,500 shares for 27,000

Ivys chargeable gain for 201011 is as follows: Purchase 15 July 2010 Disposal proceeds (27,000 x 500/4,500) 3,000 Cost (2,500) ____ Share pool Disposal proceeds (27,000 x 4,000/4,500) 24,000 Cost (10,000) ______

500

14,000 ______ 14,500 ______

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2 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 Share pool Number Purchase 1 June 2003 4,000 Purchase 30 April 2008 2,000 _____ 6,000 Disposal 15 July 2010 (15,000 x 4,000/6,000) (4,000) _____ Balance carried forward 2,000 _____ Cost 6,200 8,800 ______ 15,000 (10,000) ______ 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. Keiths 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 201011 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.

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3 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 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. Olivers chargeable gain for 201011 is as follows: Disposal proceeds Cost 140,000 (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. Quinns chargeable gain for 201011 is as follows: Disposal proceeds 140,000 Cost (80,000) ______ 60,000 ______ 2011 ACCA

4 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 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. Ritas chargeable gain for 201011 is as follows: Disposal proceeds Cost 55,000 (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:

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

6 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 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. Willows chargeable gain for 201011 is as follows: Gain Rollover relief (74,000 18,500) 74,000 (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

7 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 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. Xias chargeable gain for 201011 is as follows: Deemed proceeds Cost Holdover relief (72,000 37,000) 110,000 (38,000) _______ 72,000 (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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8 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 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 Ltds 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. Zias chargeable gain for 201011 is as follows: Deemed proceeds Cost Holdover relief 200,000 (140,000) _______ 60,000 (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.

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9 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 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. Buas chargeable gain for 201011 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 persons 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 persons basic rate tax band is available. Remember that a taxable income figure is after the personal allowance has been deducted.

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10 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 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 companys 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 March 1997 February 2011 149.8 155.4 230.0

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11 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 Disposal proceeds Incidental costs of disposal Cost Incidental costs of acquisition Enhancement expenditure 340,000 (6,200) _______ 333,800 164,000

3,600 _______ 167,600 37,000 _______

(204,600) _______ 129,200

Indexation Cost 167,600 x 0.535 Enhancement 37,000 x 0.480

89,666 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 companys taxable total profits, capital losses are never set off against other income. Example 29 Even Ltd has the following results: Year ended 31 March 2010 Trading profit/(loss) 56,000 Property business profit 4,000 Chargeable gain/(capital loss) (8,000) Year ended 31 March 2011 (17,000) 10,000 85,000

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12 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 The corporation tax liability of Even Ltd for the years ended 31 March 2010 and 2011 is as follows: Year ended 31 March 2010 56,000 4,000 ______ 60,000 ______ 60,000 ______ 12,600 ______ Year ended 31 March 2011 10,000 77,000 ______ 87,000 (17,000) ______ 70,000 ______ 14,700 ______

Trading profit Property business profit Chargeable gain Loss relief Taxable total profits Corporation tax at 21%

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 August 1999 June 2010 149.8 165.5 224.0

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13 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011 Chargeable gain Disposal proceeds Cost Indexation allowance (285,678 203,000) 300,000 (203,000) _______ 97,000 (82,678) _______ 14,322 _______ Cost 110,000 Indexed cost 110,000 11,529 _______ 121,529 180,000 _______ 301,529 106,583 _______ 408,112 (203,000) _______ 87,000 _______ (285,678) _______ 122,434 _______

1985 Pool

Number

Purchase June 1995 40,000 Indexation to August 1999 110,000 x (165.5 149.8)/149.8 Purchase August 1999 60,000 _______ 100,000

Indexation to June 2010 301,529 x (224.0 165.5)/165.5 Disposal June 2010 Cost x 70,000/100,000 Balance carried forward

180,000 _______ 290,000

(70,000) _______ 30,000 _______

In the exam Limited companies are not entitled to the annual exemption. Chargeable gains are part of a limited companys 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. David Harrowven is examiner for Paper F6 (UK)

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RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)

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

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 201011 (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. Jets 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

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and a description of the goods supplied, (4) Keen Ltds 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 Ltds 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 30 31 31 30 30 31 31 September 2009 December 2009 March 2010 June 2010 September 2010 December 2010 March 2011 VAT paid 6,200 28,600 4,300 7,600 1,900 3,200 6,900 Submitted Two months late One month late On time On Time On time On time 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 Ltds 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 taxpayers 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.

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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.

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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 Ltds 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.

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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 Omahs 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.

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The main advantage of the scheme is the simplified VAT administration. Omahs 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. David Harrowven is examiner for Paper F6 (UK)

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RELEVANT TO ACCA QUALIFICATION PAPER F9

Studying Paper F9 Performance objectives 15 and 16 are relevant to this exam

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 firms 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 markup 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 HSBCs 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 bondholders 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 institutions 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 customers 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 banks 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 worlds 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 AAOIFIs 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

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RELEVANT TO ACCA QUALIFICATION PAPER P6 (UK)

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

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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2 GUIDANCE ON THE APPROACH TO SECTION A QUESTIONS IN PAPER P6 (UK) MARCH 2011 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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3 GUIDANCE ON THE APPROACH TO SECTION A QUESTIONS IN PAPER P6 (UK) MARCH 2011 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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4 GUIDANCE ON THE APPROACH TO SECTION A QUESTIONS IN PAPER P6 (UK) MARCH 2011 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. 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. 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. 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. 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. Repeat step 5 for the remaining parts of the question such that you finish it in the time.

2.

3.

4.

5.

6.

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 taxpayers marginal rate of tax. The marginal rate of tax enables the tax saved

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5 GUIDANCE ON THE APPROACH TO SECTION A QUESTIONS IN PAPER P6 (UK) MARCH 2011 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 persons 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 persons cash position requires calculations of cash receipts and cash payments (one or more of which will be tax). A persons 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 persons tax payable but excluded from the calculations of the persons 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 companys 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)? 2011 ACCA

6 GUIDANCE ON THE APPROACH TO SECTION A QUESTIONS IN PAPER P6 (UK) MARCH 2011 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, dont 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)

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