You are on page 1of 44

The Institute of Chartered Accountants in England and Wales


For exams in 2019

Study Guide
1 Key resources 1
2 Study guide 2
3 Syllabus and learning outcomes 17
4 Technical knowledge grid 21
5 Glossary of terms 32
The Principles of Taxation module ensures you understand the general objectives of taxation
and to calculate income tax, national insurance contributions, capital gains tax, corporation tax
and VAT in straightforward scenarios.
1 Key resources
Whether you're studying the ACA qualification or ICAEW CFAB, with an employer, at university,
independently (self-studying), or via an apprenticeship, we provide a wide range of fantastic
resources and services to help you in your studies. They can be found on our website. Be sure to
visit the specific area for your qualification.
ACA students, you can access dedicated exam resources, guidance and information for the ACA
qualification via your dashboard at
ICAEW CFAB students, you can find everything you need at
Syllabus and technical knowledge grids
This gives you the full breakdown of learning outcomes for each module and how your technical
knowledge will grow throughout the qualification.
Study guide
This guides you through your learning process, putting each chapter and topic of the Study
Manual into context and showing what learning outcomes are attached to them.
Exam webinars
The pre-recorded webinars focus on how to approach each exam, plus exam and study tips.
Errata sheets
These are available on our website if we are made aware of a mistake within a Study Manual or
Question Bank once it has been published.
Student support team
Our dedicated student support team is here to help and advise you throughout your studies,
don't hesitate to get in touch. Email or call +44 (0)1908 248 250 to
speak to an adviser.

ICAEW 2019 Study Guide 1

2 Study guide

2.1 Help yourself study for your ACA exams

The right approach
1 Develop the right attitude

Believe in yourself Yes, there is a lot to learn. But thousands have

succeeded before and you can too.
Remember why you are doing it You are studying for a good reason: to advance your

2 Focus on the exam

Read through the Syllabus in this This tells you what you are expected to know.

3 The right method

See the whole picture Keeping in mind how all the detail you need to know
fits into the whole picture will help you understand it
 The Practical significance and Working context to
each chapter in the study guide put the material
into context.
 The Learning outcomes and Section overviews in
the study manual show you what you need to
Use your own words To absorb the information (and to practise your written
communication skills), you need to put it into your own
 Take notes.
 Answer the questions in each chapter.
 Draw mindmaps.
 Try 'teaching' a subject to a colleague or friend.
Give yourself cues to jog your The Study Manual uses bold to highlight key points.
 Try colour coding with a highlighter pen.
 Write key points on cards.

4 The right recap

Review, review, review Regularly reviewing a topic in summary form can fix it in
your memory. The Study Manual helps you review in
many ways.
 Each Chapter Summary will help you to recall that
study session.
 The Self-test actively tests your grasp of the
 Go through the Examples in each chapter a
second or third time.

2 Principles of Taxation ICAEW 2019

2.2 Study cycle
The best way to approach the Study Manual is to tackle the chapters in order. We will look in
detail at how to approach each chapter below but as a general guide, taking into account your
individual learning style, you could follow this sequence for each chapter.

Key study steps Activity

Step 1 This topic list is shown in the contents for each chapter and helps you
Topic list navigate each part of the book; each numbered topic is a numbered
section in the chapter.
Step 2 The practical significance and working context sections for each chapter,
Introduction set out in this study guide give you the big picture in terms of the context
of the chapter. The Examination context guidance shows what the
examiners are looking for and tells you why the topics covered in the
chapter need to be studied.
Step 3 Section overviews give you a quick summary of the content of each of the
Section overviews main chapter sections. They can also be used at the end of each chapter to
help you review each chapter quickly.
Step 4 Proceed methodically through each chapter, particularly focusing on areas
Explanations highlighted as significant in the chapter introduction or study guide.
Step 5 Take brief notes, if you wish. Don't copy out too much. Remember that
Note taking being able to record something yourself is a sign of being able to
understand it. Your notes can be in whatever format you find most helpful:
lists, diagrams, mindmaps.
Step 6 Work through the examples very carefully as they illustrate key knowledge
Examples and techniques.
Step 7 Check yours against the suggested solutions, and make sure you
Answers understand any discrepancies.
Step 8 Review it carefully, to make sure you have grasped the significance of all
Chapter summary the important points in the chapter.
Step 9 Use the self-test to check how much you have remembered of the topics
Self-test covered.
Step 10 Ensure you have ticked off the learning outcomes.
Learning outcomes

Moving on...
When you are ready to start revising, you should still refer back to the Study Manual.
 As a source of reference (you should find the index particularly helpful for this).
 As a way to review (the section overviews, examination context, chapter summaries and
self-test questions help you here).
Remember to keep careful hold of the Study Manual – you will find it invaluable in your work.

2.3 Detailed study guide

Use this schedule and your exam timetable to plan the dates on which you will complete each
study period below.
Revision phase – your revision should be centred around using the questions in the ICAEW
Question Bank.

ICAEW 2019 Study Guide 3

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

1 Ethics Ethical considerations underpin all of Ethics can be a very dry In the examination, in the objective test
your studies as well as your work topic. The best approach is questions, students may be required to:
Belonging to a professional body requires
experience. to read the chapter in
adherence to a code of ethics. This is part of  identify the five fundamental
several short sittings making
what differentiates a Chartered Accountant You will often make ethical decisions principles in straightforward
notes on the essential points
from unqualified accountants. Clients, without even realising it, but scenarios and the safeguards to be
as you go along.
members of the public, and the government sometimes you may find yourself in a put in place when these are
recognise that we are required to adhere to quandary and be unsure how to act. Finally, attempt the self-test threatened
exacting standards and so expect a certain This is when the Code of Ethics will be questions at the end of the
 demonstrate knowledge of the
standard of behaviour from us. of assistance. chapter.
framework for ethical conflict
Money laundering has been a major problem You need to know what to look out for resolution
in the past and, to combat this, professionals and how to act. You should always take
 determine which of the five
are required to participate in its prevention by particular care in relation to client
fundamental principles conflicts of
reporting certain suspicions relating to the confidentiality; not always an easy task.
interest may threaten
proceeds of crime.
Stop and think  differentiate between tax evasion
and tax avoidance
Accountants have been fined for
non-compliance with the Code of Ethics, and  identify the elements of money
have had claims against professional laundering in straightforward
indemnity insurance for breaches of scenarios
confidentiality. Accountants have been For extra question practice on these
prosecuted under the anti-money laundering topics go to the section of the Question
regulations. It is essential that professional Bank covering this chapter.
accountants should act ethically in all of their
work. The specific syllabus reference for this
chapter is: 1g, h.

4 Principles of Taxation ICAEW 2019

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

2 Introduction to taxation The volume and complexity of tax law Read through Chapter 2 of In the examination, in the objective test
is now such that many businesses have the Study Manual quickly to questions, students may be required to:
Every person in the UK is affected by our tax
to spend considerable amounts of obtain the background
system in some way. We pay tax on the money  identify the social justice principles
we earn and on the things we buy and this tax time just on tax administration. When a knowledge of which you
being applied for taxation purposes
is used by the government to pay for our business starts to trade it must inform must be aware. Learn the
schools, hospitals, roads and so on. HMRC. Without advice from an definitions of financial year  recognise external influences on the
accountant, a business may pay too and tax year. UK taxation system
There are currently over 20 taxes in the UK much tax and miss deadlines.
although you will only study the most common Finally work through the self-  understand which taxes apply to
of these for your exams. Many business decisions will have tax test questions carefully to different taxpayers eg, partnerships,
consequences and will be discussed at ensure that you have companies
As governments and business practices change,
board level. Tax is now very important grasped the main points in
the tax system changes. The annual Budget forms  identify the responsibilities of HMRC
as most large companies operate on a the chapter.
the basis for the Finance Bill which then receives
global basis and will choose which For extra question practice on these
Royal Assent, becoming the Finance Act.
country they want their business to be topics go to the section of the Question
The Finance Act is supplemented by a huge based in at least partly on the basis of Bank covering this chapter.
body of case law and practical interpretation. tax cost. The specific syllabus references for this
Unfortunately, the new law is usually just added
At the other end of the spectrum you chapter are: 1a, b, c, d, e, f.
to the existing law and so the overall legislative
burden increases over time. There are regular may encounter tax in the context of a
calls for a programme of tax simplification, but growing business taking on its first
although there has been much discussion, we employee and setting up a payroll.
have seen little real change. Small businesses often struggle most
with tax administration and can benefit
It is important to have a good overall feel for most from sensible tax advice and
the tax system early in your studies so that you planning. Just knowing in advance
know where to look for the detailed rules how much tax is payable and when,
when you need them later on. will help a small growing business
Stop and think considerably. The accountant advising
It is likely that you have personally been on how to claim a tax credit or
paying tax on your various sources of allowance will help their client to
income/gains for some time. Have you succeed.
stopped to think about how this affects the
The introduction of digitisation of tax
decisions that you make? Do you, for instance,
hopes to transform tax administration
regularly invest money in tax free individual
making it more effective, more
savings accounts?
efficient, and simpler for the taxpayer.

ICAEW 2019 Study Guide 5

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

3 Introduction to income tax In practice, much of the accountant's Read section 1 of Chapter 3 In the examination, in scenario-based
Income of different types is taxed at different job will be to check and then interpret and learn the list of exempt questions, students may be required to:
rates of income tax. This makes it difficult to the figures produced by their own income in section 1.3.
 differentiate between items which
calculate an individual's income tax liability computer system and HMRC’s.
In section 2 it is very are taxable and exempt for income
and indeed a common criticism of the tax Most will use software to prepare their important to work through tax purposes
system is that the 'man in the street' cannot clients' tax returns. This will include a the worked examples and  categorise taxable income as non
understand his own tax bill. computation of the tax payable, and interactive questions savings, savings or dividend income
One way of helping people to deal with may include other supporting carefully. These ensure that
In the objective test questions, students
complexity in the tax system is to use schedules and summaries. However, you can apply the main
may be required to:
technology. Enabling computer software to do we all know that computers are only as points studied.
much of the calculation means that the public good as the data input and the skills of  calculate the tax liability
Section 3 of this chapter is
does not need to understand the underlying the programmer. A computer cannot
vitally important and should  identify how tax relief is given for Gift
principles. replace a skilled accountant who Aid
be worked through
knows the client and understands the
There has been a strong drive from government thoroughly. The examples  compute the personal allowances
business's needs. A good accountant
in recent years to encourage people to use and interactive question are
can add perspective and give advice available for taxpayers with
internet filing. HMRC has responded to this by vital for your studies and you
beyond mere compliance work. adjusted net income exceeding
building online filing facilities into its own should work through them
website. If you look at its home page you will see Understanding how a person's income all carefully.
some of the services on offer tax liability is put together will be  compute the allowances available
Once you are happy with the
( useful not only in a work context but for married couples
above, work through section
revenue-customs). Individuals can file their own also in your personal and family life. For extra question practice on these topics
4 of the chapter. Again the
personal tax returns directly online which means examples are the most go to the section of the Question Bank
faster and more accurate processing than with important part of the covering this chapter and to the section of
paper returns and in the case of a tax refund section. the Question Bank containing scenario-
being due, it should be paid more quickly. based questions for income tax. However,
Finally, complete the self- you will need to study Chapter 4 and
Stop and think
test questions at the end of Chapter 5 before attempting these
Do you understand your own tax bill? It is likely the chapter. scenario-based questions.
that you receive employment income and
possibly income from various investments such Students have historically prepared well for
as dividend income and bank/building society this area of the syllabus. Better prepared
interest. Did you realise that you must pay students are able to perform well in the
different rates of tax on each of these types of more difficult area of Gift Aid.
income? The specific syllabus references for this
chapter are: 3a, b, j.

6 Principles of Taxation ICAEW 2019

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

4 Employment income Whilst there are some basic rules for Read quickly through In the examination, in scenario-based
what is taxable, a person's take home section 1 of this chapter but questions, students may be required to:
Most people are interested in their
pay can be altered dramatically by the pay particular attention to
employment package. Employers recognise  determine how benefits are taxable
make up and timing of their the worked example.
that a flexible and modern system for on employees
rewarding their employees results in a happier Section 2 is vitally important
 identify which benefits are exempt
and more committed workforce. They also An accountant will be expected to as you must be able to
know that one of the largest costs of running a understand how an individual's calculate the value of the Students may be required in the objective
business will be the cost of the payroll, so it is employment income will be taxed and various taxable benefits test questions to:
important to ensure it is correct. give advice on how tax can be covered. Work through the
 calculate an employee’s PAYE code
minimised. Sometimes different parts examples and questions
Whilst we have some basic rules which identify
of our tax legislation will interact. A carefully. Learn as many of  understand the operation of the
what is taxable and when, the government
choice which may reduce income tax the exempt benefits as you PAYE system
also uses the tax system to influence what
must also be considered in the context can.
employment benefits people prefer. For For extra question practice on these
of other taxes and tax credit claims to
example, environmental damage caused by In section 3 there are three topics go to the section of the Question
ensure that the best overall result is
CO2 emissions are a major concern and so examples of the calculation Bank covering this chapter and to the
achieved for a client. It is important to
employees choosing electric cars or cars of PAYE codes that you section of the Question Bank containing
keep up to date and alert for changing
which produce low emissions are taxed less should work through scenario-based questions for income tax.
than those who drive more polluting cars. carefully. However, you will need to study Chapter 5
Stop and think Understanding your client means before attempting these scenario-based
Finally work through the self-
looking beyond his business needs questions.
Think about the benefits your employer provides test questions at the end of
and it will be common to advise a
for you. Are these benefits part of your the chapter. Students need to take great care when
company not only on corporation tax,
employment package because of their tax- calculating the value of a benefit, as often
efficient status? Do you know how to quantify but also to assist with PAYE issues and
one important piece of information is
them for tax purposes? give advice to the directors on their
missed when working this out.
personal tax as well.
The specific syllabus references for this
Although there is a lot to learn, you will
chapter are: 2b, 2d, 3c.
find that friends and family will be keen
to test the extent of your knowledge in
this area too.

ICAEW 2019 Study Guide 7

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

5 Trading profits A significant practical problem is Read quickly through In the examination, in the objective test
In some businesses, it is obvious that trading is identifying when a new trade actually section 1 of Chapter 5. You questions, students may be required to:
taking place. Perhaps the client has opened a begins. It is rare that a client seeks the should be aware of the
 identify and use the badges of trade
shop or bought an existing business from help of an accountant before starting badges of trade. Then read
in a given scenario
someone else. However, in other cases it can up a new business. There is usually section 2.
be more difficult to establish whether a person some early activity and it is often only Students may be required in scenario-
Section 3 is the most
has a taxable business. There is a mass of case as the business needs to seek external based questions to:
important part of the chapter
law to help determine this. A profit motive can finance or as the first deadlines loom
and you must work through  determine whether expenditure
be a significant pointer towards the existence that the entrepreneur thinks about
it slowly and carefully. It is incurred is allowable or disallowable
of a trade, but this may not be enough on its asking for tax advice.
important that you have a in calculating trading profits
own. Many one-off transactions could be Unfortunately this can be too late for very good understanding of
treated as capital gains instead and the tax  correctly deal with other adjustments
some and they may have already when expenditure is
consequences will be very different. Many required to calculate adjusted
incurred late notification or filing allowable or disallowable.
individuals have bought and sold goods on trading profits
penalties. The job is then one of
eBay without realising that what they were The worked example in
finding out what has happened and For extra question practice on these
actually doing was trading, and that they could section 4 is the most
negotiating reduced penalties before topics go to the section of the Question
be liable to pay tax on their profits. HMRC has important part of this final
looking forward and helping the Bank covering this chapter and to the
been taking a close interest in this type of section.
business with its plans for the future. section of the Question Bank containing
activity, and eBay now requires those using the The self-test questions at the scenario-based questions for income tax.
site to register as either trading or non-trading For larger unincorporated businesses,
end of the chapter cover the
members. the financial accounts may have been The specific syllabus references for this
most important points learnt
prepared quite separately from the tax chapter are: 3d, e.
95% of the businesses which exist in the UK are so finish the chapter by
computations of the business owners.
small and most of these are unincorporated. working through them.
The accountant will then have to go
Although they may not pay very much income through the figures making changes
tax on their profits when compared to the for the differences between tax and
corporation tax paid by large multinational accounting law and practice. Smaller
companies, they are important cogs in the businesses may only prepare tax
wheels of the economy. Government tries to computations in the first place,
encourage business by giving tax relief for perhaps with additional statements
some business expenses, although not all. being prepared from time to time to
Stop and think support business plans or cash flow
Your friends/family may often buy and sell certain forecasts.
valuable items. Have you ever stopped to think What is taxable and in which year is an
about whether they are trading? ongoing challenge.

8 Principles of Taxation ICAEW 2019

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

6 Capital allowances The general rule when working out Read quickly through section In the examination, in the objective test
When a company, a sole trader or a partnership taxable profits is that any depreciation 1, but take care to spend questions for unincorporated businesses
draws up accounts, there will normally be a that has been charged in working out time on the pro forma and in scenario-based questions for
deduction for the depreciation of capital assets. accounting profits is not deductible in computation. corporation tax, students may be required
The purpose of this is to spread the cost of these computing taxable profits, so it must to:
Sections 2 to 7 are very
assets over the time that they are to be used to be added back. Capital allowances are  identify which assets qualify as plant
important and should be
generate income. The tax system deals with then calculated on certain types of and machinery
studied thoroughly. You
capital assets quite differently from financial asset, and are deducted from profits to
should work through all of  calculate writing down allowances at
reporting. Capital allowances are the deduction arrive at taxable profits.
the worked examples and the correct rate and deal with disposals
that is given for tax purposes in respect of capital Some special types of asset have to be questions very carefully.  identify which assets are eligible for
expenditure instead of depreciation. kept separately identified, for example
Finish the chapter by first year allowances
In practice, the capital allowances which are items where there is an element of
completing all of the self-test  correctly apply the annual investment
given will usually accelerate tax relief for the private use by the sole trader or
questions. allowance
costs of buying fixed assets. The expenditure on partner.
most plant and machinery qualifies for  correctly treat cars and other assets
For larger businesses, the capital with private use by the sole trader or
allowances at the rate of 18% each year on a
allowances computation will be done partner
reducing balance basis, but the government
using software. Smaller businesses
periodically introduces higher rates of relief such  determine the amount of any
may do the calculations by hand, but in
as the AIA for short periods of time. This is to balancing adjustment
all cases, accurate record-keeping is
encourage businesses to bring forward their  calculate capital allowances for periods
capital expenditure plans and to try to boost shorter or longer than 12 months
growth in the economy. More generous rates are
also used to encourage expenditure on other For extra question practice on these
assets such as environmentally friendly cars and topics go to the section of the Question
energy saving equipment. Bank covering this chapter. There is
further practice of capital allowances in
Stop and think the section of the Question Bank
Have you ever wondered how tax relief is given containing scenario-based questions for
for capital expenditure and/or whether tax relief corporation tax, to try after studying
is given for all types of expenditure? If tax relief Chapter 10.
were given for the depreciation charged on
assets through the accounts there would be A methodical approach is required to
significant potential for taxable profit to be calculate capital allowances, otherwise
manipulated by the choice of depreciation rate. this can be unnecessarily time-consuming.
Consequently, a standardised tax allowance is The specific syllabus reference for this
given to prevent this manipulation. chapter is: 3e.

ICAEW 2019 Study Guide 9

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

7 Trading profits – basis of assessment If you are training to be an accountant in Students often find the rules In the examination, in the objective test
practice, you are likely to be employed covered in this chapter quite questions, students may be required to:
It is inevitable that most businesses are started by
by a partnership. complicated when they begin
people who do not have any formal financial  correctly apply the current year basis
Whenever you begin to review a client's their studies. However, the
training or tax background. It is possible for them for taxing trading profits
tax affairs, it is important to identify the rules are fundamental and you
to get basic help and advice through the
trading medium which is being used for must be able to apply them in  calculate the taxable trading profits in
government’s website, but the reality is
the transactions you are reviewing. The any given situation. The secret the opening years of a business,
that the UK tax system is actually too complex for
tax consequences of trading as a sole to achieving this is to practise including overlap profits
a do-it-yourself approach to work in most cases.
trader or partnership follow income tax as many examples as possible.
Even the choice of accounting date can make a Gradually you will learn the  determine the taxable trading profits in
principles. A sole trader is taxed on the the final tax year of a business
big difference to a business. For example, a profits of their business whilst each technique for working out
seaside guest house will probably not want to partner is taxed on their interest in the taxable profits. Work through  understand how partnership profits are
have its year end in the middle of its busy business which will be governed by their all of the questions and allocated to individual partners and are
summer season. If a business later finds that it profit sharing agreement. examples in sections 1 to 4 taxed on them individually
needs to change its accounting date, then carefully.
special tax rules apply. The special tax rules for opening and  determine taxable trading profits using
Do not begin the section on
closing years of trading apply to sole the cash basis of accounting
The partnership remains a popular business partnerships until you are very
traders and individual partners. When
medium today. It is used by all types of trade confident with the previous For extra question practice on these topics
starting a sole trade or a partnership, it is
from small building firms, caterers and artists, to sections of the chapter. go to the section of the Question Bank
worth thinking carefully about the choice
international architects, lawyers and accountants. Section 6 is important as it covering this chapter.
of year end to reduce the amount of
overlap profits. takes you through the rules on A significant amount of practice is required
Rules have been introduced to allow sole traders
the cash basis for small by students in order to be able to deal
with turnover below £150,000 to use the cash For partnerships, the interaction of the
businesses. Work through this efficiently with opening year rules for sole
basis when calculating their taxable profits. It is accounting rules which determine
section and the worked traders and partnerships.
hoped these rules will make the tax system accounting profits, the tax rules for
example carefully. Look back
simpler for these smaller businesses. determining taxable profits, and then the The specific syllabus references for this
to Chapters 5 and 6 to
rules for assessing income in specific tax chapter are: 3e, f, g, h, i.
Stop and think contrast these rules with the
years, can lead to some inequitable
You probably know that businesses may prepare ones you have already learnt
divisions of the business’s tax charge
accounts to any date they choose. Have you ever for businesses using accruals
between the partners. For this reason,
stopped to wonder how we decide which tax year accounting.
many partnerships use a tax reserve to
the profits of a period of account should be taxed The self-test questions
in? retain cash within the control of the
business to smooth out some of these provide additional practice at
effects. However it is important to applying the rules. Work
remember that this does not change the through them carefully.
underlying principle that each partner is
taxed as an individual.

10 Principles of Taxation ICAEW 2019

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

8 National insurance contributions Just as many of the population have Read quickly through In the examination, in the objective test
National insurance contributions (NIC) were tended to ignore national insurance in section 1. Then work questions, students may be required to:
introduced early in the 20th century and were the past, so too have many in the tax through the examples and
 calculate national insurance
meant as a temporary measure. Over 100 and accounting professions. interactive question in
contributions payable by employees
years later they are still with us and form a Nevertheless, both the structure and section 2 very carefully.
and their employers
large part of the UK’s taxation yield. the amount raised by the tax are
Read through sections 3 and
worthy of careful scrutiny.  calculate national insurance
The tax is paid on earnings. The largest amount 4 paying particular attention
contributions payable by sole traders
collected relates to employed persons, both The misclassification of workers to the worked example and
and partners
personally (ie, deducted from salaries), and also (employed or self-employed) will lead interactive question in
that paid by employers (ie, as a tax on the salary). to the wrong classes and amounts of section 4. For extra question practice on these
Businesses prefer to use self-employed workers national insurance being paid. This can topics go to the section of the Question
as they do not pay NIC on self-employed Finish the chapter by
have an impact on the person's future Bank covering this chapter.
workers’ invoices. The workers themselves would completing the self-test
entitlement to state benefits. HMRC
often rather be taxed as self-employed as the questions. The specific syllabus references for this
regularly lists calculation of the amount
NIC rate is lower, ie, it saves tax. However, the chapter are: 2b, 3k.
chargeable to national insurance as
employed/self-employed classification is not a
one of the most commonly made
matter of choice, but one of law.
The high cost of NICs has also driven many
high-earning individuals to use tax-saving A further complication in practice
avoidance schemes. At one time there arises where people are both
appeared to be more fine wine in the hands of employed and self-employed, or
such people than could possibly have really where they have more than one job at
existed, but they had been paid ‘in kind’ to the same time. There are annual limits
avoid NIC. Other assets, such as platinum to the amount of national insurance
sponges, were also popular at various times as which has to be paid, which most
the avoidance industry sought to reduce tax workers will be unable to apply without
bills. These days most such contrived avoidance professional advice.
schemes have been stopped.
NIC remains a substantial cost for employers
both in absolute terms and in the costs of
administering the tax.
Stop and think
Do you realise how much of your income is taken
in national insurance? Have a look at your last
payslip. Is it more than you thought? Do you
think of it as a tax?

ICAEW 2019 Study Guide 11

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

9 Capital gains tax – individuals Individuals report any capital gains tax Read through section 1. In the examination, in the objective test
Income tax is charged on a person's income payable on supplementary pages questions, students may be required to:
Section 2 is more important
from trading, employment or derived from within the same annual tax return that is
and you must study the  determine when a gain or loss arises
ownership of investments. Capital gains tax is used for income tax self assessment
worked example and
the tax paid on the increase in the value of a purposes. Not everything needs to be  compute a gain or loss on disposal of
interactive question carefully.
capital asset when it is disposed of. This reported; for example, a small gain a capital asset
immediately raises a number of issues, such as from the sale of just one asset which is Section 3 is also very
 calculate the capital gains tax
how in practice to determine when a sale is of below the annual disclosure threshold important and the worked
payable for the tax year
a capital item and when it is of a revenue item. does not need to be included. If on the examples and interactive
Generally speaking a one off sale of other hand there have been many such question should be worked  calculate any gain or loss on disposal
something on which you did not intend to disposals, they will probably need to through carefully. of a chattel
make an immediate profit from selling will give be shown.
Once you are completely For extra question practice on these topics
rise to a capital gain. The complex nature of parts of the happy with sections 2 and 3 go to the section of the Question Bank
There have been times during the past 40 capital gains tax system we have today you should work through covering this chapter.
years when the general level of inflation has is largely created by the historical build section 4 on chattels.
The specific syllabus references for this
reached double figures. Companies, but not up of legislation. One aim behind the
Finally complete the self-test chapter are: 4a, b, c, d.
individuals, may deduct an indexation introduction of sweeping changes in
questions at the end of the
allowance from the gain to remove the effect 2008 has been to simplify the system.
of inflation on the increase in value of the This has involved making the basic
asset. The indexation allowance is based on computation more straight forward.
the movement in the retail price index and is Changes in 2010 have however
covered in Chapter 10. However, from reintroduced the link between the
31 December 2017 indexation allowance is taxation of income and gains.
There are many other reliefs which reduce
chargeable gains, particularly for assets used
by businesses. These are outside the scope of
your syllabus.
Stop and think
It is generally obvious when you are earning
income on which you must pay tax. However,
would you recognise when you might be subject
to capital gains tax on the disposal of a capital

12 Principles of Taxation ICAEW 2019

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

10 Corporation tax There are many factors which can You should read section 1 In the examination, in the objective test
affect a company's corporation tax fairly quickly. questions, students may be required to:
Companies pay corporation tax on the profits
of an accounting period. Usually this is the liability. It is important not only to Sections 2 and 3 are more  identify the correct accounting
same as the period for which they prepare and identify correctly taxable trading important and you must work periods of a company
publish (for larger companies) their accounts, profits, but also to calculate correctly through all of the worked
any tax relief for fixed assets which  calculate the corporation tax payable
but there are exceptions which you will meet examples and the interactive
were purchased during the period. by a company
in this chapter. question carefully.
The date on which an item of plant is In the scenario-based question for
When you look at a set of published accounts, Ensure you understand how
purchased and the length of the corporation tax, students may be required
you will see that the effective rate of different sources of income
company's accounting period are both to:
corporation tax paid on its profit before tax will and gains are classified, and
vary enormously from company to company relevant. In practice, the exact date of
the payment date(s) for  calculate the taxable total profits for a
and year to year. This rate has become very purchase is governed by specific tax corporation tax. company
important in recent years as boards of rules, although these are not within the
scope of this text. Finally complete the self-test  demonstrate understanding of the
directors are judged on their tax performance
questions at the end of the impact of related 51% group
as well as their trading profits. A tax rate which
chapter. companies on corporation tax
is too high may indicate that the company may
payment dates
be missing tax reliefs and credit opportunities;
too low and they may be accused of shirking For extra question practice on these
their corporate responsibility to pay their 'fair topics go to the section of the Question
share'. Bank covering this chapter and to the
Stop and think section of the Question Bank containing
scenario-based questions for corporation
When you do business with someone, think
about whether the business is run as a sole tax.
trader, or as a company. There are very The specific syllabus references for this
different tax consequences for each. chapter are: 4b, c, 5a, b, c, d.

ICAEW 2019 Study Guide 13

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

11 Value added tax The current level of the VAT threshold Read through sections 1 and In the examination, in the objective test
means that many businesses which are 2 quickly to gain a general questions, students may be required to:
VAT is an indirect tax levied on supplies of
large enough to use a professional understanding of how VAT
goods and services. As such it is collected on  determine when a transaction is within
adviser will need to register for VAT. works.
behalf of the government by registered the scope of VAT, and the impact of it
Registration brings with it extra
traders who pay it over to HMRC on a regular Section 3 on registration is being a taxable or exempt supply
administrative requirements and also
basis: monthly, quarterly or annually. We all important and is worth
means that the prices which the  identify when VAT
pay VAT, but registered traders can also working through carefully.
business charges to the general public registration/deregistration are
recover some of the VAT which they pay on
will be higher. However, it can also be The interactive question required/desirable
their purchases. The government collects a
beneficial for a business to register for covering the tax point in
huge proportion of its annual revenue in the  calculate the VAT applying to a supply,
VAT. particular in section 4 is very
form of VAT which makes the tax extremely starting at either the VAT inclusive or
important in practice. It is important to understand how and exclusive figure
when to account for VAT and to also To finish the chapter you can
Other countries within the European Union also  determine the tax point of a supply
be aware of when this differs from the work through section 5 and
have VAT and there are strict rules governing
direct taxes, income and corporation then attempt the self-test  deal with additional aspects of input
how each Member State can operate the tax.
tax. Also, because VAT is dealt with questions at the end of the tax and output tax such as bad debts,
Stop and think during a business's accounting period, chapter. discounts etc
If a business has to charge VAT on its sales, it is very much a 'real time' tax. If a
For extra question practice on these
those sales become more expensive for the client is unsure about how to account
topics go to the section of the Question
unregistered consumer and can make the for a particular transaction, the
Bank covering this chapter.
business less competitive. Thus many problem will need to be solved within
businesses depend on good VAT advice and a a matter of weeks rather than after the Students have historically been weak at
competent accountant should always end of the tax year or accounting VAT questions. This is probably because
remember to advise on the VAT period. It is not always obvious from there are a large number of small issues to
consequences of particular courses of action. legislation whether goods are deal with rather than one main pro forma
chargeable to VAT, and if they are, to learn. It is essential that students take
what rate should be used. time to understand and become
competent at VAT at an early stage.
The specific syllabus references for this
chapter are: 6a, b, c, d, e.

14 Principles of Taxation ICAEW 2019

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

12 Value added tax – further aspects Accounting for VAT and paying the tax Read through section 1, In the examination, in the objective test
on time is an important part of a working carefully through questions, students may be required to:
Successive governments have continued to
business's regular administration. An the worked examples and
introduce further schemes designed to  calculate the VAT payable or
accountant can help a business by interactive question.
simplify VAT administration to make it less of a reclaimable for a period
advising on the special schemes for
burden for business. Then ensure that you know
which it may be eligible.  identify the schemes available to
how the schemes covered in
Many businesses complete their own VAT small businesses and apply the rules
Some of these schemes just reduce section 2 work.
returns and just ask their accountant to deal of the schemes
paperwork by reducing the frequency
with problems. Read quickly through
of returns, but others can actually For extra question practice on these
section 3.
Although a business is merely collecting VAT reduce the amount of VAT which a topics go to the section of the Question
on behalf of the government, many still resent business pays over to HMRC. Not all Remember to attempt the Bank covering this chapter.
having to pay over the cash when it falls due. businesses will benefit from using the self-test questions at the end
The specific syllabus references for this
Indeed, for many smaller businesses, schemes, however, so it is important to of the chapter.
chapter are: 2a, d, 6e, f.
collecting and paying VAT can create severe understand when they are relevant.
cashflow difficulties.
Stop and think
Did you realise that VAT administration can be
a significant burden for businesses? A
competent accountant can provide invaluable
support by advising on when these
administrative burdens can be alleviated, or by
helping a business with its VAT administration.

ICAEW 2019 Study Guide 15

Study Due
Period Practical significance Working context Approach Syllabus references and exam context Date

13 Administration of tax The administrative rules which you will This is a large chapter In the examination, in the objective test
The self assessment system is built on the premise be covering in this chapter are containing the questions, students may be required to:
that individuals and companies assess their own important. Taxpayers, particularly those administration of all the
 determine due dates for employers'
tax. This places a considerable administrative in business, will need to ensure that taxes covered in the
PAYE and national insurance returns
burden on the taxpayer. they have the systems in place to meet Principles of Taxation
and payments, including penalties
the various deadlines as they fall due syllabus.
As well as obligations to submit data, the taxpayer for non compliance
and that their cash flow encompasses
also has the right to make changes later on. Sections 1 to 3 are important
payment of tax on time. Most corporate  determine when a tax return is
A company’s return will duplicate much of the as they cover the common
transactions with HMRC are now required and its submission date,
information which is required by Companies penalty regimes applying
electronic and over the last few years including the penalties for non
House and the introduction of iXBRL has meant across all the taxes.
there has been a gradual shift as compliance
companies can align their filing of the two sets businesses prepare for this. Read carefully through each
of information.  identify the administrative issues
of sections 4 to 13, working
Record retention will continue to be affecting individuals and companies
Individuals and companies must retain carefully through the
important. Usually taxpayers will need
records. Record retention may involve examples and questions, as  determine the payment dates and
to keep records for six years, however,
electronic storage of data for some taxpayers, they outline specific rules on amounts of payments to be made by
in cases where there has been
although accessing the relevant material after individual taxes. both individuals and by companies of
inadequate disclosure, HMRC has
a number of years have passed can prove all sizes
powers to make a discovery Skim read through sections
problematic in practice.
assessment which could extend back 14 and 15.  identify and calculate the penalties
Meeting deadlines and retaining records are as far as 20 years in extreme cases. and interest payable by individuals
very important if taxpayers are to avoid Finally complete the self-test
and companies for non compliance
unnecessary interest and penalties. Defaulting Additionally, you need to know what questions at the end of the
on these obligations can have far-reaching and happens when HMRC conducts a chapter.  recognise when penalties for VAT are
serious consequences. For example, many compliance check into a taxpayer's tax due and determine the amount of
companies in the construction industry rely on return and what the consequences the penalties
being able to use a special scheme for their could be. The taxpayer has certain
For extra question practice on these
subcontract work; if they have paid their rights of appeal and these can be very
topics go to the section of the Question
corporation tax late on more than two occasions, important, for example, where HMRC
Bank covering this chapter.
they can be excluded from the scheme and then has made unrealistic demands. Where
the larger building companies will not use them. interest and penalties are imposed, a The specific syllabus references for this
well prepared accountant can save a chapter are: 2a, c, d, e, f.
Stop and think
client considerable sums.
Did you realise how important it is to ensure that
a tax return is filed on time and that tax is paid by
the due date? If this is not done penalties can be

16 Principles of Taxation ICAEW 2019

3 Syllabus and learning outcomes
in chapter

1 Objectives, types of tax and ethics

Students will be able to explain the general objectives of taxation, the influences
upon the UK system of taxation, the different types of tax in the UK and will be able
to recognise the ethical issues arising in the course of performing tax work.
In the assessment, students may be required to:
(a) Identify the objectives of digitisation of tax. 2
(b) Identify the objectives of taxation in general terms of economic, social justice
and environmental issues, the range of tax opportunities open to the
government and the relative advantages of different types of tax in meeting the
government’s objectives. 2
(c) Recognise the impact of relevant external influences on UK tax objectives and
policies. 2
(d) Classify entities as individuals, partnerships, or companies for tax purposes and
state how they are taxed. 2
(e) Identify who is liable for the following taxes, how the taxes apply to income and
transactions, identify the government bodies responsible for the taxes, and
determine when an individual or entity comes within the scope of the taxes: 2
 capital gains tax
 corporation tax
 income tax
 national insurance
(f) Recognise the importance of the budget cycle, tax year and the following
sources of UK tax law and practice: 2
 legislation
 case law
 HMRC manuals, statements of practice, extra statutory concessions and
press releases
(g) Identify the five fundamental principles given in the IESBA Code of Ethics for
Professional Accountants and ICAEW Code of Ethics, and the guidance in
relation to a tax practice with regard to: 1
 the threats and safeguards framework
 ethical conflict resolution
(h) Identify the following: 1
 conflicts of interest
 money laundering
 tax avoidance and tax evasion

ICAEW 2019 Study Guide 17

in chapter

2 Administration of taxation
Students will be able to identify the obligations the UK system of taxation imposes
on taxpayers and the implications for taxpayers of non-compliance.
In the assessment, students may be required to:
(a) Identify the records which companies and individuals must retain for tax
purposes and state the periods for which the records must be retained. 12,13
(b) Identify the key features of the PAYE and national insurance system and
calculate PAYE tax codes for employees. 4, 8
(c) Identify the key features of the self assessment system for both companies and
individuals. 13
(d) Determine, in straightforward cases, due dates for:
 companies', sole traders', partnerships' and individuals' tax returns, tax
payments and payments on account 13
 businesses' VAT returns and payments 12
 employers' PAYE and national insurance returns and payments 4, 13
(e) Identify and calculate the interest and penalties due for:
 late submissions of and/or incorrect returns 13
 late and/or incorrect payments of tax 13
(f) Identify the periods within which HMRC can enquire into a taxpayer's returns or
other information and tax liabilities and recognise the taxpayer's right of
appeal and the process for dealing with disputes. 13

3 Income tax and national insurance contributions

Students will be able to calculate the amount of income tax owed by or owed to
individuals and the amount of national insurance payable.
In the assessment, students may be required to:
(a) Recognise the main sources of taxable and non-taxable income. 3
(b) Calculate the personal allowance available to an individual according to
personal circumstances including married couples allowance and marriage
allowance. 3
(c) Calculate assessable employment income for an employee or director,
including taxable and exempt benefits. 4
(d) Recognise the badges of trade. 5
(e) Allocate given items of business expenditure as allowable or disallowable for
tax purposes and calculate the adjusted trading profits after capital allowances
on plant and machinery of a sole trader or partnership using either the accruals
basis or cash basis of accounting. 5, 6, 7
(f) Allocate the tax adjusted profits of a partnership to each partner and calculate
the tax assessable profits for each partner for any given tax year. 7
(g) Calculate the assessable trading profits for a new unincorporated business and
identify the overlap profits on the commencement of trade. 7

18 Principles of Taxation ICAEW 2019

in chapter
(h) Calculate the assessable trading profits for a continuing business. 7
(i) Calculate the final assessable trading profits for an unincorporated business
ceasing to trade. 7
(j) Calculate total taxable income and the income tax payable or repayable for
individuals. 3
(k) Calculate the total national insurance contributions payable by employees,
employers and self-employed individuals. 8

4 Capital gains tax and chargeable gains for companies

Students will be able to calculate the amount of capital gains tax payable by
individuals and the chargeable gains subject to corporation tax.
In the assessment, students may be required to:
(a) Classify persons, assets and disposals as either chargeable or exempt for
capital gains purposes. 9
(b) Calculate the chargeable gains and losses on the disposal of assets, including
indexation where appropriate. 9
(c) Calculate total taxable gains for both individuals and companies. 9, 10
(d) Calculate the capital gains tax payable by individuals. 9

5 Corporation tax
Students will be able to calculate the amount of corporation tax payable by
In the assessment, students may be required to:
(a) Identify accounting periods for a company. 10
(b) Recognise the interaction of having one or more related 51% group companies
with corporation tax payment dates. 10
(c) Allocate given items of business expenditure as allowable or disallowable for
tax purposes and calculate the adjusted trading profits after capital allowances
on plant and machinery. 10
(d) Calculate the taxable total profits and the corporation tax payable for a
company resident in the UK which has a period of account of 12 months or
less. 10

Students will be able to calculate the amount of VAT owed by or owed to
In the assessment, students may be required to:
(a) Classify supplies in given straightforward situations as exempt, zero-rated,
standard-rated, subject to a reduced rate of 5%, or outside the scope of VAT. 11
(b) Recognise the implications of supplies being classified as reduced-rated,
standard-rated, zero-rated or exempt. 11

ICAEW 2019 Study Guide 19

in chapter
(c) Identify when a business could or should register or deregister for VAT and
state the time limits. 11
(d) Determine the tax point for a supply of goods or services. 11
(e) State the principles of VAT payable or repayable on the supply of goods or
services by a taxable person and calculate the monthly, quarterly or annual VAT
payable or repayable by a business. 11, 12
(f) State the alternative schemes for payment of VAT by businesses and calculate
the VAT payable or repayable for a business using these. 12

20 Principles of Taxation ICAEW 2019

4 Technical knowledge
The tables contained in this section show the technical knowledge in the disciplines of ethics
and taxation covered in the ACA syllabus by module.
For each technical topic, the level of knowledge required in the relevant Certificate or
Professional Level module is shown.
The knowledge levels are defined as follows:
Level D
An awareness of the scope of the standard.
Level C
A general knowledge with a basic understanding of the subject matter and training in its
application thereof sufficient to identify significant issues and evaluate their potential
implications or impact.
Level B
A working knowledge with a broad understanding of the subject matter and a level of
experience in the application thereof sufficient to apply the subject matter in straightforward
Level A
A thorough knowledge with a solid understanding of the subject matter and experience in the
application thereof sufficient to exercise reasonable professional judgement in the application
of the subject matter in those circumstances generally encountered by chartered accountants.
Key to other symbols:
 The knowledge level reached is assumed to be continued

ICAEW 2019 Study Guide 21

Ethics Codes and Standards
Ethics Codes and Standards Level Modules

IESBA Code of Ethics for Professional Certificate Level

Accountants (parts A, B and C and Definitions) C/D Accounting
B Assurance
ICAEW Code of Ethics C/D Business, Technology and Finance
D Law
C Management Information
C Principles of Taxation
Professional Level
A Audit and Assurance
B Business Strategy and Technology
B Financial Accounting and Reporting
B/C Financial Management
B Tax Compliance
B Business Planning
Advanced Level
A Corporate Reporting
A Strategic Business Management
A Case Study

FRC Revised Ethical Standard (2016) B Assurance

A Audit and Assurance
Advanced Level
A Corporate Reporting
A Strategic Business Management
A Case Study

22 Principles of Taxation ICAEW 2019

Certificate & Professional
Level modules

Tax Compliance
Principles of


Anti-money laundering guidance C B A
Base erosion and profit-shifting project B
Disclosure of tax avoidance schemes (DOTAS) A
Extent of tax legislation to England, Wales, Scotland & Northern
General anti-abuse rule A
HMRC B  
Objectives of taxation C  
Professional Conduct in Relation to Taxation (PCRT) C B
Tax planning, evasion and avoidance C B A

Administration B  
Appeals C  
Apprenticeship levy C 
Digital accounts B  
PAYE B  
Payments B A 
Penalties and interest B  
Self-assessment B A 


Chargeable gains
Annual exempt amount B A 
Capital gains tax for trusts B
Chargeable assets C B 
Chargeable disposals C B 
Chargeable persons C B 
Chattels: wasting and non-wasting B  

ICAEW 2019 Study Guide 23

Certificate & Professional
Level modules

Tax Compliance
Principles of


Connected persons A 
Converted trading losses B 
Costs of acquisition and disposal C B 

Leases A
Nil gain/nil loss transfers A 
Part disposals B 
Qualifying corporate bonds B 
Rate of tax B A 
Relief for capital losses A 
Reorganisations and reconstructions A
Shares and securities (including bonus and rights issues) B 

Chargeable gains reliefs

Entrepreneurs' relief B A
Gift relief B A
Incorporation relief A
Letting relief A 
Principal private residence relief A 
Reinvestment relief under EIS/SEIS B
Rollover relief B A
Overseas aspects of capital gains tax
Arising basis B A
Deemed domicile B A
Domicile B A
Double tax relief A 
Gains on foreign assets B A
Remittance basis B A
Residence C A
Temporary absence A
UK taxation of non-domiciled individuals B A

24 Principles of Taxation ICAEW 2019

Certificate & Professional
Level modules

Tax Compliance
Principles of


Trading profits
Adjustments to profits B A 
Badges of trade B A 
Capital allowances B A 
Cash basis of accounting B A 
Foreign currency transactions A
Pension contributions A 
Pre-trading expenditure A 
Patent royalties B
Owner-managed businesses
Basis of assessment – current year basis B A 
Change of accounting date A 
Commencement and cessation of trade B A 

Overlap profits B A 
Partnerships B A 
Trading losses A 
Treatment of opening year losses A 
Treatment of terminal losses A 
Employment income
Allowable deductions against employment income A 
Employment income B A 
Share schemes A
Statutory Mileage Rates Scheme A 
Taxable and exempt benefits B A 
Termination payments B
Other income/expenditure
Dividends from UK companies B A 
Enterprise Investment Scheme B

ICAEW 2019 Study Guide 25

Certificate & Professional
Level modules

Tax Compliance
Principles of


Investment income B A 
ISAs B  
Lease premiums A
Miscellaneous income A 
Property income C B A
Savings income B A 
Seed Enterprise Investment Scheme B
Venture Capital Trusts B
Overseas aspects of income tax
Arising basis B A
Deemed domicile B A
Domicile B A
Double tax relief A 
Income on foreign assets and income from foreign employment B A
Remittance basis B A
Residence C A
UK taxation of non-domiciled individuals B A
Income tax computation
Exempt income B A 
Gift of assets and cash to charity B A 
Income tax liability and income tax payable B A 
Income tax charge on child benefit B 
Independent taxation and jointly owned assets B A
Income tax for trusts B
Limit on income tax reliefs A 
Married couples’ allowance and marriage allowance B A 
Pension contributions – provisions for retirement B A
Pension contributions – tax reliefs B A
Personal allowances B A 

26 Principles of Taxation ICAEW 2019

Certificate & Professional
Level modules

Tax Compliance
Principles of


Qualifying interest payments B 
Rates of taxation B A 
Taxable persons C A 

Fundamental principles of inheritance tax
Chargeable persons B 
Chargeable property B 

Excluded property B 
Inter-spouse transfers A 
Rates of taxation A 
Related property B 
Seven-year accumulation period A 
Transfers of value A 
Trusts C B
Valuation A 
Inheritance tax on lifetime transfers
Relevant property trusts A 
Potentially exempt transfers A 
Inheritance tax on death
Death estate A 
Deeds of variation B
Lifetime transfers A 
Overseas aspects of inheritance tax
Deemed domicile B A
Domicile A 
Double tax relief A 
Lex-situs rules A 
Reliefs and exemptions from inheritance tax
Agricultural property relief C B

ICAEW 2019 Study Guide 27

Certificate & Professional
Level modules

Tax Compliance
Principles of


Annual exemption A 
Business property relief B A
Fall in value relief A 

Gifts to charities and political parties A 

Gifts with reservation of benefit A
Inter-spouse transfers A 
Marriage/civil partnership exemption A 
Normal expenditure out of income A 
Quick succession relief B 
Small gifts exemption A 
Taper relief A 


Classes of NIC C B 
Directors B 

Maximum contributions C 
Taxable benefits B 

Chargeable gains
Chargeable assets C B 
Chargeable disposals C B 
Chargeable persons C B 
Chattels: wasting and non-wasting B  
Costs of acquisition and disposal C B 
Indexation B A 
Leases A
Nil gain/nil loss transfers A 
Part disposals B 
Purchase of own shares A
Qualifying corporate bonds B 

28 Principles of Taxation ICAEW 2019

Certificate & Professional
Level modules

Tax Compliance
Principles of


Relief for capital losses A 
Reorganisations and reconstructions A
Shares and securities (including bonus and rights issues) B 

Substantial shareholding exemption C A

Trading profits
Adjustments to profits B A 
Badges of trade B A 
Capital allowances B A 
Foreign currency transactions A
Long periods of account C A 
Pension contributions B A
Patent royalties B
Taxable total profits
Chargeable gains B A 
Intangible assets B A
Loan relationships B B A
Loan relationships – corporate interest restriction A
Miscellaneous income B A 

Patent box B
Property income (including lease premiums) B A
Qualifying donations B A 
Research and development expenditure A 
Research and development tax credits B A
Trading losses B A
Trading profits B A 
Use of deficit on non-trading loan relationships B A
Corporation tax computation
Accounting periods C B A
Close companies A

ICAEW 2019 Study Guide 29

Certificate & Professional
Level modules

Tax Compliance
Principles of


Corporation tax liability B A 
Distributions B 
Diverted profits tax B
Double tax relief (including underlying tax and withholding tax) B 
Liquidation A
Provision of services through a company A
Rates of taxation B A 
Residence C B 
Tax treaties and the OECD Model Tax Convention C
Capital gains groups B A
Change in group structure A
Change in ownership A
Consortium relief A
Controlled foreign companies A
Degrouping charges B A
Group loss relief B A
Group relationships A 

Non-coterminous accounting periods A

Overseas companies and branches A
Pre-acquisition gains and losses A
Related 51% group companies B A
Rollover relief B A
Transfer of assets B A
Transfer pricing A

Basic principles B 
Chargeable occasions B 
Exemptions B 

30 Principles of Taxation ICAEW 2019

Certificate & Professional
Level modules

Tax Compliance
Principles of


Stamp taxes for groups B 

Capitals goods scheme B 
Classification of supplies B 
Distinction between goods and services C 
Overseas aspects A 
Group aspects A 

Input VAT A  
Output VAT A  
Partial exemption B 
Payments A  
Penalties and interest A  
Property transactions B A
Registration and deregistration A  

Single and multiple supplies B 

Small business reliefs A  
Taxable person A  
Taxable supplies A  
Transfer of a business as a going concern A
VAT records and accounts A  

ICAEW 2019 Study Guide 31

5 Glossary of Terms
Accounting period Period for which a company's taxable total profits are charged to
corporation tax.
Actual basis For income tax purposes, the basis of assessment in the first tax year
that a business operates is the actual basis. This means that the taxable
trading profits for the first tax year are the taxable trading profits of the
business from the date of commencement to the following 5 April.
Adjustment to profits The process whereby an accounting profit or loss is adjusted to accord
with tax law.
Advocacy threat May occur when a professional accountant promotes a position or
opinion to the point that objectivity may be compromised.
Allowable expenditure Expenditure incurred wholly and exclusively for the purposes of the
trade which is not specifically disallowed by legislation.
Annual accounting A scheme available to small businesses which allows them to make
scheme for VAT payments on account of VAT during the year based on the previous
year's VAT liability. A single VAT return for the year is then filed within
two months of the year end together with any balancing payment of
VAT due.
Annual exempt amount The amount of gains on which no CGT is payable.
Annual investment A type of capital allowance, which offers tax relief at 100% on
allowance (AIA) qualifying expenditure in the year of purchase. The maximum
deductible from taxable profits is currently £200,000 pa.
Appropriations of profit Withdrawals from a business (such as the payment of a 'salary' to a
sole trader or partner, or dividends paid by a company to
shareholders) after tax ie, they are not allowable for tax purposes.
Augmented profits Taxable total profits plus exempt ABGH distributions.
Badges of trade As there is no statutory definition of 'trading' the Courts have
developed a number of tests to determine whether an entity is trading.
Collectively these tests are known as the 'badges of trade'.
Balancing allowance If too few capital allowances have been given on an asset over its
lifetime, a balancing allowance may arise. This might happen if an
asset is sold for an amount less than its tax written down value.
A balancing allowance can only arise on the main pool if the business
ceases. Balancing allowances can arise on single asset pools when the
asset is sold, even when the business has not ceased.
Balancing charge If too many capital allowances have been given on an asset over its
lifetime, a balancing charge arises. This might happen if an asset is
sold for an amount in excess of its tax written down value.
A balancing charge can occur on the main pool and on single asset
pools at any time.

32 Principles of Taxation ICAEW 2019

Budget cycle The process by which UK statutory tax law is developed The tax law is
amended each year by the Finance Act. This is based on proposals
from the Government and presented by the Chancellor of the
Exchequer in the Budget. The Budget forms the basis for the Finance
Bill which is presented to Parliament each year to enact the proposals
and bring them into law. This process is complete once the Finance
Bill receives Royal Assent, becoming the Finance Act.
Business Payment Assists businesses which are unable, or anticipate they will be unable,
Support Service (BPSS) to meet income tax, national insurance, corporation tax, VAT or other
payments owed to HMRC.
The service reviews the circumstances of the business and may
arrange temporary options such as for payments to be made over a
longer period. Additional late payment penalties will not be charged
on payments included in the arrangement, provided the taxpayer
makes payments in line with the arrangement. However interest will
continue to be payable as applicable.
Capital allowances Tax allowances for certain types of capital expenditure. Depreciation
on assets is not allowable for tax purposes. Instead, capital allowances
give tax relief by allowing part of the cost of capital assets each year.
Capital gains tax (CGT) Paid by individuals on their taxable gains.
Careless inaccuracy The taxpayer has not taken reasonable care in completing the return.
Cash accounting Allows small businesses to account for VAT on the basis of cash paid
scheme for VAT and received, rather than on invoices received and issued.
Cash basis Certain small unincorporated businesses may elect to use the cash
basis rather than accrual accounting for the purposes of calculating
their taxable trading income. Under the cash basis, a business is taxed
on its cash receipts less any cash payments of allowable expenses.
Chattels An item of tangible moveable property. Specifically excludes goodwill,
shares and leases.
Common penalty Relates to situations where a taxpayer has made an error/inaccuracy in
regime a tax return. The regime covers income tax, national insurance
contributions, corporation tax and value added tax. Penalties are
based on the Potential Lost Revenue (PLR) and range from 30% to
100% of the PLR. Penalties may be reduced or suspended.
Company A company is a legal person formed by incorporation under the
Companies Acts. It is legally separate from its owners (shareholders)
and its managers (directors).
Compliance checks HMRC may conduct two main types of compliance checks into
taxpayer returns:
 pre-return checks; and
 enquiries into returns, claims or elections which have already
been submitted.
In addition, HMRC may conduct a check after a return has become
final (or where no return has been submitted) where it believes that an
assessment or determination may need to be issued under the
discovery provisions.

ICAEW 2019 Glossary of terms 33

Confidentiality Professional accountants are required to respect the confidentiality of
information acquired as a result of professional and business
relationships and, therefore, not disclose such information without
proper and specific authority unless there is a legal or professional
right or duty to disclose, nor use the information for their personal
advantage or the advantage of third parties.
Corporation tax Paid by companies on their taxable total profits for an accounting
Criminal property Includes (but is by no means limited to):
 the proceeds of tax evasion, other tax-related offences or any
other crime
 a benefit obtained through bribery and corruption (including
both the receipt of a bribe and the income received from a
contract obtained through bribery or the promise of a bribe)
 benefits obtained, or income received, through the operation of a
criminal cartel
 benefits (in the form of saved costs) arising from a failure to
comply with a regulatory requirement, where that failure is a
criminal offence
Current year basis For income tax purposes, the CYB is the basis on which trading profits
(CYB) are taxed. Under the CYB, the basis period for the tax year is the
taxable trading profits for the 12-month period of account ending in
that tax year.
Default surcharge The default surcharge regime applies where there is late payment of
VAT or late filing of a VAT return. However, a default surcharge penalty
only applies to late payments of VAT.
Deliberate and The taxpayer has deliberately made an inaccurate return and has
concealed inaccuracy positively done something to conceal the inaccuracy such as produced
false invoices or bank statements.
Deliberate but not The taxpayer has deliberately made an inaccurate return but has not
concealed inaccuracy positively done anything to conceal the inaccuracy
Determinations If a return is not received by the filing date HMRC may make a
determination (to the best of its information and belief) of the tax due.
This may include a determination of any amounts added or deducted
in the computation of the tax payable, or any amount from which those
figures are derived. The determination must be made within three
years of the statutory filing date. The determination is treated as if it
were a self assessment.
Direct taxes Paid by those who generate the funds to pay the tax eg, income tax.
Discovery assessments HMRC has the power via a discovery assessment to collect extra tax
where it discovers a loss of tax even if the normal time period in which
it could open a compliance check has passed.
HMRC can make a discovery assessment after the usual time for a
compliance check if it is discovered that full disclosure has not been
made by the taxpayer.
Dividend nil rate band The first £2,000 of taxable dividend income on which income tax is
charged at the dividend nil rate (0%).

34 Principles of Taxation ICAEW 2019

Dividend income Distributions received by shareholders from companies.
Dormant company One which is not carrying on a trade or business.
Employment income Includes income arising from an employment and the income of an
office holder such as a director. There are two types of employment
 General earnings
 Specific employment income (not in your syllabus).
European Union The overall aim of the European Union (EU) is the creation of a single
European market with no internal trade barriers between member
states and common policies relating to trade outside the EU.
Exempt ABGH Exempt dividends received from UK and overseas companies. Exempt
distributions ABGH distributions, other than those received from companies which
are 51% subsidiaries of the receiving company or 51% subsidiaries of a
company of which the receiving company is a 51% subsidiary, are
added to taxable total profits to give augmented profits.
Exempt supplies One on which output VAT cannot be charged. In general, input VAT
cannot be recovered by a trader making exempt supplies.
Familiarity threat May occur when, because of a close relationship, a professional
accountant becomes too sympathetic to the interests of others.
Finance Act Each year the Chancellor of the Exchequer presents the Budget, which
contains all the tax measures for the year ahead. The UK has a single
annual fiscal event: the Autumn Budget. The statutory provisions to
effect these tax measures are set out in a single Bill: the annual Finance
Bill. Once enacted it becomes the Finance Act.
Financial year Runs from 1 April in one calendar year to 31 March in the next
calendar year. The financial year running from 1 April 2018 to
31 March 2019 is called Financial Year (FY) 2018.
First year allowance A type of capital allowance, which offers tax relief at 100% on
qualifying expenditure in the year of purchase. There is no limit on the
qualifying amount although the qualifying assets are very restricted.
Flat rate scheme for Allows small businesses to calculate net VAT due by applying a flat
VAT rate percentage to their VAT inclusive turnover rather than accounting
for VAT on individual sales and purchases.
Future prospects test A person must register for VAT if, at any time, there are reasonable
for VAT grounds for believing that the taxable turnover in the next 30 days
alone will exceed the threshold.
If a person is liable to register under the future prospects test, he must
notify HMRC by the end of the 30-day period in which the threshold is
expected to be exceeded. This 30-day period includes the date the
trader becomes aware that the threshold is likely to be exceeded.
Registration takes effect from the beginning of the 30-day period.
General earnings A category of employment income including any salary, wages or fee,
any gratuity or other profit or incidental benefit of any kind obtained
by an employee consisting of money or money's worth, and anything
else constituting an emolument of the employment, together with
anything treated under any statutory provision as earnings (eg,

ICAEW 2019 Glossary of terms 35

Gift Aid Gives tax relief for cash donations made by individuals to charities.
Gross income Income before any form of deduction has been made.
Historic test for VAT A person must register for VAT if, at the end of any month, the taxable
turnover in the prior period exceeds the threshold. The prior period is
the previous 12 months or the period from the commencement of the
business, whichever is the shorter.
If a person is liable to register under the historic test, he must notify
HMRC within 30 days of the end of the month in which the threshold
was exceeded (the relevant month).
Registration takes effect from the first day after the end of the month
following the relevant month.
Her Majesty's Revenue HMRC was established in 2005 as the UK's tax and customs authority,
& Customs responsible for making sure that money is available to fund the UK's
public services and for helping families and individuals with targeted
financial support. Through its customs service it facilitates legitimate
trade and protects the UK's economic, social and physical security.
Income tax Paid by individuals (employees, investors, partners and self-employed)
on their taxable income.
Income tax payable or The amount of income tax payable by a taxpayer (or repayable by
repayable HMRC) under self assessment after taking into account tax deducted at
Indexation allowance A relief which may reduce gains made by companies on chargeable
disposals. The allowance reflects the impact of inflation on the
allowable cost of the asset disposed of. Indexation allowance is
available from the date of acquisition to the earlier of the date of
disposal and 31 December 2017.
Indirect taxes Relate to consumption. It is up to individuals whether they spend
money on such goods eg, value added tax.
Input VAT Each VAT registered business receives credit for any VAT that it has
suffered on its purchases. This credit is deducted from its output VAT
to reduce how much it owes to HMRC.
Integrity Professional accountants are required to be straightforward and
honest in all professional and business relationships.
Intimidation threat May occur when a professional accountant may be deterred from
acting objectively by actual or perceived pressures, including attempts
to exercise undue influence over the professional accountant.

36 Principles of Taxation ICAEW 2019

Job related Accommodation is job related if:
(a) The accommodation is necessary for the proper performance of
the employee's duties (eg, caretaker); or
(b) The accommodation is provided for the better performance of the
employee's duties and the employment is of a kind in which it is
customary for accommodation to be provided (eg, police
officers); or
(c) The accommodation is provided as part of arrangements in force
because of a special threat to the employee's security (eg,
members of the government).
A director can only claim one of the first two exemptions if he or she
owns 5% or less of the shares in the employer company and either
they are a full-time working director or the company is non-profit
making or is a charity.
Limited cost trader A limited cost trader is a VAT-registered trader operating the flat rate
scheme. The flat rate applicable to a limited cost trader is 16.5%.
Loan relationship A company has a loan relationship if it loans money as a creditor or is
loaned money as a debtor.
A loan relationship includes bank and building society accounts, bank
overdrafts, government gilt-edged securities and loans to and from
other companies which are often in the form of debentures. It does not
include trade debts.
Making Tax Digital Making tax digital for business (MTDfB) is a government project which
will fundamentally change the UK tax system by ending the use of the
tax return in its current form for many taxpayers. It will simplify
maintenance of records and accuracy of tax liabilities for businesses
and individuals. Under MTDfB taxpayers will be required to maintain
records digitally and make a quarterly return of data to HMRC, with a
final adjusting return when figures are finalised.
MTDfB is being phased in and will apply only to VAT from April 2019.
Marriage allowance A spouse or civil partner may elect to transfer £1,190 of their personal
allowance to their spouse/civil partner provided the transferor spouse
either has no income tax liability or would be a basic rate taxpayer
after the transfer, and the recipient spouse is a basic rate taxpayer.
Married couple's Additional allowance available for older married couples and
allowance (MCA) registered civil partners. The married couple's allowance (MCA) is not
deducted from net income to arrive at taxable income like the
personal allowance. Instead the MCA reduces an individual's income
tax liability and is called a tax reducer. The MCA tax reducer is
calculated at a fixed rate of 10% of the relevant MCA amount.
Modified VAT invoice A 'less detailed', or modified, invoice can be issued for retail supplies
over £250.
Money laundering The term used for a number of offences involving the proceeds of
crime or terrorist funds. It includes possessing, or in any way dealing
with, or concealing, the proceeds of any crime.
Money laundering All firms who are subject to the anti-money laundering (AML) rules
reporting officer must appoint a MLRO. The MLRO is responsible for oversight of the
(MLRO) firm's compliance with its AML obligations and should act as a focal
point for the firm's AML activity.

ICAEW 2019 Glossary of terms 37

National Insurance Paid by self-employed individuals, employees and employers. The
Contributions (NIC) contributions are used to bear part of the liability of the government to
pay state benefits such as jobseekers allowance and state pensions.
National Crime Agency The NCA became operational in 2013 and replaced the Serious
(NCA) Organised Crime Agency (SOCA).
NCA tackles serious and organised crime, strengthens UK borders,
fights fraud and cyber-crime, and protects children and young people
from sexual abuse and exploitation.
As the UK's financial intelligence unit it receives suspicious activity
reports about money laundering and terrorist financing.
Net income For income tax purposes, it is the total chargeable income before
deducting the personal allowance.
Non-savings income Employment income, Trading profits, Property income, Miscellaneous
income. Income that is not categorised as from a specific source is
taxed as miscellaneous income.
Non-wasting chattel One with a predictable life at the date of disposal of more than 50
years. Examples include antiques, jewellery and works of art.
Objectivity Professional accountants are required to not allow bias, conflict of
interest or the undue influence of others to override professional or
business judgements.
OECD The Organisation for Economic Cooperation and Development: the
OECD's model tax treaty forms the basis of many of the UK's
international tax treaties.
Output VAT As the goods or services go through the production and distribution
process, each VAT registered business charges VAT on the value of
the goods or services it supplies. This VAT is collected on behalf of
Overlap profits For income tax purposes, choosing a period of account which ends on
a date other than 5 April will result in double counting of trading
profits. Such profits are taxed more than once.
Partnership A partnership is a group of persons carrying on a business together
with a view to making a profit.
Pay As You Earn (PAYE) Pay As You Earn (PAYE) is HMRC's system for collecting income tax
and national insurance contributions from employees. The employer
deducts tax and national insurance contributions directly from
employment income or occupational pensions on behalf of HMRC.
Period of account The period for which a company has prepared its accounts.
Personal allowance The amount of income on which no income tax is charged.
Potential lost revenue The amount of tax outstanding at the end of the tax year (income tax
(PLR) and CGT) or accounting period (corporation tax). For VAT purposes it
is the amount outstanding as a result of the failure.
Proceeds of Crime Act POCA criminalises all forms of money laundering and creates other
2002 (POCA) offences such as failing to report a suspicion of money laundering and
'tipping off'.
Professional accountant A member of ICAEW.

38 Principles of Taxation ICAEW 2019

Professional behaviour Professional accountants are required to comply with relevant laws
and regulations and avoid any action that discredits the profession.
Professional Conduct in The purpose of Professional Conduct in Relation to Taxation is to assist
Relation to Taxation and advise members on their professional conduct in relation to
(PCRT) taxation, and particularly in the tripartite relationship between a
member, client and HMRC. Part 2 explains the Fundamental Principles
governing the conduct of members. Part 3 covers the Standards for
Tax Planning.
Professional Professional accountants are required to maintain professional
competence and due knowledge and skill at the level required to ensure that clients or
care employers receive competent professional service based on current
developments in practice, legislation and techniques and act diligently
in accordance with applicable technical and professional standards
when providing professional services.
Profit sharing ratio The taxable trading profits of a partnership are allocated between the
partners according to the profit-sharing ratio agreed for the period of
Progressive taxes Rise as a proportion of income as that income rises. For example, in
the UK the personal allowance means income tax is not paid at all on
low levels of income, whereas the rate of income tax on income of over
£46,350 is 40% and that on taxable income of over £150,000 is 45%.
Qualifying donations The amount paid by a company to a charity in the accounting period.
Real Time Information Employers are required to inform HMRC about tax, NICs and other
(RTI) deductions every time a payment is made to an employee, rather than
after the end of each tax year.
Regressive taxes Rise as a proportion of income as income falls. The amount of duty
paid on a packet of cigarettes is the same, regardless of the income of
the purchaser. That amount will be a greater proportion of the income
of a person with a low income than a person with a higher income.
Related 51% group Companies A and B are related 51% group companies if A is a 51%
company subsidiary of B, or B is a 51% subsidiary of A, or both A and B are 51%
subsidiaries of the same company. B is a 51% subsidiary of A if more
than 50% of B's ordinary share capital is owned directly or indirectly by
Safeguards Safeguards are measures that may eliminate threats or reduce them to
an acceptable level.
Savings income Interest from investments.
Savings income nil rate The first £1,000 (basic rate taxpayer) or £500 (higher rate taxpayer) of
band savings income, above the starting rate band, on which income tax is
charged at the savings nil rate (0%).
Self-interest threat May occur as a result of the financial or other interests of a professional
accountant or of an immediate or close family member.
Self-review threat May occur when a previous judgment needs to be re-evaluated by the
professional accountant responsible for that judgment.

ICAEW 2019 Glossary of terms 39

Senior accounting Is the director who, in the company's reasonable opinion, has overall
officer (SAO) responsibility for the company's financial accounting. The SAO must
take reasonable steps to establish and maintain accounting systems
within their companies that are adequate for the purposes of accurate
tax reporting.
Simple assessment HMRC can, if it has sufficient information, issue a simple assessment of
an individual's income tax or capital gains tax liability without the
individual completing a tax return.
Simplified VAT invoice A 'less detailed', or simplified, invoice can be issued for supplies under
Small pool limit If the balance on the main pool, after additions and disposals but
before claiming the WDA, is less than the small pool limit of £1,000, a
WDA can be claimed up to the value of the small pool limit. This
means that the main pool may be written down to nil, rather than a
small balance being carried forward on which allowances have to be
claimed each year.
Small profits threshold Class 2 NICs are not payable where an individual's taxable profits
figure is below the small profits threshold (previously known as the
small earnings exception).
State pension age The age at which an individual is entitled to receive the basic state
pension and cease paying NICs.
Supplies outside the A supply which has no effect for VAT purposes eg, the payment of
scope of VAT wages or dividends.
Surcharge liability If a taxable person files a VAT return late or pays VAT late, a default
notice occurs and a surcharge liability notice is issued. The surcharge liability
period runs for 12 months from the end of the period of default.
Suspicious activity A report made to the National Crime Agency about suspicions of
report (SAR) money laundering or terrorist financing. This is commonly known as a
Taxable income For income tax purposes, this is the net income after deduction of the
personal allowance.
Taxable person for VAT A person making taxable supplies who is, or who is required to be,
registered for VAT. Person includes a sole trader, a partnership (not
the individual partners) and a company.
Taxable supply for VAT Any supply of goods or services made in the UK other than an exempt
supply or a supply outside the scope of VAT.
Taxable total profits The sum of a company's income and gains less its qualifying donations
(TTP) paid for an accounting period.
Taxation at source Some income is received by the taxpayer net of tax, which means that
tax is already deducted at the source of the income. This simplifies the
collection of tax for HMRC.
Tax avoidance Any legal method of reducing a taxpayer's liability. The fact that
avoidance is legal does not mean that it will always be acceptable.

40 Principles of Taxation ICAEW 2019

Tax evasion An illegal method of seeking to pay less tax than is due by deliberately
misleading HMRC. This may be attempted by either:
• suppressing information to which HMRC is entitled, for example
– failing to notify HMRC of a liability to tax; or
– understating income or gains;
• or providing HMRC with false information, for example by
– deducting expenses that have not been incurred; or
– claiming capital allowances on plant that has not been
Tax liability The total amount of tax due from a taxpayer.
Tax point for VAT VAT becomes due on a supply of goods or services at the time of
supply. Normally VAT must be accounted for on the VAT return for the
period in which the tax point occurs.
The basic tax point is the date on which goods are removed or made
available to the customer or the date on which services are completed.
However, the actual tax point may occur before or after the basic tax
Tax year Runs from 6 April in one calendar year to 5 April in the next calendar
year. The tax year running from 6 April 2018 to 5 April 2019 is called
the 2018/19 tax year.
Tax written down value Once the writing down allowance has been deducted from the pool
(TWDV) balance, the remainder of the value of the pool is then carried forward
to the start of the next period of account. This amount is called the
TWDV. It continues to be written down on a reducing balance basis.
Trading allowance An allowance which effectively exempts an individual’s trading profits
which are less than the trading allowance.
Unit taxes Calculated as a flat rate per item, regardless of value.
Value Added Tax A tax payable on the consumption of goods and services by the final
(VAT) consumer.
VAT fraction VAT charged on taxable supplies is based on the VAT exclusive value
of the supply. For standard rated items, the rate of VAT is 20%. If the
VAT inclusive price is given, the VAT component of the consideration
20 1
120 6
Value taxes Based on a percentage of the value of the item, such as value added
Voluntary payrolling Employers may voluntarily opt to process all benefits except
accommodation and beneficial loans through the payroll. Tax is then
paid on these benefits through RTI PAYE.
Wasting chattel One with a predictable life at the date of disposal not exceeding 50
years. Examples include caravans, boats, and computers and animals.
Plant and machinery are always treated as having a useful life of less
than 50 years.

ICAEW 2019 Glossary of terms 41

Writing down For each period of account a business may claim a capital allowance
allowance (WDA) known as a WDA on a proportion of the value of its capital assets.

42 Principles of Taxation ICAEW 2019