Business Taxation: Part 2 Paper 2.3

Study Text Edition: August 2003
Business Taxation
Part 2 Paper 2.3
Study Text Edition
August 2003
AH03 – 23
BPP Home Study Students

This Study Guide is for use by students who have purchased
the BPP i-Learn disk for this paper or are using the Study
Modules on the BPP Virtual Campus.
If you are a BPP Home Study student, use your Home Study
Programme rather than this document.
© BPP Professional Education 2003
(i)
BUSINESS TAXATION
1 Introduction
This Home Study course will guide you through the August 2003 edition of the BPP Study
Text. If your Study Text does not have that date on the cover, please contact BPP.
2 Using the BPP Home Study

The Study Programme is made up of 24 Study Periods, which BPP has graded as high,
medium or low priority, based upon guidance from ACCA and the examiners. Each Study
Period consists of the following elements.
(a) Exam Guidance
This gives an introduction to each Study Period by explaining the emphasis that the
examiner has placed on the topics to be covered on the basis of the pilot paper, past
exams and discussions with BPP authors and tutors.
(b) Guidance through the Study Text
Here you are given important instructions on how to work through the BPP Study
Text. You must follow the guidance in this table for time effective study, as you will be
told which areas of each chapter must be worked through in detail and which can be
skimmed over. The table contains essential points, summarising the most vital
areas of the Study Period.
(c) Were you awake?
These are brief questions, designed to test whether you were concentrating. You
MUST get these questions right! If not you'll need to go back and study the material
again. There is space for you to add your own notes as you study the Text.
(d) Common Pitfalls
To help your question practice and revision, we give you guidance on the most
common mistakes made by students on key areas.
(e) Learning Resource Centre
For further help with study and revision, we refer you to the relevant sections of
BPP's i-Pass CD Rom, and BPP's i-Learn CD Rom.
There is an overview of all Study Periods, on page (iv), which can be used to set up a
timetable.
The annotated Study Programme will become a key document in your revision
phase.
(ii)
3 Revising from the BPP Home Study

For your revision phase, your Home Study Course includes the following.
(a) The BPP Practice and Revision Kit, which contains past paper questions and other
useful practice questions. The Kit also contains Revision Guidance which highlights
the key questions to attempt to maximise your chances of exam success.
(b) The Study Programme, where the Essential Points and Common Pitfalls will serve as
a reminder of the work you did in each Study Programme.
(c) The BPP Passcards, which give short summaries of the content of each chapter of
the Text.
4 Feedback
The success of BPP's courses has been built on what you the students tell us.
Towards the end of your course you will be sent a feedback form to complete and
return.
If you have any issues or ideas before you are given the form to complete, please contact
the course administrator, on 020 8740 2233 or via e-mail at accaqueries@bpp.com.
5 Overview of Business Taxation

The paper aims to test your ability to:
• Explain the operation of the UK tax system
• Prepare computations of the corporation tax liability for individual companies and
groups of companies
• Prepare computations of the income tax liability for employees, sole traders and
partnerships
• Prepare computations of the chargeable gains arising on incorporated and
unincorporated businesses
• Explain and apply the principles and scope of Value Added Tax
• Explain the impact of National Insurance Contributions on employees, employers and
the self-employed
• Explain the use of exemptions and reliefs in deferring or minimising tax liabilities
• Demonstrate the skills expected at Part 2
(iii)
STUDY PERIOD PLANNER
Use this schedule and your exam timetable to plan the dates on which you will complete each
study period. The letters 'H', 'M' and 'L' tell you whether the topic is high, medium or low priority.
Detailed guidance and prioritisation of each study period begins overleaf.
Study
Due Date
Period Topic
1 An outline of H
corporation tax
2 Schedule D Case I H
3 Capital allowances H
4 Industrial buildings, M
loan relationships and
Schedule A
5 Corporation tax H
losses
6 Groups H
7 Overseas aspects of H
corporation tax
8 Payment of tax by M
companies
9 An outline of income H
tax and self
assessment
10 Schedule D Cases I H
and II
11 Schedule D Cases I H
and II (continued)
12 Capital allowances/ H
IBAs for soletraders
13 Trading losses H
14 Trading losses M
(continued)
15 Partnerships M
16 Value added tax 1 M
17 Value added tax 2 M
18 Question technique H
19 The taxation of H
employment
20 Taxable and exempt H
benefits
21 Pensions and NIC M
22 Chargeable gains H
23 Capital gains tax H
24 Tax planning H
(iv)
STUDY SKILLS
Before you begin your studies, you may want to spend some time thinking about how to approach
them. Consider the following.
(a) The study environment. Studying while working is very different from studying full time.
Time management is crucial.
(b) Types of subject. You need to think about the form the exam will take and the skills it will
draw on. For example, does it test knowledge, numerical skills, application of knowledge or
application of theory?
(c) What is your learning style? Your learning preferences should affect the way you
approach this study material.
(d) You need to think about how to work through the text, how to take notes and how to do
examples.
(e) How will you approach your revision?
(f) You need a technique for dealing with common types of question.
(g) You must approach the exam in a methodical manner.
Detailed guidance on all these points can be found in BPP's Study Skills book: Learning to Learn
Accountancy.
To order this and other products, visit: www.bpp.com/acca.
(v)
APPROACHING BUSINESS TAXATION
The examiner for Paper 2.3 is David Harrowven. He is an experienced ACCA examiner
who has been involved with taxation papers for ACCA for many years (he was the
examiner for paper 11, Tax planning, under the old syllabus). He sets fair questions.
You will benefit from reading relevant articles to paper 2.3 in your student magazine,
called Student Accountant. You can access these articles via the ACCA website at
www.accaglobal.com. The articles written by David Harrowven are vitally important.
As you work through the study programme and the information in the Study Text don't
get too bogged down with every minute rule, you will never remember them all!! The
key to passing this paper is to practice as many questions as you can to learn techniques
rather than lists of rules. You need to be able to apply the rules for Section A of the
exam, and then perhaps write about the rules and techniques in Section B. It is much
easier to be able to write down things if you can actually apply them yourself.
The exam is in two sections, Section A is 2 compulsory questions totalling 55 marks, one
will be on a corporate business (for approximately 30 marks) and the other will be on an
unincorporated business and/or employees (for approximately 25 marks). Section B will
contain 5 questions, where you will have to choose 3 to complete. The Section A
questions will be mainly computational and you should aim to gain most of your marks
here. In Section B the questions will be a mix of computational and written.
Do attempt the questions in the text as directed and the course exams, as question
practice is the key to passing. Developing good exam techniques starts now, not two
weeks before the exam.
1
Study Period 1
An outline of corporation tax
Priority = High Examined: 12/01, 6/02, 12/02, 6/03
Date due:
Exam Guidance
This is a very important topic within the syllabus. The examiner has stated that he expects a
considerable amount of study time to be devoted to this area.
A typical Section A question will require a computation of profits chargeable to corporation tax
(PCTCT) and then computing the mainstream corporation tax liability.
It is important to grasp that although the tax liability is computed by reference to tax rates for
financial years (different to fiscal years which will be seen when you study income tax later on),
the PCTCT is computed for a chargeable accounting period.
Exam focus point

You can expect to have to compute a company's PCTCT in nearly every exam.
Guidance through the Study Text

These topics are covered in Chapter 1 An outline of corporation tax.
Section Approach Essential points

1 Background knowledge. Skim read.
2 Basic knowledge. Read through quickly.
3 Read this section through carefully. You will be expected to Dividends received from UK
compute PCTCT in nearly every exam so learn the pro companies are not included
forma in 3.5. in PCTCT
4 This section is important. A long period of account may well A long period of account is
appear in the Section A question and if you do not correctly split into two accounting
split it into two accounting periods you are unlikely to pass periods
the paper. Work though the question in this section carefully The first AP is always 12
ensuring that you know how to allocate income/expenses to months long
the correct periods.
5 This section is vitally important. You must be able to work Tax rates
out the rate of tax applicable in any given case. Study all of Changes in tax rates
the questions in this section carefully. Associated companies
Short APs
Try Question 1 in the Exam Question Bank of your Study Text
2
Study Period 1 continued
Were you awake?
How is income and expenditure split between the two chargeable accounting periods of a long
period of account?
When does starting rate marginal relief apply?
What situation will give rise to a scaling down of the upper and lower limits?
Common Pitfalls
• Failure to learn the pro forma of a corporation tax computation
• When two financial years are 'straddled', time apportioning each line of the
computation rather than just PCTCT
• Forgetting to reduce the various upper and lower limits in a short period
• Including dividend transactions in PCTCT
• 'Grossing up' bank /building society interest; (companies receive this gross)
Any problems?
Email (accaqueries@bpp.com) fax (020 8740 2293) or phone us (020 8740 2242/2245)
Learning Resource Centre

What do you want to do? How to do it! Reference
Test your knowledge BPP i-Pass* Corporation tax computation
Learn interactively BPP i-Learn/BPP Virtual Campus Module 2
BPP's Learning to Learn
Improve your study skills
Accountancy book *
* Included within your Home Study course
If you want any of these products, visit: www.bpp.com/acca
3
Study Period 2
Schedule D Case I
Date due:
Exam Guidance
In his guidance on the syllabus, the examiner stated that a good working knowledge of this
topic is important.
Exam focus point

The best way of learning this topic is to practice plenty of questions.

These topics are covered in Chapter 2 Schedule D Case I.

1 An introduction to the topic. Read through quickly.
2 This is an important section. The adjustment of Disallowable items: fines,
profits is a core exam topic. Read the section carefully capital v revenue expenditure,
and make detailed notes. appropriations, entertaining
Note that you do not need to memorise case names and gifts, donations, legal fees,
just concentrate on understanding the principles bad debts
drawn out by case law. Ensure that you are happy
with the significance of the wholly and exclusively
rule.
3 Read quickly. Income not taxed under
Schedule D case I may need to
be deducted from the accounts
profit
4 Read quickly. Work carefully through the question in The deductible annual sum in
this section. respect of a lease premium
5 Skim read. This is the least important section of the
chapter.
4
Were you awake?
If you've been concentrating, you should to able to answer some key questions.
How does the Law Shipping case differ from the Odean Associated Theatres v Jones case?
When are legal and professional fees allowable?
When are gifts made to customers allowable?
How is a general provision for bad debts treated in the adjustment of profits?
Common Pitfall
• Being aware of the types of adjustments to profit but being unable to deal with
the arithmetic involved
Any problems?

Trading income and capital
Test your knowledge BPP i-Pass*
allowances
Accountancy book*
5
Study Period 3
Capital allowances
Date due:
Exam Guidance
The examiner expects a full knowledge of the nature of those assets qualifying for capital
allowances, since capital allowances can be set as part of an income tax or corporation tax
question.
Computational questions involving capital allowances on plant and machinery arise in most
exams.
Exam focus point

The key to getting a capital allowance question right is to have learnt the pro forma.

These topics are covered in Chapter 3 Capital allowances.

1 An introduction to the topic. Read through quickly. Capital allowances are calculated
for accounting periods
2 Read through quickly. You need an overview of what Plant performing a function
qualifies for capital allowances and what does not, but qualifies for capital allowances
it is not worth getting bogged down in this section. whereas plant that is part of the
You are not expected to memorise case names. setting does not
3 This section is vitally important. Concentrate on being WDAS
able to calculate capital allowances and the relationship FYAS
between capital allowances and Schedule D Case I. Balancing charges/(allowances)
Work through all of the questions carefully and note
Cars
the exam focus points. Long life assets are the least
important of the assets dealt with in this section. Private use assets
4 Short life assets are frequently examined so work Short life assets are not pooled
through this section carefully. Ensure that you can deal SLA's are transferred to the
computationally with a short life asset. general pool if the asset is not sold
within four years of the end of the
accounting period
5–6 Read quickly. With the exception of 5.3, these sections The allowable deduction for lease
are not important. rentals in 5.3
6
Were you awake?
If you've been concentrating, you should be able to answer some key questions.
When do balancing adjustments arise?
When should a short life asset election be made?
What capital allowances are available on cars?
Common Pitfalls
• Pro-rating FYA's
• Forgetting to scale the WDA up or down for a non 12 month period
• Inability to deal with balancing allowances/charges
• Pooling an expensive car in the pool, once its TWDV falls to under £12,000
• Claiming capital allowances on the full cost (ie. cash price and finance charges)
of an asset bought on hire purchase, instead of just cash price
Any problems?

Trading income and
capital allowances
Accountancy book*
7
Study Period 4
Industrial buildings, loan relationships
and Schedule A
Priority = Medium Examined: 12/01, 6/02, 12/02, 6/03
Date due:
Exam Guidance
Industrial buildings allowance is a key topic which may either be part of a compulsory question
on corporation tax or income tax in Section A.
Exam focus point

Sales at less than cost following a period of non-industrial use are not examinable.

These topics are covered in Chapter 3 Capital allowances and Chapter 4 Loan relationships/
Schedule A.

Chapter 3
7 Read 7.1 – 7.11 quickly. Broadly, these Eligible expenditure
paragraphs provide you with background
knowledge. Next read 7.12 – 7.16 carefully.
Make detailed notes on eligible expenditure.
8 Work through 8.1 – 8.12 thoroughly. Read Writing down allowances
8.13 – 8.14 quickly. Questions are likely to be Balancing adjustments
computational so ensure that you are happy
with the questions in this section.
Chapter 4
1 Read quickly. This section is really only Income from non-trading loan
background knowledge. You are only likely relationships is taxed under Schedule D
to have to deal with the computational Case III on an accruals basis
aspects of loan relationships in a corporation Income/expenses on trading loan
tax computation. relationships is dealt with under
Schedule Case I
2 Read quickly. Make brief notes. 10% wear and tear allowance
Premiums taxable under Schedule A
Try Questions 4 & 5 in the Exam Question Bank of your Study Text
8
Were you awake?
Which buildings cannot be industrial buildings?
What expenditure qualifies for IBAs?
What IBAs are available to the second owner of an industrial building?
When is the wear and tear allowance given?
Common Pitfall
• When calculating a second user's allowance (after non-industrial use), many
students calculate the residue value after sale – this is not necessary and wastes
time. The allowances for the second owner is based on the lower of his cost and
the original cost paid by the first user
Any problems?
Email (accaqueries@bpp.com), fax (020 8740 2294) or phone us (020 8740 2234/2252)

Test your knowledge BPP i-Pass* IBAS and Schedule A income
Learn interactively BPP i-Learn/BPP Virtual Campus Modules 4 and 5
Accountancy book*
* Included within your Home Study package
9
Study Period 5
Corporation tax losses
Priority = High Examined: 6/02, 12/02
Date due:
Exam Guidance
The examiner expects knowledge of all the methods of relieving trading losses from
corporation tax.
This came up as a compulsory question in Section A of the June 2002 paper. It came up as an
optional question in the December 2002 paper.
Exam focus point

The examiner has stressed the importance of learning a comprehensive layout, showing clearly
where loss reliefs are deducted.

These topics are covered in Chapter 6 Losses.

1 Overview of relief for various losses. Read quickly.
2&3 Vitally important. Work through carefully ensuring you are S 393 (1)
happy with the questions. Note, in particular how the answers S 393A
are laid out and ensure you lay your own answers out like this.
Note also how to deal with gift aid donations.
4 Awareness needed. Read through quickly.
5 Vitally important. Work through question thoroughly and Rates of relief (5.1)
ensure you are happy with it.
10
Were you awake?

What profits may trading losses under s393(1) be set against?
Against how many months worth of profits can a carry-back claim under s393A be made?
What factors need to be taken into account when deciding how to relieve losses?
Common Pitfalls
• Failure to understand the interaction of s393A relief and non-trade charges
• Carrying back a trading loss without offsetting in the current year first
• Offsetting trading losses carried forward against total profits, instead of trading
profits
Any problems?

Test your knowledge BPP i-Pass* Corporation tax losses
Accountancy book*
11
Study Period 6
Groups
Priority = High Examined: 12/01, 12/02, 6/03
Date due:
Exam Guidance
Groups may come up in either Section A or B. Question 5 (15 marks) in part B will either be on
groups or on overseas aspects, so it must have a 50% chance of arising. It appeared in Part B of
the above three exams.
Exam focus point

The key to dealing with a groups question correctly is to start by correctly identifying any group
relief group and/or any chargeable gains group.

These topics are covered in Chapter 7 Groups. It is essential that you understand the sessions
already completed in respect of calculating corporation tax and also the loss reliefs available
before you start this session.

1 Background. Read through quickly. Associated company
2 Work carefully through whole section. Study the Group relief group
questions thoroughly ensuring you can identify a Amounts to surrender
group relief group, that you understand how to best Corresponding periods
allocate group relief and that you can deal with
Planning group relief
corresponding periods.
12
Were you awake?

How does the number of associates effect the corporation tax upper and lower limits?
What amounts can be group relieved?
What is a group relief group?
Common Pitfalls
• Forgetting to adjust the corporation tax limits for associates
• Forgetting that companies pay 32.75% in the small companies marginal relief
band and 23.75% in the starting rate marginal relief band
Any problems?

Accountancy book*
13
Study Period 7
Overseas aspects of corporation tax
Priority = High Examined: 6/02
Date due:
Exam Guidance
Question 5 (15 marks) in the exam (Section B) will be on either groups of companies or
overseas aspects.
It is quite a tricky area so ensure you take your time whilst practising questions.
Exam focus point

It is worth being prepared for a question on overseas aspects of corporation tax as it must have a
50% chance of appearing in Question 5. It has only appeared once in the four sittings to date
which perhaps makes it a 'hot topic' for the 2004 exams.

These topics are covered in Chapter 8 Overseas aspects of corporation tax.

1 Overview. Read briefly through this section. Ensure that Branch v Subsidiary
you can distinguish between a branch and a subsidiary and
that you know the tax consequences of each.
2 This section is vitally important. Work carefully through Unilateral credit relief
the questions. Learn the formula in 2.4 as this may well be Underlying tax relief
essential in the examination and it will not be given.
Ensure that you understand when underlying tax relief
may be available and how to calculate the amount of DTR.
3 Overview. Read quickly through this section.
14
Were you awake?
When may a company claim relief for underlying tax?
What is the formula for calculating underlying tax?
What is the maximum DTR that can be given against any source of income?
Does the transfer pricing legislation apply to transfers of goods between two UK resident
companies?
Common Pitfalls
• Failing to use actual tax paid (not profit and loss account figure for tax) when
calculating underlying tax
• Generally students fail to give this area of their studies enough time – the only
way to feel comfortable with overseas aspects is to practice questions
Any problems?

Tax planning and
overseas matters
Accountancy book *
15
Study Period 8
Payment of tax by companies
Priority = Medium Examined: 12/01, 12/02, 6/03
Date due:
Exam Guidance
This is a key topic. You may see the payment of tax by companies in Question 1 in Section A
or in Question 7 in Section B.
Exam focus point

Filing dates/payment dates often provide the easy marks in a question. It is good exam technique
to attempt the easy parts of the question first.

These topics are covered in Chapter 9 Payment of tax by companies.

1 Read through making notes on the essential points opposite. Filing dates
Penalties
Records
Enquiries
2 Work through this section carefully. It is essential that you Quarterly instalments
can calculate the quarterly instalments for large companies.
Work through the question slowly.
16
Were you awake?

What is the due date for filing a CT return?
What are the penalties if you file a CT600 return late?
What are the due dates for the payment of quarterly instalments of CT?
Which companies must pay their CT in quarterly instalments?
Common Pitfall
• Failing to attempt the 'easy' marks in this part of the question
Any problems?

Payment of tax by
companies
Learn interactively BPP i-Learn/BPP Virtual Campus
Accountancy book*
17
Study Period 9
An outline of income tax and self assessment
Date due:
Exam Guidance
This is a very important area as the schedular system forms the basis of all tax computations.
Exam focus point

The examiner has stated that in the compulsory section of the exam paper, there will be a
question requiring students to produce a full income tax computation.

These topics are covered in Chapter 12 An outline of income tax and Chapter 18 Self assessment for
individuals and partnerships.

Chapter 12
1 Study the income tax pro-forma carefully, noting the Pro forma
three columns. If you set out your computations like this,
you will have made an important first step towards
getting them right.
2 Read carefully. It is important that you can deal with Dividends
dividends and interest and that you recognise the various Bank/building society interest
types of exempt income. Exempt income
3&4 Read through quickly. Ensure you can distinguish Personal allowance
between charges paid net and charges paid gross. Charges paid net/gross
5 This section is vital. Work through the examples Income tax computation
carefully. You will have to produce an income tax
computation in the examination.
Chapter 18
1–3 Read through quickly make notes on due dates and Filing due date
penalties. Penalties
4 This is probably the most important section in this Payment dates
chapter. Work through carefully. Study the questions Surcharges
carefully and make notes on payment dates, surcharges Interest
and interest.
5 Read through quickly. The initial paragraphs on Enquiries
enquiries are the most important.
Try Questions 16, 17 & 24 in the Exam Question Bank of your Study Text
18
Were you awake?
What are the three columns needed in an income tax computation?
How must dividends received be grossed up for inclusion in the income tax computation?
What are the due dates for the payment of income tax?
When might a surcharge be levied for the late payment of income tax?
Common Pitfalls
• Forgetting to 'gross up' income received net in the computation
• Including exempt income in the personal computation
Any problems?

Self employed tax computation
and self assessment
Learn interactively BPP i-Learn/BPP Virtual Campus Modules 1, 9, 12
Accountancy book*
19
Study Period 10
Schedule D Cases I and II
Date due:
Exam Guidance
In his guidance on the syllabus, the examiner has stated that a good working knowledge of this
topic is important.
Exam focus point

The best way to prepare yourself for a question in this area is to practice plenty of profit
adjustment questions.

These topics are covered in Chapter 13 Schedule D Cases I and II.

1 Make brief notes so that you could list the Badges of Trade in The Badges of Trade
the exam. This is a popular written question in part B of the
exam. You do not need to memorise case names; concentrate
on the principles drawn out by case law rather than the details
of the cases themselves.
2 Read carefully and review the notes you made when looking at Allowable/
Schedule D Case I for companies. Take care to ensure that you disallowable items
understand the differences between the adjustments needed for
companies and the adjustments needed for individuals. Skim
read paragraphs 2.22 to 2.28 which are the least important.
20
Were you awake?
List the Badges of Trade.
Explain what is meant by the remoteness and duality test.
When are parking fines allowable?
To what extent is redundancy pay allowable?
Common Pitfalls
• Not bothering to learn the badges of trade and hence missing out on very easy
marks
• Being aware of the types of adjustments to profits but being unable to deal with
arithmetic involved
Any problems?

Trading income and
capital allowances
Accountancy book*
21
Study Period 11
Schedule D Cases I and II (continued)
Date due:
Exam Guidance
Basis periods and the allocation of Schedule D Case I profits to tax years is a fairly popular
exam topic that you could see in either Section A or B.
Exam focus point

You must calculate the Schedule D Case I profit for each period of account before you try to
allocate any profits to tax years. This will often mean that your first step in a question should be to
prepare a capital allowance computation as capital allowances are deducted in arriving at the
Schedule D Case I profit.


3&4 Work thoroughly through these sections ensuring Overlap profits
that you understand all the questions. This area is Basis periods for first three years
frequently examined so it is worth spending plenty Change of accounting date
of time on these sections. The computational aspects
of these sections are the most important.
22
Were you awake?
Explain how the basis period is arrived at for the first three tax years of a business.
Explain how overlap profits arise and when they may be relieved.
When a change of accounting date results in one short period of account in a tax year, what is
the basis period for that tax year?
Common Pitfalls
• Not being able to identify the second and final fiscal years of assessment
correctly
• Incorrectly computing the overlap profits when there has been a change of
accounting date
Any problems?

Unincorporated
businesses
Accountancy book*
23
Study Period 12
Capital allowances/IBAs for sole traders
Priority = High Examined: 12/01, 12/02
Date due:
Exam Guidance
The examiner has stated that full knowledge will be required of the nature of those assets
qualifying for capital allowances, since capital allowances can be set as part of an income tax or
corporation tax question.
Exam focus point

The key to getting a capital allowance computation correct is to use the correct pro forma.


5.1 – 5.23 Work through carefully. This should all be revision from when WDA
you studied capital allowances for companies. It is particularly FYA
important to work through the question carefully. Cars
5.24 Work through carefully. This is the main difference between The private use
capital allowances for an unincorporated business and capital restriction
allowances for a company.
5.25 – 5.35 Read through quickly.
24
Were you awake?

Explain when writing down allowances may be pro-rated for an unincorporated business.
How are capital allowances given to a sole trader on assets which are not used wholly for
business purposes.
Common Pitfalls
• Pro-rating first year allowances
• Only deducting WDA that relates to business use from the private use asset
column instead of full WDA
Any problems?

Trading income and
capital allowances
Accountancy book*
25
Study Period 13
Trading losses
Priority = High Examined: 12/01
Date due:
Exam Guidance
This is a fairly important area of the syllabus. It may be examined as a full optional question in
Section B (15 marks). However, in December 2001, it appeared as part of the compulsory
question in Section A.
Exam focus point

An important consideration is the choice between different reliefs available, and the examiner has
stressed the importance of learning a comprehensive layout. The aim is to use a loss to save as
much tax as possible, as quickly as possible.

The topics in this study period are covered in Chapter 14 Trading losses.

1 Introduction. Read quickly.
2 & 3.1 – 3.8 Work through carefully making detailed notes. S 385
Ensure you work through the examples thoroughly S 380
as the computational aspects of loss relief are very Calculation of loss arising in
important. tax year (3.2 & 3.3)
3.9 – 3.10 Skim read now. You'll look at capital gains later in
your studies.
3.11 – 3.13 Work through carefully. Try not to get too bogged Rate of relief
down on the choice between reliefs. Waste of personal allowance
Timing
5 Work through quickly.
26
Were you awake?

What income may losses carried forward under s.385 be set off against?
How does s.380 loss relief operate?
Common Pitfalls
• Forgetting that losses under s.385 can only be set against future Schedule D
Case I profits, and not against total income
• Not realising that s.380 is an optional loss relief and is not compulsory
• When claiming relief under s.380, incorrectly restricting the claim to preserve
personal allowances, forgetting that s.380 is an 'all or nothing' relief
Any problems?

Unincorporated business
tax losses
Accountancy book*
27
Study Period 14
Trading losses (continued)
Priority = Medium Examined: 12/01
Date due:
Exam Guidance
Losses in the opening years of a new business, and losses in the closing years are important
elements of the syllabus. They are most likely to appear in Section B of the paper, although
they may appear in Section A.
Exam focus point

If you have to choose between alternative loss reliefs consider the rate of relief, timing and
whether personal allowances are wasted.

These topics are covered in Chapter 14 Trading losses.

4 Read quickly, so that you have an awareness of this relief.
6 Read carefully, making detailed notes. Study the question Set off on a FIFO basis
carefully.
7 Study carefully, making detailed notes. Ensure you work Calculation of loss
through the question carefully.
28
Were you awake?
What relief is available under s.381?
How is the terminal loss under s.388 calculated?
Common Pitfalls
• Failure to carry back losses on a FIFO basis, when a claim is made under s.381
• Incorrectly allowing for the 'double counting' of losses in the opening years
• Ignoring the fact that loss relief under s.381 applies to all 3 years automatically,
unlike s.380 where the order of relief in the years concerned is at the choice of
the taxpayer
• Forgetting to restrict the terminal loss relief in the carryback years, so that trade
charges that were previously relieved do not now become unrelieved as a result
of a s.388 claim
Any problems?

Unincorporated business
tax losses
Accountancy book*
29
Study Period 15
Partnerships
Priority = Medium Examined: 6/02
Date due:
Exam Guidance
There was a full 15 mark partnership question in Section B of the June 2002 exam.
Exam focus point

Always divide the profits of each period of account between the partners before you start
attributing profits to tax years.

This topic is covered in Chapter 15 Partnerships.

1 Read through studying carefully. Work through the example Taxation of partners
thoroughly. Ensure you can deal with the allocation of Changes in membership
profits where the PSR changes, loss reliefs and changes in
partnership personnel. The computational aspects of this
topic are probably the most important.
2 Read quickly.
30
Were you awake?
How are the partnership's profits for a period of account shared out between the partners?
What happens to the income of a partnership when a new partner is taken on?
Common Pitfalls
• Forgetting to treat partner's salaries and interest on capital as appropriations
which need to be added back to arrive at the actual Schedule D Case I profits of
the partnership
• Forgetting to pro-rate salaries and interest in periods of less than 12 months
• Forgetting to apply the special opening and closing year rules where a new
partner joins or an existing partner leaves
Any problems?

Self employed tax
Test your knowledge BPP i-Pass* computation and self
assessment
Accountancy book*
31
Study Period 16
Value added tax 1
Date due:
Exam Guidance
This topic will always appear as one of the optional questions in Section B (15 marks) of the
exam paper. The questions tend to be partly computational and partly discursive.
Exam focus point

Registration, deregistration, tax point and penalties are key exam topics.

These topics are covered in Chapter 10 Value added tax 1.

1&2 Read quickly. These sections provide background Taxable supplies/persons
knowledge. Supplies goods/services
3 Work through thoroughly make detailed notes. These are Registration
frequently examined topics.
4 Read through. Make brief notes. Ensure that you work Tax point
through the question on the tax point carefully. The
determination of the tax point is frequently examined.
5 Read through. Make brief notes. Details on invoice
6&7 Read through. Make brief notes. Discounts
8 Read thoroughly. Make detailed notes. Study questions Default surcharge
carefully. Penalties are frequently examined. Misdeclaration penalty
32
Were you awake?

What are the tests for compulsory registration?
What is the basic tax point, and in what situations will it be overruled?
What penalties arise when a trader submits his VAT return late, or submits the return on time
but pays the VAT late?
Common Pitfalls
• Ignoring VAT when it is potentially a source of easy marks
• Not being able to ascertain when VAT registration becomes compulsory, using
the annual test
• With discounts, computing VAT on the net value after trade discounts (but
before settlement discounts) instead of after all potential discounts
Any problems?

Test your knowledge BPP i-Pass* Value added tax
Accountancy book*
33
Study Period 17
Value added tax 2
Priority = Medium Examined: 6/02, 6/03
Date due:
Exam Guidance
The examiner has indicated that full knowledge of all exempt items will be required, as will the
ability to distinguish between standard rated and zero rated items.
As far as VAT schemes are concerned, the examiner only expects a basic understanding of the
principles of such schemes, not a detailed knowledge.
Exam focus point

As a VAT question is guaranteed in Section B of the exam, it is worth learning as many of the
VAT rules as you can.

These topics are covered in Chapter 11 Value added tax 2.

1 Skim read. Learn as many taxable/exempt items as
you can but don't get bogged down.
2 Read carefully. Make brief notes. Irrecoverable VAT
Fuel
Bad debts
3 Read carefully. Make detailed notes. Ensure that you Cash accounting
could answer a written question on these schemes. Annual accounting
Flat rate scheme
34
Were you awake?

What conditions need to be satisfied for bad debt relief to be available?
Describe the cash accounting scheme, the annual accounting scheme and the flat rate scheme.
Common Pitfalls
• A failure to understand the difference between zero-rated and exempt supplies
• Recovering input VAT on the purchase of cars where there has been some
business usage
Any problems?

Test your knowledge BPP i-Pass* Value added tax
Accountancy book*
35
Study Period 18
Question technique
Priority = High
Date due:
Question technique
There are many ways of attempting the questions in the exam, but they all have several elements in
common. Set out below is a suggested approach that has been used successfully by students of this
paper. The key things to remember is that by practising questions now you will find what works for
you personally. Feel free to amend the suggested approach. For example if you find it easier to
highlight the key points on the question paper, or to write them on the answer paper do whatever you
find easier, as long as you include them in your answer.
Approach to questions:
Step 1 Read and analyse the requirements – note the mark allocation for any parts of the
requirements.
This is so that you can identify what it is you are looking for in the scenario. The danger of
reading the scenario first is that you do not know what you are looking for and therefore it
could be argued that you are wasting time in doing so. It is better to read the requirements
first then you can look for specific items, points or issues when reading the scenario for the
first time.
To skim read or not to skim read
Some tutors suggest that by skim reading the scenario first you gain an appreciation of what
the situation is that you are dealing with. The argument against skimming is that you may
confuse yourself or not take any of it in. In which case you have wasted your time. My
advice is try it and see if it works for you. If you can skim read quickly and retain the
information then by all means skim read the scenario before reading the requirements. If
you find that skim reading does not add anything to your understanding then don't do it,
read the requirements first. The important thing is to find out what works for you before
you enter the exam room.
Step 2 Try and pick up the key points in the requirements. For example, what are you asked to do?
Is there any incidence of the word and that indicates that there are actually two individual
requirements?
Step 3 If anything strikes you as being significant then make a note of it now on the question
paper. For example, does the question include income or charges that require grossing up.
Step 4 Set up any proformas that are relevant to the question eg. Corporation tax computation or
any headings that will help to structure a written question, this will prevent you from
missing any key parts.
36
Step 5 If doing a computational question put the points you find easy into your proforma, this
helps to gain the easy marks first. Perhaps cross them off on the question paper once you
have dealt with them. Don't get too bogged down if there is something you can't deal with,
remember you don't need to know every rule to pass this exam. Move on to the bits that you
can do.
Step 6 If doing a written question, you may find it helps to do a quick plan to avoid you having an
unstructured answer. Don't spend too long doing this, just jot down key points for you to
expand on in your answer. Check back to the requirements to make sure your points are
relevant. Stand back and think a little more widely. Is there anything else relevant to the
question?
Step 7 Remind yourself of the mark allocation especially if there are several points to the question
to avoid spending too long on one particular part that is for, say, only 5 marks and running
out of time on part c which contains 15 marks. You must attempt all questions in the exam
to stand a good chance of passing.
Step 8 When writing out your full answer do the easy parts first as you will gain more marks on
these. Make sure you explain them and relate them to the scenario if relevant. Leave a little
space after all questions in case you have time to go back later or think of extra relevant
points.
Remember to use this technique when practising questions and when attempting your course exams
in later study periods. Most importantly remember to use it in the real exam!!! (It should be
automatic by then.)
You are now ready to attempt the first course exam. These exams are designed to give you
some question practice at an early stage in your studies and to enable you to obtain
feedback on exam technique. Don't worry too much if you have to revert to the material
when answering questions. Obviously it will be beneficial to attempt them without
reference to your Study Text and notes, but it is the technique in producing answers that
is the valuable element at this stage.
Once you have completed your attempt, send your solutions, together with the front sheet,
to:
Marking Department
BPP Professional Education
Aldine House
Aldine Place
142 – 144 Uxbridge Road
Shepherds Bush Green
London W12 8AA
37
Study Period 19
The taxation of employment
Date due:
Exam Guidance
The taxation of employment income is a core topic and should be a source of easy marks in
Section A of the exam.
Employed vs self-employed is a key topic which may form a written question in Section B (15
marks) of the exam.
Exam focus point

The examiner has stated that the compulsory income tax question in Section A will often be a
mixed personal (taxable earnings) and business (Schedule D) tax question.

This topic is covered in Chapter 19 Employment income; PAYE.

1 Read carefully, making notes on the distinction between Employment vs self-
employment and self-employment. Ensure that you could employment
answer a 15 mark written question on this topic. Date of receipt
2 Read Sections 2.1 & 2.2 carefully. Skim read Sections 2.3 – 2.5. Travel expenses
Read Sections 2.6 – 2.14 thoroughly. Skim read Sections 2.15 – Wholly, exclusively
2.16. and necessarily rule
3 Make brief notes on this section, ensuring you are happy with Codes
how the PAYE system works and that you can calculate a Year end returns
PAYE code if required. It is also important that you are aware
of what year end returns are needed.
38
Were you awake?

What factors may be of importance when trying to distinguish between employment and self
employment?
When are travelling expenses deductible?
List the year end returns that an employer must make.
Common Pitfalls
• Ignoring the PAYE system – it may provide easy marks in Section B of the exam
• Confusing the Badges of Trade with employment vs self-employment
Any problems?

Test your knowledge BPP i-Pass* Employees, PAYE and NI
Accountancy book*
39
Study Period 20
Taxable and exempt benefits
Date due:
Exam Guidance
Knowledge is required of the full range of taxable and exempt benefits for the exam.
Exam focus point

Work systematically through a benefits question. You will gain marks for each benefit that you
calculate correctly. You will also gain marks for stating when a benefit is exempt.

This topic is covered in Chapter 20 Taxable and exempt benefits.

1 Read carefully, making notes. Work through all the Luncheon vouchers
questions thoroughly. Keep your tax rates and Living accommodation
allowances schedule to hand as some of the Statutory mileage allowances
information will be given to you in the exam and you
Cars/ fuel for cars
shouldn't waste time learning it.
Beneficial loans
Assets available for private use
2 Read through carefully. Try to learn the list of exempt
benefits so that you can spot them quickly and gain an
easy mark in the exam.
40
Were you awake?

When is accommodation job related?
How is the taxable benefit in respect of assets available for private use calculated?
Prepare a list of exempt benefits.
Common Pitfalls
• Failing to deduct contributions made by the employee (except for fuel benefit)
• Forgetting to pro-rate benefits
Any problems?

Accountancy book*
41
Study Period 21
Pensions and NIC
Date due:
Exam Guidance
The examiner does expect you to be familiar with the rules of both personal pension plans and
occupational schemes run by employers. He may require you to advise a business on which is
the best approach, possibly as part of a compulsory question, or more likely as a full optional
question in Section B.
Computational questions may be set on both pensions and NIC.
Exam focus point

NIC's are fairly topical at the moment as the additional 1% has only just been introduced.

These topics are covered in Chapters 16 Personal pensions. NICs for the self-employed and 21
Occupational pension schemes. NICs for employees. As you work through the chapters refer to the
tax rates and allowances tables to familiarise yourself with what will be given in the exam and
what is required to be memorised.

Chapter 16
1 Read carefully and make detailed notes. Study Limits
questions thoroughly. The computational aspects Contributions
of personal pensions are particularly important. Benefits
2 Read through carefully. Ensure that you can Calculation of NICs
calculate the NIC in the example.
Chapter 21
1 Read carefully, making brief notes. The earnings cap
Consequences of approved scheme
Maximum benefits/ limits
2 Read carefully. Ensure that you can calculate the Calculation of NICs
NIC in the examples.
42
Were you awake?

What are the maximum contributions that can be made by an employee to an occupational
pension scheme?
What type of NICs are paid by employees and employers?
Explain how Class 4 NICs are calculated.
Common Pitfalls
• Not being able to correctly compute net relevant earnings
• Not identifying the basis year for personal pension contributions correctly
• Forgetting the Earnings Cap
• Not remembering to extend the basic rate band by the gross amount of personal
pension contributions
Any problems?

Learn interactively BPP i-Learn/BPP Virtual Campus Modules 11 and 13
Accountancy book*
43
Study Period 22
Chargeable gains
Date due:
Exam Guidance
Question 4 (15 marks) in Section B will be on capital gains either for an incorporated or
unincorporated business.
Exam focus point

The examiner has indicated that identification and application of relevant exemptions and reliefs
will be examined.

These topics are covered in Chapter 5 Chargeable gains and Chapter 7 Groups.
Sections Approach Essential points
Chapter 5
1&2 Read through quickly. Learn the exempt items in Losses (1.2)
paragraph 2.8, so that you do not waste time calculating Exempt assets
gains on these assets.
3 Read whole section carefully. Capital gains group
No gains/loss transfers
Rollover relief
Matching gains/losses
4 Read through carefully. Any retail price indexes needed
will be given to you in the exam. Work through the
question carefully.
5&6 Read carefully. Make detailed notes. Study the FA 1985 pool
questions carefully. It is crucial that you memorise the Matching rules
share matching rules and practice using them.
7 Read carefully. Make brief notes. Bonus and Rights issues
8 Read carefully. Make detailed notes. Rollover relief is a Rollover relief
very popular relief in exam questions. The key is to be
able to identify when rollover relief is available, so
ensure you memorise the assets listed in Section 8.2.
Chapter 7
3 Read whole section carefully Capital gains group
No gains/loss transfers
Rollover relief
Matching gains/losses
Try Questions 6, 7, 10 & 29 in the Exam Question Bank of your Study

Text
44
Were you awake?

Name three exempt assets.
What are the share matching rules for companies?
What assets qualify for rollover relief?
Common Pitfalls
• Calculating a gain or loss on the disposal of an exempt asset – hence wasting
time and not earning any marks
• Using the individual share matching rules instead of the company rules
Any problems?

Accountancy book*
45
Study Period 23
Capital gains tax
Date due:
Exam Guidance
The examiner has indicated that chargeable gains may form part of Question 2 in Section A for
a maximum of 10 marks. In addition Question 4 (15 marks) in Section B will be on capital
gains (either for an incorporated or unincorporated business).
Exam focus point

Take care to identify whether you are calculating chargeable gains for an incorporated or
unincorporated business, as the computations are different.

This topic is covered in Chapter 17 Capital gains tax.

1 Skim read.
2 Ensure that you can identify connected persons and that you Consequences of
know the consequences of disposals to them. These topics are disposal to connected
frequently examined. persons
3 Work through studying the examples and the question in this Losses
section carefully. Computational aspects of CGT are Taper relief
particularly important. Have a look at your tax rates and
allowances tables so that you can see the information you will
be given. You may find it helpful to draw up a schedule
showing the differences between individuals and companies
for this topic.
4 Work through studying questions and examples carefully.
Ensure that you understand how the matching rules for
individuals differ to the matching rules for companies.
5–7 Read carefully. Study examples thoroughly. Of the three Gift relief
reliefs, rollover relief is probably the most frequently Incorporation relief
examined. Rollover relief
46
Were you awake?

From what date does taper relief apply to gains for individuals?
How do you calculate the taper relief available?
What are the share matching rules for individuals?
Common Pitfalls
• Calculating a gain or loss on the disposal of an exempt asset – hence wasting
time and not earning any marks
• Offsetting capital losses against income other than chargeable gains
• Confusing the rules concerning the calculation of chargeable gains for
companies with the rules that apply to individuals
Any problems?

Test your knowledge BPP i-Pass* Capital gains tax
Accountancy book*
47
Study Period 24
Tax planning
Date due:
Exam Guidance
Question 6 (15 marks), in Section B of the exam, will be on one of the six topics listed at the
start of Chapter 22 to test your ability to apply your tax knowledge to a given scenario.
Exam focus point

It is worth ensuring that you are prepared for a question in this area, since it is guaranteed to
arise.

This topic is covered in Chapter 22 Tax planning.

1–6 Work through carefully. Make detailed notes on each topic. Each of the six topics
There should be nothing new here of a technical nature,
however the chapter will help you to think of the taxes
together as opposed to in isolation, therefore bringing
together all of the study periods to date.
48
Were you awake?
Explain the advantages and disadvantages of employment and self employment.
What are the advantages/disadvantages of incorporating a business?
What are the advantages/disadvantages of buying a company's assets as opposed to its

shares?
Common Pitfall
• Students often concentrate all or most of their study time to number crunching
calculations – you must learn to write about tax by practising questions. Don't
leave it until the day of the exam, it is often more difficult than you think to
generate ideas – especially under exam pressure!!
Any problems?

Tax planning and
overseas matters
Accountancy book*
49

Business Taxation: Part 2 Paper 2.3

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Business Taxation: Part 2 Paper 2.3

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Study Text Edition: August 2003

BPP Home Study Students

© BPP Professional Education 2003

2 Using the BPP Home Study

3 Revising from the BPP Home Study

5 Overview of Business Taxation

STUDY PERIOD PLANNER

Exam focus point

Guidance through the Study Text

Section Approach Essential points

Try Question 1 in the Exam Question Bank of your Study Text

Were you awake?

When does starting rate marginal relief apply?

Learning Resource Centre

* Included within your Home Study course

If you want any of these products, visit: www.bpp.com/acca

Exam focus point

Guidance through the Study Text

Section Approach Essential points

Try Question 2 in the Exam Question Bank of your Study Text

When are legal and professional fees allowable?

When are gifts made to customers allowable?

Learning Resource Centre

* Included within your Home Study course

If you want any of these products, visit: www.bpp.com/acca

Exam focus point

Guidance through the Study Text

Section Approach Essential points

Try Question 3 in the Exam Question Bank of your Study Text

When do balancing adjustments arise?

When should a short life asset election be made?

What capital allowances are available on cars?

Learning Resource Centre

* Included within your Home Study course

If you want any of these products, visit: www.bpp.com/acca

Exam focus point

Guidance through the Study Text

Section Approach Essential points

Which buildings cannot be industrial buildings?

What expenditure qualifies for IBAs?

What IBAs are available to the second owner of an industrial building?

When is the wear and tear allowance given?

Learning Resource Centre

* Included within your Home Study package

If you want any of these products, visit: www.bpp.com/acca

Exam focus point

Guidance through the Study Text

Section Approach Essential points

Try Question 8 in the Exam Question Bank of your Study Text

Were you awake?

What profits may trading losses under s393(1) be set against?

Learning Resource Centre

* Included within your Home Study package

If you want any of these products, visit: www.bpp.com/acca

Exam focus point

Guidance through the Study Text

Section Approach Essential points

Try Question 9 in the Exam Question Bank of your Study Text

Were you awake?

What amounts can be group relieved?

What is a group relief group?

Learning Resource Centre

* Included within your Home Study package