ACCA Strategic Professional · Advanced Taxation (UK)

Appropriateness of planning measures to a taxpayer's circumstances and objectives: formula sheet

Full chapter guide

Key formulas

Suitability test: Suitable measure = meets the client's objectives + affordable + acceptable non-tax effects + low risk; Use this as a checklist for every measure. If one part fails, say so and explain the effect.
Net benefit of a measure: Net benefit = tax saved − costs − tax or cash cost created elsewhere; Always look for a tax cost created by the plan, for example a CGT charge triggered by a gift made to save inheritance tax.
Corporation tax marginal relief: (Upper limit − Augmented profits) × Standard fraction × Taxable total profits ÷ Augmented profits; Lower limit £50,000, upper limit £250,000, standard fraction 3/200. Given in the exam tax tables. Useful when planning the timing of company income.
Inheritance tax rates: Nil rate band £325,000; residence nil rate band £175,000; lifetime rate 20%; death rate 40%; Use these to quantify the effect of lifetime gifts against holding assets until death.
Capital gains tax rates: 18% and 24%; annual exempt amount £3,000; BADR rate 14% on up to £1,000,000 lifetime; Use when comparing a sale with a gift or a deferral of a gain.
Tax evasion: Evasion = deliberate non-disclosure or misstatement to HMRC → illegal; The key words are deliberate and hiding or lying. Penalties and prosecution can follow.
Tax planning (mitigation): Planning = using reliefs and exemptions as Parliament intended → acceptable; The client's real actions match the purpose of the relief, for example a genuine ISA subscription or pension contribution.
Tax avoidance: Avoidance = within the letter of the law, against its spirit → legal but open to challenge; Look for artificial steps, no commercial purpose, and a result Parliament did not intend.
GAAR test: Tax arrangement + tax advantage + abusive (not a reasonable course of action) → advantage can be counteracted; The GAAR targets abusive arrangements only. It is not aimed at ordinary, sensible planning.
Appropriateness test: Appropriate = legal and intended + meets client objectives + acceptable risk, cost and cash flow; A measure that saves tax but fails the client's wider aims is not appropriate.
Penalty amount: Penalty = penalty % × potential lost revenue (PLR); PLR is the additional tax due because of the error. Work out the tax first, then the penalty.
Careless error: Maximum 30%; minimum 0% (unprompted) or 15% (prompted); Applies where reasonable care was not taken.
Deliberate but not concealed: Maximum 70%; minimum 20% (unprompted) or 35% (prompted); The error was knowing but no attempt to hide it.
Deliberate and concealed: Maximum 100%; minimum 30% (unprompted) or 50% (prompted); The error was knowing and hidden.
Interest on underpaid tax: Interest = underpaid tax × 8.50% × time; Use the rate given in the tax tables (8.50% on underpaid tax). Interest is separate from the penalty.
Interest on underpaid tax: Interest = Tax underpaid × 8.50% × (days late ÷ 365); Use the assumed rate in the tax tables. Time the period from the due date to payment.
Interest on overpaid tax: Interest = Tax overpaid × 3.50% × (days ÷ 365); Use the assumed rate in the tax tables and the same day-count basis as for underpaid tax. The rate is lower than the underpaid rate, so overpaying earns less than underpaying costs.
Standard error penalty: Penalty = Potential lost revenue × penalty %; Maximum: careless 30%, deliberate not concealed 70%, deliberate and concealed 100%.
Minimum penalty range: Careless: 0% unprompted, 15% prompted. Deliberate not concealed: 20% unprompted, 35% prompted. Deliberate and concealed: 30% unprompted, 50% prompted; The actual penalty lies between the minimum for the type of disclosure and the maximum for the behaviour. Unprompted disclosure has a lower minimum than prompted disclosure.
VAT late payment penalty: Up to 15 days: none. 16 to 30 days: 3%. More than 30 days: 6% plus a daily penalty at an annual rate of 10%; Apply to the VAT paid late.
Cap on income tax reliefs: Cap = higher of £50,000 or 25% of income; Unless otherwise restricted. Relief planning can fail if the cap is overlooked.

Quick revision

Planning must fit the client's circumstances, objectives and attitude to risk, not just save tax.
Acceptable planning uses reliefs and options the way the law intends.
Avoidance is arranging affairs to cut tax in ways that may defeat the intent of the law, and it carries risk.
Evasion is illegal: deliberately hiding or misstating facts to pay less tax.
Penalty maximums for errors: deliberate and concealed 100%, deliberate but not concealed 70%, careless 30%.
Minimum penalty, unprompted disclosure: 30%, 20% and 0% respectively.
Minimum penalty, prompted disclosure: 50%, 35% and 15% respectively.
Interest on underpaid tax is 8.50% in the assumed rates and on overpaid tax 3.50%.
Late VAT payment: none up to 15 days, 3% at 16 to 30 days, 6% plus a daily penalty beyond 30 days.
Always show the risk, the consequence and a clear recommendation in advice.
Ethics: if you find a client error or evasion, think about confidentiality, your duty and the need to urge disclosure.
Use the tax tables and show all workings to the nearest £.

Common mistakes

Describing a relief without linking it to the client. Fix: After each rule, add a sentence starting 'For this client...' that ties it to a fact in the scenario.
Ignoring non-tax factors. Fix: Always cover control, cash flow, risk, family and commercial reasons. They carry professional skills and technical marks.
Treating avoidance and evasion as the same thing. Fix: State that evasion is illegal and involves concealment or false statements. Avoidance is legal but may be counteracted.
Saying any tax saving is unacceptable. Fix: Explain that using reliefs as intended is legitimate. The GAAR targets only abusive arrangements.
Applying the penalty percentage to the total tax liability instead of the extra tax due to the error. Fix: Compute the difference between the correct tax and the tax shown on the return. Use only that as PLR.
Giving a single penalty figure instead of a range. Fix: Give the minimum and maximum, then explain where the penalty is likely to sit within the range.
Listing generic risks without using the scenario. Fix: Tie each risk to a specific fact in the question and say why it matters for this client.
Giving a risk but no number. Fix: Use the rates provided. Even a simple interest or penalty figure earns marks.

Exam tips

Always refer to the client by name and use their facts. Generic answers lose professional skills marks.
Cover non-tax factors in every planning answer. Use a short heading such as 'Non-tax points' to make them easy to find.
Use the tax rates and allowances in the exam rather than memory. Show a short working to quantify a saving.
End each section with a clear recommendation, even if it is conditional.
State any assumption, such as that the client survives seven years. Examiners reward stating it.
Define the three terms in one line each, then spend most of your time applying them. Marks go to application.
Always link your conclusion to the client's stated objectives. A legal measure can still be inappropriate.
When you discuss the GAAR, say what it needs: arrangements that are abusive and give a tax advantage. Do not say it bans all avoidance.