So far in this article we have considered the importance of time management and the requirement and we have looked at a suggested approach to take when answering Section A questions. We are now going to look at some particular approaches to calculations that may be useful when answering Section A questions and the importance of question practice.
Section A questions usually require a combination of explanations and calculations. Calculations are time consuming, so it is important that you do not waste time performing any that turn out to be unnecessary. Think before you start; identify the calculations that you will need to perform and the most efficient way of carrying them out.
Brief explanations of some of the techniques that you may find useful in the exam are set out below.
Working at the margin
The question may tell you (or provide you with the information to work out) the taxpayer’s marginal rate of tax. The marginal rate of tax enables the tax saved or payable in respect of different strategies to be calculated by simply applying the rate to the change in the level of income without the need to prepare full tax computations. Accordingly, if you know the marginal rate of tax it is important that you use it as it will save you time.
Calculating a person’s cash position
Taxpayers are often more interested in their final cash position as opposed to their tax liability and the questions in the exam may reflect this. Calculating a person’s cash position requires calculations of cash receipts and cash payments (one or more of which will be tax). A person’s tax liability may be affected by non-cash items – for example, the original cost of an asset sold or benefits from employment; these items must be taken into account when calculating the person’s tax payable but excluded from the calculations of the person’s cash position.
Finding a missing figure
Rather than requiring you to calculate tax or cash, a question may require you to find a missing figure – for example, the number of shares that should be sold or the minimum fee that should be charged in order to achieve a particular objective. In order to do this you will need to understand the relevant tax principles involved and then identify a method to solve the problem.
Problem – How much group relief can be surrendered to a particular company without wasting double tax relief?
Tax principle – Double tax relief is the lower of the UK tax and the overseas tax on the overseas income. In order not to waste double tax relief, the UK tax on the overseas income must equal the overseas tax.
Solution – The amount of overseas income that must remain subject to UK tax is the overseas tax divided by the UK tax rate. For example, if the overseas tax is £15,000 and the UK tax rate is 20%, the amount of overseas income that must remain subject to UK tax is £75,000 (£15,000/20%). The amount of group relief to surrender to the company is its taxable total profits less £75,000. The group relief will relieve all of the company’s UK income and gains together with an amount of its overseas income, such that its taxable total profits equal £75,000, all of which is overseas income.
Problem – How many shares should the taxpayer sell in order to realise a chargeable gain of a particular amount (for example, an amount equal to the annual exemption)?
Tax principles – The chargeable gain will equal sales proceeds less acquisition costs and costs of disposal. It may be necessary to consider gift relief or incorporation relief when the shares were acquired in order to determine the base cost of the shares. There may also be capital losses to take into account.
Solution – Calculate the gain that would arise on the sale of a single share. The number of shares to be sold is the total gain that the taxpayer wishes to realise divided by the gain in respect of a single share. An alternative approach would be to calculate the gain on the sale of all of the shares. The proportion of that gain that the taxpayer wishes to realise will provide the proportion of the shareholding and, therefore, the number of shares that need to be sold.
The more questions you practise, the more confident you will be that you have an approach that works for you and the better you will perform in the exam. You will also become more familiar with the way in which the information is presented and the sort of tasks you will be expected to perform.
When practising questions:
It is very tempting to have a quick look at the answer while doing a question, just to check that you are progressing in the right direction. However, if you do, you will never obtain full confidence in your own abilities; you will be reliant on that ‘quick look’ to give you the encouragement you need to keep going. The problem is of course, once you are in the exam, that encouragement will not be available.
Once you have finished the question, ask yourself the following questions before you look at the answer:
When you come to review the answer, don’t be too hard on yourself. You will be awarded marks for everything you do that is correct, provided it relates to the requirement, even if you have made mistakes prior to that point. So start by recognising where your answer is correct or where it would be were it not for earlier mistakes. Then make a note of the mistakes that you made and the areas where your knowledge was weak and study those technical areas to improve your performance.
This is one of five non-technical articles that focus on the structure of the exam and exam technique. The other four such articles are:
Written by a member of the ATX-UK (P6) examining team