PAGE 3 AIM To ensure candidates can apply judgement and technique in the provision of a range of taxation services. In particular to equip candidates with the ability to resolve problems involving the computation of tax liabilities, basic tax and financial planning and which draw upon the interaction of a wide range of taxes. The primary focus of the paper will be based around taxation issues. OBJECTIVES On completion of this paper candidates should be able to: • prepare computations for and advise clients on issues relating to the tax liabilities of individuals arising from income receipts, capital disposals and transfers of value • prepare computations for and advise clients on issues relating to the tax liabilities of corporations arising from income generation and capital disposals • provide advice on minimising or deferring tax liabilities for individuals or corporations by using exemptions and/or reliefs • evaluate a corporation's and individual's financial position with particular regard to the importance of taxation in decision making and to recommend appropriate personal financial plans and • demonstrate the skills expected in Part 3. Paper 3.2 Advanced Taxation (United Kingdom) POSITION OF THE PAPER IN THE OVERALL SYLLABUS This is the final tax paper and builds upon the knowledge acquired in Paper 2.3 Business Taxation concerning the taxation of businesses and employees. A thorough understanding of the Paper 2.3 syllabus is therefore considered requisite for Paper 3.2. Candidates also need to understand formats of accounts used for sole traders, partnerships and companies from Paper 1.1 and also the need to have an understanding of some of the financial reporting standards from Paper 2.5. There is no substantial integration with other papers in Part 3. SYLLABUS CONTENT 1 Taxation of individuals (a) Principles of income tax (b) Income tax on income from land and buildings (c) Income tax on income from Investment (d) Income tax on income from employment (e) Income tax on income from self- employment (f) Capital gains tax (g) Trusts (h) Administration of income tax and CGT (i) Inheritance tax (j) Overseas aspects of income tax, capital gains tax, inheritance tax and value added tax (k) Value added tax (l) National insurance contributions (m) Stamp duty and stamp duty reserve tax. 2 Taxation of corporate businesses (a) Corporation tax on income and chargeable gains of single companies and groups of companies and consortia trading in the UK and overseas (b) Value added tax (c) National insurance contributions 3.2 Advanced Taxation 2.3 Business Taxation PAGE 4 (d) Stamp duty and stamp duty reserve tax. 3 Financial planning (a) Sources of Finance (b) Personal Financial Planning (c) Financial Services Products (d) The Regulatory Framework. EXCLUDED TOPICS Note that the labelling of excluded topics relates to the relevant section of the syllabus 1 Taxation of individuals (c) Income tax on income from investments (i) detailed knowledge of anti- avoidance procedures (d) Income tax on income from employment (i) PAYE system (ii) an employee share ownership plan (ESOP) will not be examined in its own right (e) Income tax on income from self- employment (i) averaging of farmers profits (ii) averaging of profits for authors and creative artists (iii) the allocation of notional profits and losses for a partnership (iv)research and development expenditure (v) capital allowances for agricultural buildings, patents, flats above shops, scientific research and know-how (vi)in respect of industrial buildings allowance: enterprise zones, initial allowances and the sale of an industrial building at less than original cost following a period of non industrial use (note that sales for more than original cost are examinable) (vii) detailed anti-avoidance legislation. (f) Capital gains tax (i) assets held at 31 March 1982 (ii) the grant of a lease or sub-lease out of either a freehold, long lease or short lease (iii) a detailed knowledge of the statements of practice on partnership capital gains (iv) retirement relief (v) relief for losses on loans made to traders. (h) Trusts (i) overseas aspects (j) Inheritance Tax (i) double grossing up on death (ii) pre 18 March 1986 lifetime transfers (iii) woodlands relief (iv)conditional exemption for heritage property (v) relief on relevant business property and agricultural property given as exempt legacies (vi) valuation of an annuity or an interest in possession where the trust interest is subject to an annuity (v) detailed knowledge of the double charges legislation (vi)an accumulation and maintenance trust ceasing to qualify (vi) double taxation relief calculation involving the formula A x C A+B (vii) IHT aspects of discretionary trusts prior to 27 March 1974. (k) Value added tax (i) capital goods scheme (ii) in respect of property and land leases and do it yourself builders (iii) flat rate scheme for farmers (iv) special schemes for retailers. (l) National insurance contributions (i) detailed calculation of director's NIC on a month by month basis – a knowledge of the annual earnings period rules (including where a person becomes a director part way through a tax year is, however, required). (ii) offset of trading losses against non-trading income (for Class 4 purposes). 2 Taxation of corporate businesses (a) Corporation tax on income and chargeable gains of single companies and groups of companies and consortia trading in the UK and overseas (i) a detailed knowledge of anti- avoidance provisions (with the exception of those detailed in the Study Guide) Advanced Taxation (United Kingdom) (Continued) PAGE 5 (ii) corporation tax rates on companies in the process of winding up (iii) 51% groups and group income elections (iv) quarterly accounting for income tax (v) anti-avoidance provisions where arrangements exist for a company to leave a group (vi)detailed knowledge of double taxation agreements (vii) migration of a UK resident company (viii) mixer companies (ix)expense relief in respect of overseas tax (x) detailed computational questions on the carry back and carry forward of unrelieved foreign tax (xi)an awareness of these provisions is required (xii) detailed computational questions on the 'onshore pooling' provisions (xiii) again an awareness of these provisions is all that is required. (b) Value added tax (i) as for individuals. (c) National insurance contributions (i) detailed calculations of director's NIC on a month by month basis – a knowledge of the annual earnings period rules (including where a person becomes a director part way through a tax year is, however, required.) 3 Financial planning (a) Sources of finance (i) the mortgage code. (c) Financial services products (i) detailed knowledge of the conditions which must be met to obtain Inland Revenue approval for an occupational pension scheme (ii) personal pension rules applicable prior to 6 April 2001 (iii) knowledge of the different maximum benefit regimes in occupational schemes (iv) calculation of maximum or actual benefits available on early or late retirement (v) calculation of a pension cash equivalent transfer value. KEY AREAS OF THE SYLLABUS All areas of the syllabus may be regarded as important. The Study Guide details those areas of particular importance for the compulsory Section A questions: APPROACH TO EXAMINING THE SYLLABUS The examination is a three hour paper divided into two sections. Section A: Two compulsory scenario based questions worth a total of 50 marks set in the following areas: • Non business income tax (although including employment income) • Capital gains tax • Inheritance tax • Overseas aspects of income tax, inheritance tax and capital gains tax • Taxation of trusts The detailed syllabus areas that will feature are those set out in italics within the Study Guide. It is to be noted that these are primarily the syllabus areas new to 3.2. Section B: Four 25 mark scenario based questions from which candidates will be required to select and answer two. One of these questions, at least, will focus upon business taxation. One of the questions in Section B will have as its main focus personal financial planning. The other question will be set on other areas of the syllabus. The following further guidance should be noted: Section A • To assist in the transition from paper 2.3 to paper 3.2 the compulsory questions, whilst being set within a scenario involving some elements of planning and tax interaction, the emphasis will be on computation (as an approximate guide around 50%). A mainly discursive question is therefore unlikely in Section A. • As a general guide Section A questions will primarily focus upon (non-business) income tax, Inheritance tax and capital gains tax (both business and non- business aspects). • Questions involving mainly financial Advanced Taxation (United Kingdom) (Continued) PAGE 6 Paper 3.2: Advanced Taxation (United Kingdom) (Continued) planning will not feature in Section A. Note, however, that questions may involve the taxation elements of, for example, investment or pension products (for example calculating an individual's maximum permissible pension contributions). • Whilst no detailed questions will be set involving income tax aspects of businesses this will not preclude the inclusion within questions of, for example, a Schedule D Case 1 figure (or possibly even series of figures). Candidates will, however, not be required to calculate those figures as part of Section A questions. • A question will not be set that exclusively examines the taxation of trusts, stamp duty or overseas taxation aspects although these may feature as part of a question. Section B • The 25 mark format adopted in Section B will allow more developed optional questions. • Questions can be set in any area of the syllabus but within the broad overall guidelines mentioned above. • The question focusing upon financial planning is likely to be scenario based, including some taxation elements, with candidates required to analyse a particular set of circumstances and make sensible financial planning recommendations going forward. As a guide it is likely that the pure financial planning elements of this question will not exceed 60–70%. • As a general rule it is likely that Section B questions will examine letter or report-writing skills to a greater extent than Section A. Two marks will always be allocated within one of the Section B questions covering these skills. In summary for the June 2003 paper onwards: Number of marks Section A: 2 compulsory questions 50 Section B: Choice of 2 from 4 (25 marks each) 50 100 Tax rates, allowances and relevant benefits will be given in the examination paper. ADDITIONAL INFORMATION ACCA adopts a six month rule in that questions requiring an understanding of new legislation will not be set until at least six calendar months after the last day of the month in which the legislation received Royal Assent. The same rule applies to the effective date of the provisions of an Act introduced by Statutory Instrument. It would however be considered inappropriate to examine legislation it is proposed to repeal or substantially alter. Knowledge of section numbers will not be needed to understand questions in this paper, nor will students be expected to use them in their answers. If students wish to refer to section numbers they may do so and will not be penalised if old, or even incorrect, section numbers are used. Names of cases or a detailed knowledge of judgements are not required but knowledge of the principles decided in leading cases is required. The Study Guide provides more detailed guidance on the syllabus. RELEVANT TEXTS There are a number of sources from which you can obtain a series of materials written for the ACCA examinations. These are listed below: Foulks Lynch – ACCA's official publisher Contact number: +44 (0)20 8831 9990. Website: www.foulkslynch.com Accountancy Tuition Centre (ATC) International Contact number: +44 (0)141 880 6469. Website: www.ptc-global.com BPP Contact number: +44 (0)20 8740 2211. Website: www.bpp.com The Financial Training Company Contact number: +44 (0)174 785 4302. Website: www.financial-training.com Candidates may also find the following textbooks useful: Advanced Taxation (United Kingdom) (Continued) PAGE 7 (i) paper 2.3 section 2d (have scope now for both business and non business assets including shares and securities) plus (ii) exempt assets and disposals (particularly on disposals arising at death) (iii) concept of independent taxation and transfers between spouses (iv)timing of disposal (particularly in the context of conditional contracts) (v) losses in the year of death (vi)variations/disclaimers arising on death (vii) connected persons (viii) payment of tax by instalments (ix)part disposals (x) principal private residence relief (xi)matching rules for shares and securities (xii) basic reorganisations and takeovers (particularly s135 TGGA 1992, the conditions, including for bona fide commercial purposes, and the advance clearance procedure). (xiii) leases, chattels and wasting assets (xiv) compensation and insurance receipts (xv) EIS/VCT reinvestment relief (xvi) appropriations to and from trading stock (xvii) gift relief where there is an immediate charge to IHT (s260 Paper 3.2: Advanced Taxation (United Kingdom) (Continued) Advanced Taxation (United Kingdom) (Continued) STUDY SESSIONS Items in italics refer to syllabus areas that can be examined within Section A. 1 Taxation of individuals (a) Principles of income tax (i) paper 2.3 syllabus section 2a plus (ii) schedular system (iii) concept of independent taxation and jointly held assets (iv) personal allowances and reliefs (v) non business charges on income and Gift Aid (b) Income tax on income from land and buildings (i) income liable (ii) basis of assessment and computation of assessable profits and losses (iii) reverse premiums (iv)premiums received on the grant of a short lease (v) furnished holiday lettings and implications (vi)rent a room relief (c) Income tax on income from investments (i) tax free investments (ii) schedule D case III (iii) taxation of savings income and dividends (iv)accrued income scheme (v) schedule D case vi (vi)double taxation relief (d) Income tax on income from employment (i) paper 2.3 syllabus sections 3a(i), (ii) and (iv) plus (ii) share and share option incentive schemes (approved and unapproved schemes) (iii) lump sum receipts (iv)exempt benefits (v) personal service companies (e) Income tax on income from self- employment (i) paper 2.3 syllabus sections 2c(i) – (vii) (ii) losses on shares in qualifying companies (section 574 ICTA 1988) (f) Capital gains tax A Homer, R Burrows Tolleys Tax Guide Tolley Publishing ISBN 1860128319 Sonia Gable The Basic Principles of Tax Taxbriefs Limited ISBN 1902824571 This book can be purchased by registered students at a 50% discount of £24.50 (RRP £49). This includes P&P to a UK address, foreign P&P would be extra. To order, quote your student registration number and phone +44 (0)20 7250 9067 or fax +44 (0)20 7251 8867 or e-mail info@taxbriefs.co.uk. Simon Philip Kelly's Financial Planning for the Individual Gee ISBN 1860890385 Wider reading is also desirable, especially regular study of relevant articles in ACCA's student accountant. PAGE 8 CGTA 1992) (g) Trusts (i) define a trust (ii) distinguish between interest in possession trusts and discretionary trusts (iii) explain how income tax applies to: – interest in possession trusts – discretionary trusts (iv)explain how inheritance tax applies to – transfers of property into trusts – transfers of property out of an interest in possession trust upon the termination of the life tenant's interest – discretionary trusts – ten year charges and exit charge (v) define accumulation and maintenance trusts and explain their advantages (vi)explain how capital gains tax applies to: – transfers of property into trust – disposals made by trustees of settled property within trusts to third properties – disposals made by trustees of settled property within trusts to beneficiaries (vii) explain how trusts can be used in tax and financial planning. (h) Administration of income tax and capital gains tax (i) paper 2.3 syllabus Section 2b (i) Inheritance tax (i) basic principles – explain the terms transfer of value, chargeable transfer, potentially exempt transfer, excluded property and persons chargeable – loss of donor principle (ii) principle chargeable occasions for IHT – chargeable lifetime transfers – potentially exempt transfers becoming chargeable – death (iii)seven year cumulation principle (iv)concept of grossing up (v) how IHT is calculated on chargeable lifetime transfers, potentially exempt transfers becoming chargeable and upon death (vi)exemptions available covering lifetime gifts (vii)concept of independent taxation particularly in the context of transfers between spouses (viii) other exempt transfers (gifts to charities, political parties, for national purposes and to housing associations) (ix)tax treatment of transfers of value by close companies (x) principles of valuation: – general open market valuation rule – specific rules – related party rules Advanced Taxation (United Kingdom) (Continued) (xi)business property and agricultural property relief and the relevant conditions applying (xii) quick succession relief (xiii) tapering relief (xiv) determine the value of an individual's estate at death including the liabilities and other deductions that may be taken into account (xv) relief available for the fall in value of assets the subject of a chargeable lifetime transfer (xvi) adjustments to the value of the death state in respect of the sale of assets following death and the effect of reinvestment (xvii) allocation of the estate at death where: – the entire estate is chargeable and specific gifts of UK property are made – there are exempt specific gifts with a chargeable residue and vice versa (xviii) explain how wills can be varied after death and the conditions applying (xix) explain the rules governing gifts with reservation of benefit (xx) explain the rules relating to associated operations (xxi) administration of inheritance tax – who is responsible for PAGE 9 payment? – instalment option – property – due dates (j) Overseas aspects of income tax, capital gains tax, inheritance tax and value added tax (i) explain the concepts of residence, ordinary residence and domicile (ii) application of the rules at (i) above to income tax (iii) detailed rules in circumstances where an individual comes to the UK or leaves the UK (iv)schedule D case iv and v – basis of assessment arising or remittance (v) overseas trades travelling expenses (vi)employment income - overseas aspects (vii) employees travelling and subsistence expenses (viii) double taxation relief (ix)application of the rules at (i) above to CGT (x) temporary absence rules (xi)overseas aspects of inheritance tax: – extended definition of domicile for inheritance tax purposes – rules governing location of assets – calculate double taxation relief (xii) explain how VAT is applied to imports and exports and to acquisitions within the EU (k) Value added tax (i) paper 2.3 syllabus section 1j and 2e plus (ii) explain the application of the disaggregation rules (iii) group registration and divisional registration (iv)second hand goods (v) explain the consequences for being partially exempt and calculate the input tax recovery for a partially exempt trader (vi)explain in broad terms the principle rules governing the supply of land and buildings in the UK (l) National insurance contributions (i) paper 2.3 syllabus section 2f and 3c (m) Stamp duty and stamp duty reserve tax (i) basic principles – concept of tax on documents (ii) chargeable occasions – shares and securities – other assets – leases (iii) exemptions – gifts – goodwill – group transactions (basic transactions involving transfers between associated companies and share transfers where there is no real change of ownership) (iv)fixed duty. 2 Taxation of Corporate Businesses (a) Corporation tax on income and chargeable gains of single companies and groups of companies and consortia trading in the UK and overseas (i) paper 2.3 syllabus sections 2.3 1a – i plus (ii) determination of accounting periods when a company is being wound up (iii) explain the treatment of returns of capital to shareholders after a company has commenced winding up (iv)treatment of a company's non trading deficits on loan relationships (v) restrictions on the use of trading loss reliefs (particularly upon a change in ownership of an entity) (vi)corporate venturing scheme (vii) Rules governing the transfer of a company's trade and assets within a group situation (viii) exemption for disposal of substantial shareholdings (ix)explain how intangible assets and goodwill are treated within a corporation tax environment including the reinvestment relief introduced by FA2002 (x) explain the rules governing the (xi)explain the terms consortium owned company and consortium member; operation of consortium relief Advanced Taxation (United Kingdom) (Continued) PAGE 10 (xii) explain the concept of permanent establishment (xiii) explain how profits chargeable to corporation tax are determined for an investment company (xiv) explain the consequences of being a close company and close investment holding company (xv) explain the taxation consequences from a company purchasing its own shares and the conditions applying to satisfy treatment as a capital distribution (b) Value added tax (i) as for individuals (c) National insurance contributions (i) paper 2.3 syllabus section 3c (d) Stamp duty and stamp duty reserve tax (i) as for individuals. 3 Financial Planning (a) Sources of Finance (i) describe the sources of finance available to: – individuals – companies (ii) distinguish between the tax implications of raising equity finance and of raising loan finance (iii) explain the tax implications involved in the decision whether to lease, use hire purchase or to purchase outright (iv)evaluation of the impact of taxation on a business' cash flows (v) describe the mortgage products available to individuals involved in purchasing their own home (vi)identify circumstances in which it is appropriate to repay/replace borrowings (b) Personal Financial Planning (i) evaluating an individual's financial position – calculating an individual's net worth having regard to future capital taxation liabilities – calculating an individual's net of tax disposable income – identify potential disaster scenarios for both individuals and businesses – determining sensible strategies to protect wealth and income levels (c) Financial Services Products (i) protection products awareness of the basic structure, types, risk that is being covered, the form in which proceeds are paid upon a valid claim being made and the tax treatment of the premiums and proceeds of the following classes of product: – life assurance – health insurance – provision for long-term care – redundancy insurance (ii) investment products awareness of the basic structure, types and tax treatment of the following investments – deposit based investments (including cash mini ISAs) – fixed interest securities – packaged investments – collective investments (including ISAs) – equities – enterprise investment scheme – venture capital trusts – property Note for section A purposes only the tax treatment of the above is examinable (iii) constructing investment portfolios having regard to such factors as risk, accessibility, liquidity, marketability, flexibility and volatility (iv)pension products awareness of the main features and tax treatment of premiums payable (where applicable – by both individuals and employers) and eventual benefits in making provision for retirement through the following: – occupational pension schemes – explain the difference between defined benefits and defined contribution schemes – explain the difference between approved and unapproved schemes – explain the operation of self-administered occupational schemes Advanced Taxation (United Kingdom) (Continued) PAGE 11 – describe the options upon changing employment – personal pension (including stakeholder) schemes – explain the operation of self-invested personal pensions – describe the options available on reaching retirement – state pension schemes Note for Section A only the tax treatment of the items in italics is examinable (v) explain the options available as regards pension rights on divorce (d) The Regulatory Framework (i) describe the regulatory framework in place (ii) explain the meaning of investment and investment business (iii) explain the regulations and 'best practice' affecting investment advice laid down by the FSA and ACCA (iv)explain the compensation and redress available. Advanced Taxation (United Kingdom) (Continued) . non- business aspects). • Questions involving mainly financial Advanced Taxation (United Kingdom) (Continued) PAGE 6 Paper 3.2: Advanced Taxation (United Kingdom) (Continued) planning will not feature. gift relief where there is an immediate charge to IHT (s260 Paper 3.2: Advanced Taxation (United Kingdom) (Continued) Advanced Taxation (United Kingdom) (Continued) STUDY SESSIONS Items in italics. regard to the importance of taxation in decision making and to recommend appropriate personal financial plans and • demonstrate the skills expected in Part 3. Paper 3.2 Advanced Taxation (United Kingdom) POSITION