study tax exams

Brave new tax world

A comprehensive understanding of tax rules and strategy,

and the skills to apply it, are crucial to becoming a
competent, professional ICAEW Chartered Accountant

ou will be expected by your

employer and your clients to be
aware of the key issues in tax
legislation, how they impact on the
business and how legislation should be
applied. Tax legislation has grown
significantly over the last few years, and
the recent changes to the ACA qualification
have seen two new tax modules introduced
at the Professional Level: Tax Compliance
and Business Planning: Taxation.
Compliance and planning are the two key
competency frameworks required in the
tax regimes around the world.

Tax Compliance

The Tax Compliance module requires

you to demonstrate that you understand
the rules for individuals and companies to
be compliant with their legal
responsibilities in dealing with the
preparation of tax computations.

Key issues

You will be tested on your ability to

understand tax rules and apply them in real
life scenarios. You will be assessed across
seven taxes and asked to calculate, state
and explain tax issues. You will need to be
able to perform a variety of tax calculations
under exam pressure.

How to approach the

questions

corbis

You must have the fundamentals at your

fingertips. Become familiar with your tax
tables, know how to use them and devise
a method to memorise the various
proformas for the different taxes so you

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october 2013 vital

vital october 2013

can reproduce them quickly and accurately

on your exam script.
Legal and ethical issues may be tested in
any of the four questions. If you were to
review exam questions you will realise that
applying ethical judgement is not just
about distinguishing between tax
avoidance and tax evasion. There are many
other things to consider relating to
fundamental principles, conflicts of
interest and regulatory issues.

When youre
writing, take a
breath occasionally
and ask yourself
why or so what
or what happens
next?
Business Planning: Taxation

While the Tax Compliance module focused

on your technical knowledge, the Business
Planning: Taxation paper is a skills-focused
paper, which relies on the knowledge
brought forward from the Tax Compliance
and Principles of Taxation modules.

Key issues

Business Planning: Taxation requires you to

learn some advanced technical topics, such
as the treatment of losses, group scenarios
and international taxation issues. Since this
module has a skills focus, make sure you

read through the skills development grid,

which is available in the exam resources
area at icaew.com/dashboard
You will now be required to
recommend determine analyse
and evaluate, in addition to supporting
your tax advice through the use of
relevant calculations and appropriate
communication styles.
This module, in particular, asks you to
apply your professional judgement.
Specific examples may include:
applying scepticism to the integrity of
information provided in the scenario
having regard to its source;
selecting between technical choices;
identifying omissions in the information;
evaluating inconsistencies in
information;
evaluating the effects of future events;
identifying key linkages between
information provided in a scenario and
possible tax treatments;
comparing the effects of a range of
estimates, outcomes or tax treatments;
exercising your own ethical judgement
in assessing the consequences of various
courses of action.
You are also required to think about the
interaction of taxes and how this should be
addressed from a technical viewpoint.
For example:
does a gift that is efficient for inheritance
tax purposes create a capital gain?
can that gain be mitigated?
how should this be communicated to the
reader of my response?
is my response appropriate, given
their circumstances?

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study FM EXAM TIPS

Heads up

One examiner reveals the most common mistakes made

by students in the discursive sections of the Financial
Management exam and how to avoid repeating them
hen it comes to the
numerical sections
of the Professional
Level Financial Management
(FM) exam, students have
consistently performed well.
But in the last year, there has
been a marked decline in
performance on the
discursive sections.
The result? A fall in the
pass rate below its long-term
average. In December 2012,
the pass rate stood at 80.1%,
but this fell to 78.8% in
March 2013, and 73.6% in
June 2013.
Though there are many
changes in the new FM paper,
which launched last month,
the balance between the
numerical and discursive
aspects will remain the same,
at roughly 60:40. So getting to
grips with the discursive

How to approach
the questions

Fail to plan or plan to fail? While you

are running neither a marathon nor a
sprint, in this 2.5 hour assessment you
need to work efficiently. This involves an
assessment and identification of the
requirements, deconstruction of the
question and a route map through your
answer to achieve an appropriate
response. Taking each of these in turn:
The requirements may be stated, or
embedded in the question, especially
in the longer case study-style question.
You need to track down those
requirements and create a plan for
allocating your time. Use your judgement,
and allocate your time in order to
maximise your knowledge.
When deconstructing the question, it
is important to assimilate information

Create your own

route map through
the question; this
will allow you to
assimilate the facts,
and structure your
answer well
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efficiently and try to make connections

between different parts of the scenario.
Do not go too far down a rabbit hole.
You may know lots of things about a
particular subject, for example the
calculation of a deficit on a non-trading
loan relationship, but do not neglect to
assess how that might be used in the
broader context of the group structure.
Try to see the whole picture and keep
re-checking the requirement.
Creating your route map through the
question will allow you to assimilate
the facts and structure your answer
well. In practical terms, you may choose
to annotate the question paper, or maybe
transfer your thoughts onto a separate
piece of paper, as you are assimilating
the information. Some of the information
presented to you in the exam paper will
be structured in lists or proformas, some
may be unstructured and descriptive.
Practise analysing the information using
the questions from the learning materials,
and find your own route map. Would
you take your driving test without
practising reversing? You have to practise
the questions and develop a methodology
that works for you. Be creative. Practising
your approach to these questions is your
key to success.
Achieving an appropriate response
involves the synthesis of your skills. You
are now combining your tax technical
prowess, an understanding of the business
scenario and an appreciation of the
commercial, ethical and legal issues. When
you are writing, take a breath occasionally
and ask yourself why or so what or
what happens next? For example, if you
are writing the phrase the gains on

incorporation are what comes after

that for your client/manager? Remember
to consider all of the taxes.
An appropriate response also involves
an understanding of the person to whom
you are communicating, including use of
relevant language. The question will guide
you as to the recipient of your advice, but
keep that in mind at all times and also the
format you have been asked to use (eg,
report, email, or memo). Let that guide
the tone of your language and keep in
mind the business context. Dont be
afraid to be honest. If you feel there is
further relevant information that you
require in order to advise, make that clear
and be specific.
An appropriate response may require
the consideration of legal and ethical
issues. You may be asked to consider not
only the issues that may arise for the
recipient of your advice, from the
scenario presented, but also the
appropriate action to be taken by you.

Open book beware of

knowledge dumping

Business Planning: Taxation is an

open-book assessment and therefore you
may refer to any materials in the exam,
including your learning materials. Be
careful; if you copy out large chunks of
content from the learning materials, you
will not be rewarded with any marks
unless the information is applied in the
context of the scenario. If you were asked
to consider the application of the CFC
legislation to a particular scenario, you
should determine the relevant parts of the
legislation rather than write out
everything you know about CFCs.

october 2013 vital

MISTAKE ONE

Forgetting to apply your

own knowledge to the
circumstances described in the
question. This is something that
students often fail to do, losing
them crucial marks.
Example: Question 1 in
the June 2013 paper required
candidates to deal with the
acquisition of one business
by another using NPV.
Requirement (c) was as
follows.
Explain what is meant by the
term real options and suggest

two real options that might be

relevant to Brixhams purchase
of Cabin. (6 marks)
Breaking this requirement
down, there is a pure
knowledge aspect what is
meant by real options and
also an application of real
option knowledge to the
specific scenario.
Most students addressed
the knowledge aspect, then
blindly regurgitated material
from the study manual that
was inappropriate for the
circumstance described.
Frequent references to the
project also gave away the
fact that they were not
considering the specific
acquisition scenario.

MISTAKE TWO

Failing to answer the actual

question. Be clear about
what is being asked of you
and read ahead to other
questions in the set.
Example: Question 2 in the
December 2012 paper
concerned the WACC and
requirements (b) and (c)
were as follows.
Discuss the underlying
assumptions and weaknesses of
the approach you have employed
in calculating the cost of equity
in part (a). (8 marks)
Discuss any reservations you
may have regarding the use of
the WACC as a discount factor
in appraising Liteforms
potential investment projects
next year. (5 marks)
The majority of students
answered part (b) as if it read
calculating the WACC, rather
than calculating the cost of
equity. As a result, rather than
basing the answer on the
dividend valuation model,

corbis

Your technical skills will be assessed but

do not be afraid of the word planning.
You are not being handed a blank piece
of paper. You will be assessed within the
context of the scenario, which will
include plenty of facts and figures for you
to use. Ensure that you have considered
the following:
the broader commercial aspects
of your advice;
the nature and needs of the client and
their priorities;
any legal and ethical issues.

elements of the paper is just

as important as ever.
Here, an FM examiner
explains some of the most
common mistakes made by
students and how to avoid
repeating them.

vital october 2013

there was a vast amount in

their answers to (b) on
keeping the gearing constant,
having the same systematic
business risk and not having
project specific finance that
scored nothing.
Unfortunately, what they
had written as their answer
to (b) was instead relevant
to answering (c). The
sensible students repeated
their answer to (b), ensuring
they scored some marks.
However, many wrote very
little for (c) and scored, in
most cases, zero.

MISTAKE THREE

Failing to break down the

requirements and answer all
aspects of the scenario.
Example: Question 3 in
the June 2013 paper, again
on WACC and part (c) was
as follows.
Critically evaluate the
suggestions of the finance
director, the managing director
and the production director, in
respect of both the method of
financing and the cost of
capital. (11 marks)
A well-structured answer
would have six distinct parts;
the student would have
recognised that there are
three directors, each
commenting on two things
(method and cost).
Weaker answers dived
straight in, having seen there
was debt. Those students
adopted the write all I know
about M&M approach. This
comes back to the first point
about applying knowledge.
For links to more FM exam
resources, visit your dashboard
at icaew.com/dashboard

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