taxation (tx uk) sept / dec 2020 examiner’s report

Examiner’s report – TX-UK September/December 2020 1

Taxation (TX UK)

Sept / Dec 2020

Examiner’s report

The examining team share their observations from the

marking process to highlight strengths and

weaknesses in candidates’ performance, and to offer

constructive advice for those sitting the exam in the

future.

Contents General comments .............................................................. 2

Section A ............................................................................. 2

Example 1 ........................................................................ 3

Example 2 ........................................................................ 3

Example 3 ........................................................................ 4

Example 4 ........................................................................ 6

Section B ............................................................................. 7

Question 1 ........................................................................ 8

Question 2 ........................................................................ 8

Question 3 ........................................................................ 9

Question 4 ...................................................................... 10

Question 5 ...................................................................... 10

Section C ........................................................................... 11

Aurora ............................................................................ 11

Requirement (a) – 3 marks ......................................... 12

Requirement (b) – 3 marks ......................................... 13

Requirement (c)(i) – 3 marks ...................................... 13

Requirement (c)(ii) – 1 mark ....................................... 14

Sam, Tam & Uma ........................................................... 15

Requirement (a) – 5 marks ......................................... 15

Requirement (b) – 10 marks ....................................... 16

Harbour Ltd .................................................................... 18

Requirement (a) – 10 marks ....................................... 19

Requirement (b)(i) – 3 marks ..................................... 19

Requirement (b)(ii) – 2 marks ..................................... 20


General comments

This examiner’s report should be used in conjunction with the published

September/December 2020 sample exam which can be found on the ACCA Practice

Platform.

In this report, the examining team provide constructive guidance on how to answer

the questions whilst sharing their observations from the marking process,

highlighting the strengths and weaknesses of candidates who attempted these

questions. Future candidates can use this examiner’s report as part of their exam

preparation, attempting question practice on the ACCA Practice Platform, reviewing

the published answers alongside this report.

The Taxation (TX-UK) exam is offered as a computer-based exam (CBE). The model of delivery for the CBE exam means that candidates do not all receive the same set of questions. In this report, the examining team share their observations from the marking process to highlight strengths and weaknesses in candidates’ performance, and to offer constructive advice for future candidates.

• Section A objective test questions – four specific questions from this sitting of

the exam.

• Section B objective test case questions – the key challenge areas for this

section in the exam.

• Section C constructed response questions - guidance on how to complete all published CR questions from the sample exam

Section A Section A questions aim to provide a broad coverage of the syllabus, and future candidates should aim to revise all areas of the TX-UK syllabus, rather than attempting to question spot. The following four questions are reviewed with the aim of giving future candidates an indication of the types of questions asked, guidance on dealing with exam questions and to provide a technical debrief on the topics covered by the specific questions selected.

https://cbept.accaglobal.com/sso/acca




Example 1 Which TWO of the following statements about allowable capital losses for an individual are true?

A. The annual exempt amount is deducted before any brought forward capital losses are utilised against current year gains

B. Current year capital losses remaining after offset against current year

chargeable gains can always be offset against current year income

C. The annual exempt amount is deducted before any current year capital losses

are utilised against current year gains

D. Excess current year capital losses are carried forward indefinitely until future chargeable gains arise

This question is on syllabus area C 2. b) Compute and explain the treatment of capital losses; and covers all the rules about the current and brought forward capital losses. The question is in the format of a multiple choice from which two options should be chosen. The correct answer is Options A and D. Brought forward capital losses are deducted after the annual exempt amount (AEA) is deducted, thus ensuring that no AEA is wasted. Capital losses are generally not set against income but can be carried forward to be set off against future chargeable gains.

Example 2 On 1 October 2019, Sou granted a 25 year lease of a freehold property in return for a premium of £20,000.

What is Sou's assessable property income for the tax year 2019–20 in respect of this lease premium?

A. £10,400

B. £9,600

C. £5,200

D. £10,000

This question covers syllabus area B4(d) compute the amount assessable when a premium is received for the grant of a short lease The correct answer is A


The premium received is on a short lease therefore a proportion of it is treated as income. 20,000 less (2%((25-1) x 20,000)) = 10,400 being the correct income portion of the premium

(B) Calculates the capital portion of the premium 2%((25-1)x20,000) = 9,600

(C) Calculates the correct part of the premium but it is unnecessarily time apportioned (since Sou is the lessor and is taxed to income on receipt of the premium) 10,400 x 6/12 = 5,200

(D) 20,000 less (2%((25) x 20,000)) = 10,000 This does not deduct one year from 'n', the number of years on the lease

Example 3 Flat Wall Ltd has the following results for the year ended 31 December 2019:

£

Trading profits 13,300

Property business income 4,600

Interest receivable 2,500

Qualifying charitable donations (1,000)

The company also has the following brought forward losses:

£

Trading losses 20,400

Flat Wall Ltd always utilises its tax losses in the most efficient way possible.


Match the date by which Flat Wall Ltd must make a claim to offset its brought forward trading losses in the year ended 31 December 2019 and the amount of unrelieved trading loss which will be carried forward to the year ended 31 December 2020.

N.B. This is a drag and drop question, eg you would drag either 31 December 2020 or 31 December 2021 into the box labelled ‘Date by which loss relief claim must be made’. The correct answer is 31 December 2021 and £1,000.

The taxable total profits computation is as follows:

£

Trading profits 13,300

Property income 4,600

Interest income 2,500

Total income 20,400

Less: Trade loss bf (£20,400 - £1,000)

(19,400)

Qualifying charitable donations (QCDs)

(1,000)

TTP 0

The losses carried forward are therefore:

Trading loss = £1,000 (20,400 - 19,400) - Note, the claim is restricted in order to avoid wasting QCD's

Dates Date by which loss relief

claim must be made

Trading losses carried

forward

31 December 2020

31 December 2021

Trading losses

£0

£1,000


A claim must be made within two years of the end of the accounting period in which the loss is relieved i.e. 31 December 2021.

The incorrect options are:

Date 31 December 2020 is the date the tax return should be filed.

Trading loss - £0 - fails to recognise that trade loss offset against total income can be restricted to avoid wasting QCD's.

Example 4 Brett commenced trading on 1 February 2019. His sales (exclusive of value added tax (VAT)) were £5,500 a month for the first three months of trading, £7,500 for the next four months and £10,000 a month after that.

From what date will Brett have to charge output VAT on his supplies?

A. 1 March 2020

B. 1 January 2020

C. 30 January 2020

D. 1 February 2020

This question covers syllabus area F 1 a) recognise the circumstances in which a person must register or deregister for VAT (compulsory) and when a person may register or deregister for VAT (voluntary).

The correct answer is D. 1 February 2020

The VAT registration threshold of £85,000 is breached in December 2019 ((Feb, Mar, Apr 3*5,500) + (May, Jun, Jul, Aug 4*7,500) + (Sep, Oct, Nov, Dec 4*10,000)=£86,500). So, registration will be from 30 January 2020 and Brett must charge VAT from 1 February 2020

The other incorrect options are:

A. 1 March 2020 is the month after the date from which he must start charging VAT

B. 1 January 2020 is the day after the end of the month in which the registration threshold is breached

C. 30 January 2020 is the registration deadline


Section B Section B tests candidates’ knowledge in more depth than Section A. There are three case questions each made up of five objective test (OT) questions for 2 marks each. Case questions will examine a single tax in the context of a given scenario and will cover a variety of different aspects of that particular tax. Therefore, candidates must be able to apply their knowledge of that tax to the specific scenario to be able to score well. Example of a case scenario You should assume that today’s date is 1 March 2020.

Tony died on 17 July 2019. Anita was his wife.

Tony

Tony had made the following lifetime transfers:

Date Type of transfer Amount

£

26 February 2011 Potentially exempt transfer 95,000

14 April 2011 Chargeable lifetime transfer 120,000

10 June 2017 Potentially exempt transfer 500,000

The above potentially exempt transfers and the chargeable lifetime transfer are after taking account of all available exemptions.

Tony left an estate valued at £1,600,000 for inheritance tax (IHT) purposes. As the nil rate band has already been used, IHT was payable on the chargeable estate. Under the terms of his will, Tony left £400,000 to his wife, Anita, a specific legacy of £100,000 to his brother, and the residue of the estate to his niece, Marguerite.

In Marguerite's will she leaves all of her estate to her children.

Anita

Anita made a cash gift of £600,000 to her niece, Marguerite, on 20 August 2015. This figure is before taking account of any exemptions. Anita had already made a chargeable lifetime transfer on 2 December 2013 which fully utilised her nil rate band.


Question 1 How much IHT was payable in respect of the potentially exempt transfer of £500,000 made on 10 June 2017 as a result of Tony's death?

A. £156,000 B. £118,000 C. £108,000 D. £70,000 This question tests syllabus area D1.d. Demonstrate the seven year accumulation principle taking into account changes in the level of the nil rate band On Tony’s death the lifetime transfers within seven years are reviewed again, this means only the PET made on 10 July 2017 is reviewed again. When reviewing this PET again we need to look back seven years from the date this PET was made (from July 2017 to July 2010) to assess what NRB had already been used. Thus the NRB available is 325,000 less the 120,000 (the NRB used by the CLT on 14 April 2011). Note the PET in February 2011 has not used any NRB since there was no lifetime charge (being a PET) and no charge on death (as it falls out of the seven year period). The correct answer is B. (500,000 – (325,000 – 120,000)) x 40% = £118,000

The alternative (incorrect) options are:

A (500,000 – (325,000 – 95,000 - 120,000)) x 40% = £156,000 deducting also the PET in February 2011

C (500,000 – (325,000 – 95,000)) x 40% = £108,000 only deducting the PET in Feb 2011 and not the CLT

D (500,000 – 325,000) x 40% = £70,000 assuming that neither the PET or CLT in 2011 are taken into account since they are both more than seven years before death.

Question 2

What is the amount of inheritance received by Marguerite?

A. £1,120,000 B. £1,100,000 C. £1,020,000 D. £620,000


This question tests syllabus area D.2.b. - Understand and compute the tax liability on a death estate The correct answer is D Death estate 1,600,000

Exempt amount to wife (400,000)

Chargeable estate 1,200,000

IHT @ 40% (480,000)

720,000

Specific legacy to brother (100,000)

Residue to niece 620,000

Alternative incorrect answers:

A 1,600,000 – 480,000 = 1,120,000 (doesn't deduct the amount to the wife or the brother)

B 1,600,000 – 400,000 – 100,000 = 1,100,000 (doesn't deduct tax)

C 1,600,000 – 480,000 – 100,000 = 1,020,000 (doesn't deduct the amount to the wife)

Question 3 What would the IHT implications have been if, under the terms of his will, Tony had left part of the residue of his estate to Marguerite’s children rather than leaving the entire residue to Marguerite?

A. It would have reduced the amount of IHT payable in respect of Tony's estate B. It would have removed the potential for a double charge to IHT before Tony's estate is inherited by Marguerite’s children C. It would have reduced the potential IHT payable when Marguerite’s children die D. It would not have resulted in any IHT saving for either Tony, Marguerite or her children Syllabus area covered here is D.3.b. Basic inheritance tax planning The correct answer is B It can be beneficial to skip a generation i.e. leaving part of the estate to Marguerite’s children. This avoids a further charge to IHT when the first generation (Marguerite) dies. Gifts will then only be taxed once before being inherited by the second generation, rather than twice.

https://examdev4.pearsonvue.com/ExamDeveloper/role_common/ViewBluePrint.aspx?qSSKKKDF6U0AcJhOYzdQxujwZXH4FuDA6IbR9mZjbCWsQ4IHm8bSC0jwIZv7Mq%2bS11XwjWwGoU71zLTSJ0VBOHPoYWGtlADYnFAfuHjhTjLwS6qHGLzWWsy%2f%2bjCCUFNd130WgrLT6Xf28VtQH0hKnxxxFkVfw3IzTZNq9n963cyVxPqGkfKKThFtC%2brOYS%2f4r7opYym3UzdFqPxCA5eSe9irR0natAD10IdXW1ocB1s%3d




Question 4

If Anita were to die on 15 March 2020, how much IHT would she have saved as a result of making the cash gift of £600,000 to Marguerite on 20 August 2015, rather than retaining this cash until her death?

A. £96,000 B. £2,400 C. £97,440 D. £240,000 This question is also on syllabus area D.3.b. The correct answer is C The gift would be a PET and, as a lifetime gift, the annual exemption for 2015/16 and 2014/15 is available. Thus, the value of the PET would be 600,000 – 3,000 – 3,000 = 594,000. Anita’s death within seven years means this PET would be reviewed again and the NRB available would be the unused amount at 20 August 2015 looking back seven years. As the NRB had all been used by the CLT on 2 Dec 2013 the full value of the PET will be chargeable at the death rate of 40% (594,000 x40% = 237,600). However, the PET was made more than 4 years but less than 5 years before death so taper relief of 40% is given (237,600 –(40%x237,600) =142,560)

If the gift had been left in the estate, on death the tax would be the value on death at the death rate of tax; 600,000 x 40% = £240,000

Therefore the saving is £240,000 - £142,560 = £97,440

The incorrect options are:

A (600,000 – (600,000x60%)) x40% = 96,000 (missed annual exemption on lifetime)

B 3,000 + 3,000 x 40% = 2,400 (applying the saving due to annual exemptions only and forgetting there is also taper relief)

D 600,000 x 40% = 240,000 (saving calculated as the value of not being in the death estate)

Question 5

If Anita were to die on 15 March 2020, who would be responsible for paying the IHT arising from the cash gift to Marguerite on 20 August 2015, and when would this IHT be due?

A. Marguerite by 30 September 2020 B. Marguerite by 15 September 2020 C. The personal representatives of Anita's estate by 30 September 2020 D. The personal representatives of Anita's estate by 15 September 2020


This question covers syllabus area D.4.a. Identify who is responsible for the payment of inheritance tax and the due date for payment of inheritance tax The correct answer is A Anita’s niece, the donee, would be responsible for the IHT arising from the gift. The due date will be six months after the end of the month in which Anita, the donor, died.

Section C

Aurora

As is typical for the 10-mark question, different taxes were covered, in this case namely inheritance tax, capital gains tax and income tax. The question revolved around three residential properties owned by Aurora, with two of the properties qualifying for private residence relief. The question was not particularly technical, and much of the relevant information was provided. However, it was important for candidates to sort out which information related to which requirement.

• As regards inheritance tax, it was the values of the three properties, the amount of outstanding interest-only mortgages, and Aurora’s main residence.

• As regards capital gains tax, it was the chargeable gains, periods of ownership and the periods which Aurora had lived in each property.

The 10-mark question will often exclude certain reliefs. This was the case here, with both Aurora and her deceased husband, Andrew, having made lifetime gifts which fully utilised their respective inheritance tax nil rate bands of £325,000. This being the case, the nil rate bands could simply be ignored. Only the residence nil rate bands were relevant.


The capital gains tax requirement stated that the chargeable gain should be calculated before deducting the annual exempt amount. Therefore, the annual exempt amount and the tax liability were irrelevant, and could not possibly gain any marks. The income tax aspect involved the income tax benefit which Aurora would receive from making a net personal pension contribution of £40,000. The requirement stated that full tax computations were not expected, being a clear indication that workings should be carried out at the margin. This should have been fairly straightforward given the gross pension contribution exactly matched the amount of Aurora’s income subject to 40% higher rate income tax.

Requirement (a) – 3 marks

For just 3 marks, it should be clear that a long, detailed, answer is not required. With the 10-mark question, it is always a good idea for candidates to spend a few minutes planning out their answers, especially as this can avoid wasting time taking a much longer approach than necessary. With this requirement, the three property values and the two mortgage figures can be combined into just the two figures - £1,050,000 (3 x £350,000 for the property values) and £230,000 (2 x £115,000 for the mortgages). Three separate sets of workings not only take longer, but there is more scope for error. The next important point is that the chargeable gain figures are completely irrelevant to this requirement, and, as already noted, so are the nil rate bands of £325,000. It is also necessary to include the main residence valued at £500,000. This is why the reading and planning aspect of answering the 10-mark question is so important. The only slightly technical aspect to the requirement is the residence nil rate bands. Since Andrew is deceased and would not have used his residence nil rate band on his death (the entire estate being left to Aurora), two residence nil rate bands of £150,000 are available. The total of £300,000 is clearly less than the value of the main residence (£500,000). As can be seen from the model answer, all of this is easily combined into a five-line computation with no separate workings required.


Requirement (b) – 3 marks

At just 3 marks, another short set of workings is required here. Since the chargeable gains are given, it is just a matter of establishing the available reliefs. As for requirement (a), it is important to ignore any information which is not relevant, such as the property values and the mortgages. There are two slightly more difficult aspects to this requirement:

• Although the periods of occupation are given, it is necessary to add in a further 18 months (1.5 years) where relevant for the final periods of ownership.

• All three properties have been let out, so letting relief is also available for those two properties qualifying for private residence relief.

As regards letting relief, it is important to appreciate the limits which are applicable. For Aurora’s properties, letting relief is restricted to the lower of £40,000 and the amount of gain exempt under the private residence rules. Once again, the model answer shows how the workings can be combined into a four-line computation. Using this format, there is no need for any separate workings for letting relief since the limits should be quite clear. The periods of ownership and the periods which Aurora has lived in each property are given in years, so it makes sense to retain this format and not convert to months. The final 18 months are simply included as 1.5 years.

Requirement (c)(i) – 3 marks

As already mentioned, a working at the margin approach is the approach to use here. Not only will this save time, but there is much less scope for making an arithmetical error. The question states that Aurora has sufficient unused brought forward annual allowances to cover her net pension contributions of £40,000, so any consideration of brought forward relief is obviously irrelevant. Candidates initially needed to calculate the gross personal pension contribution (£40,000 x 100/80 = £50,000). Aurora’s basic rate band is therefore extended to £87,500 (£37,500 + £50,000), the same amount as her taxable income. There is no impact on Aurora’s personal allowance. There are then two aspects to the tax relief calculation:


• The extension of Aurora’s basic rate tax band will move income from the 40% higher rate tax band into the 20% basic rate tax band, saving £50,000 at 20% (40% - 20%) = £10,000.

• In addition, basic rate tax relief will be given at source since for the pension contribution of £50,000, with Aurora only having to contribute £40,000. A further benefit of £10,000.

This results in total tax relief of £20,000. The same answer can simply be calculated as £50,000 at 40% = £20,000.

Requirement (c)(ii) – 1 mark

A net personal pension contribution of £40,000 (or £50,000 gross) removes all of Aurora’s higher rate tax liability, so any further contribution will only qualify for basic rate tax relief. This is good tax planning as, provided sufficient pension funds can be built up using this approach, each £100 of contribution only costs £60 (£100 - £40). For an additional rate taxpayer, the cost is even lower at £55 (£100 - £45). A little bit of thought is required here, although only 1 mark is involved. It should be obvious that the answer does not involve the annual allowance of £40,000 (or the annual allowance charge) since the gross pension contribution of £50,000 already exceeds this amount.


Sam, Tam & Uma

The income tax question was based around a partnership, with Sam (80% profit share) and Tam (20% profit share) having been in partnership since 1 July 2006, Tam retiring as a partner on 31 October 2019, and Uma (20% profit share) replacing her as a partner on 1 November 2019. Trading profits were given for the years ended 30 June 2019 and 2020, with Sam and Tam having unused brought forward overlap profits. Part (a) required some care in calculating the partners’ trading income assessments for the tax year 2019-20. The cessation rules apply for Tam, with the commencement rules applicable to Uma. Part (b) was more straightforward, with computations of taxable income required for each partner for the tax year 2019-20. A read through the question should indicate that Sam’s personal allowance is restricted, with Uma (who has director’s remuneration of £180,000) not benefiting from any personal allowance.


With this type of requirement, candidates need to firstly appreciate the relevant basis period rules (ongoing, cessation or commencement), and then be very careful with dates. They also need to have well laid out answers so that their workings can be followed by markers. The model answer shows how this should be done, and it is much better to deal with each of the three partners separately. Headings are essential. Sam – Her assessment is on a current year basis; so is simply her share (80%) of the

partnership profit for the year 30 June 2019. Sam has not ceased trading, so her brought forward overlap profits are not deducted.

Tam – The cessation rules apply to Tam because she left the partnership on 31

October 2019. Therefore, for the tax year 2019-20, she is assessed on her share of the profits for the year ended 31 June 2019 and for the four-month


period from 1 July to 31 October 2019 (4/12ths of the trading profit for the year ended 30 June 2020). Tam’s unused brought forward overlap profits are then deducted from this figure.

Uma – The commencement rules apply to Uma because she joined the partnership

on 1 November 2019. For the tax year 2019-20, she is assessed on her share of the profits for the five-month period from 1 November 2019 to 5 April 2020 (5/12ths of the trading profit for the year ended 30 June 2020).

Requirement (b) – 10 marks

There is an interaction with part (a), because it is necessary to bring forward the trading income assessments that have been calculated (even if calculations have been incorrectly performed). There are three very easy ½ marks for including each of the three figures, so it is essential to make sure figures are consistent across the two requirements. This is where having neatly laid out answers pays off. Sam Sam did not have any other income apart from her partnership trading profit, but it was necessary to restrict her personal allowance. With an 80% profit share, candidates should have managed to calculate a figure in the appropriate income range, and the marks for the personal allowance restriction are then awarded based on the candidate’s own figure. Tam The entire working for Tam can be shown in the one computation. There are two items where a zero should be shown, and, as already mentioned, deductions should be included as negative figures. There are some particular points of note:

• With an occupational pension scheme, only the employee’s (Tam’s) contributions are deducted against employment income. The non-deductibility and non-taxable status of the employer contributions should be indicated by a zero.

• There is no 4% surcharge for Tam’s diesel company car because it meets the real driving emissions 2 (RDE2) standard. Her company car is therefore taxed on the same basis as a petrol company car.

• There is no taxable benefit in respect of Tam’s interest-free loan because it does not exceed the de minimis limit of £10,000 during the tax year. There is no need for a calculation or an explanation – just a zero entry in the tax computation.


• Both the state pension income and the occupational pension income received by Tam are taxable.

Uma In addition to her partnership trading profit and director’s remuneration, Uma had dividend income of £2,400 and paid interest of £2,100 on a personal loan taken out to purchase her share in the partnership. Although the dividend nil rate band of £2,000 will be available, this is not relevant to the question because the requirement is just to calculate taxable income. Once again, reading the question carefully, should lead to the interest on the personal loan being deducted rather than being included as income. The fact that Uma has director’s remuneration of £180,000 is sufficient by itself to establish that no personal allowance is available. All that is needed is a zero entry. Another general point over which candidates should take care, is when entering numbers into spreadsheet computations; for example, please be careful not to enter £125,000 when you mean to enter £12,500.


Harbour Ltd

The corporation tax question should have been relatively straightforward, although some basic tax planning is covered in part (b)(i). An important point to note is that Harbour Ltd is going to prepare accounts for a four month period. When reading through the question, candidates should therefore take a note that this is going to impact on the calculation of the lease premium deduction, capital allowances and property business income. Then when candidates are planning the layout of their answer, it should be apparent that separate workings are only required for the lease premium and capital allowances. Everything else can be dealt with within the main computation, with just one column required for the figures. Note how the workings for interest payable and for the property business income are included in the model answer. The main computation must commence with the computation of Harbour Ltd’s trading profit, which is then followed by other income (property business income and chargeable gain). The corporation tax figure follows after the main computation. There are two very important points here: Negative figures should be clearly shown by entering them as such on the spreadsheet. It is very difficult for markers to pick up negative figures if all figures are shown positive, with the total calculated within the cell on the lines of A1 + A2 – A3 + A4. It is also very easy to make mistakes using this approach. If negative figures are entered, the total is simply SUM(A1:A4).



As the note states, answers should commence with the operating profit. Any different approach makes an answer quite difficult to mark, especially an answer which attempts to rewrite the statement of profit or loss. Figures should not be combined. For example, the amortisation add back of £1,300 and the lease premium deduction of £806 should not be shown as £494, especially as £494 was also a fairly common incorrect answer for the lease premium deduction. It should also be noted that since the lease premium consists of a payment, it simply cannot result in an income entry. There are a couple of aspects which require obvious care:

• Interest paid in the statement of profit or loss is £24,600. Accruals at the beginning and end of the period are £20,500 and £12,300 respectively. The correct figure (on a payable basis) to deduct in working out the trading profit is therefore £24,600 - £20,500 + £12,300 = £16,400.

• With the property business income, the rent has been received for six months, but the insurance paid for 12 months. Given the four-month accounting period, the calculation is therefore (15,600 x 4/6) – (1,800 x 4/12) = £9,800.

Question practice will eliminate mistakes such as giving an annual exempt amount (which is not available for companies) against the chargeable gain, thereby losing a very easy ½ mark. Also, candidates should appreciate that both the annual investment allowance and writing-down allowance are given for the same asset if the annual investment allowance expenditure limit is exceeded. In this case, the annual investment expenditure limit was reduced to £1,000,000 x 4/12 = £333,333 because of the four-month accounting period.

Requirement (b)(i) – 3 marks

The fact that this requirement is just for 3 marks, together with the use of ‘briefly’ should be a very good indication that only a short set of answers is required. This is why it is important to make use of the model answers since candidates’ answers should not be any longer. If tax evasion and tax avoidance are muddled up, the available marks are obviously going to be lost, so candidates should think first, write second. The key point is that tax evasion is illegal, whereas tax avoidance is legal.


As regards Harbour Ltd extending its accounting period, the company can do this provided company law requirements are met (and these are not relevant to the tax examination). Therefore, candidates cannot expect to get the full mark available if there any caveats to their answer. HM Revenue and Customs will not see this is as tax evasion, nor is there any possibility of a compliance check being carried as a result of the change.

Requirement (b)(ii) – 2 marks

A quick read of the requirement should make it clear that it is not necessary to calculate any tax saving or provide an explanation. The detail in the model answer is just there to help candidates follow the workings. With a 12-month accounting period, the full annual investment allowance of £1,000,000 is available, so the annual investment allowance becomes £548,000. The capital loss now arises within the same accounting period, so can be offset against Harbour Ltd’s chargeable gain. The 2 marks available again indicate the length of answer required.

taxation (tx uk) sept / dec 2020 examiner’s report

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