Chapter 1: Ethics

1 B Professional intellect
The five fundamental principles of the IESBA Code of Ethics are:
 Integrity
 Objectivity
 Professional competence and due care
 Confidentiality
 Professional behaviour
2 B Integrity
C Professional behaviour
3 A Objectivity
D Confidentiality
Sandra may be biased in her dealings with the company because of her relationship
with Heather, and this threatens objectivity.
Sandra may acquire information in her work which may be to Heather's advantage, but
she must respect the confidentiality of such information.
4 A When he suspects a client of money laundering
Richard must inform the NCA (National Crime Agency) if he suspects a client of money
laundering.
Confidentiality is required in respect of prospective or former clients, and must be
maintained even in a social environment.
5 E Intimidation threat
William is experiencing intimidation threats which occur when a professional
accountant is deterred from acting objectively by threats, actual or perceived.
6 A Self-interest threat
D Familiarity threat
Roger is experiencing familiarity threats which occur when, because of a close
relationship, a professional accountant becomes too sympathetic to the interests of
others. As Jennifer's husband, he is himself also financially involved, which poses a self-
interest threat.
This question is from the sample paper issued by ICAEW.
7 A Freddy is laundering money through his business and as Florence is aware of this she is
required to disclose it to the proper authorities.
C Florence may be guilty of money-laundering offences as she has assisted Freddy in
concealing the proceeds of crime.
Florence should not discuss her decision to go to the authorities with Freddy. This
would amount to tipping off which is in itself an offence under money laundering
legislation.
Florence may well have felt justified in increasing her fee for such risky work but in the
circumstances this probably amounts to possessing the proceeds of a criminal activity
which is another offence.

ICAEW 2019 Chapter 1: Ethics 119

 8 B Now
D The firm's Money Laundering Reporting Officer
Iqmal's responsibility is only to report to the MLRO. If he has reasonable suspicion, he
should not try to obtain proof before reporting.
9 B (1) to (3) only
An innocent error in a tax return, unlike a deliberate error, would not give rise to
proceeds of crime. Tax avoidance is not a crime and so cannot give rise to the
proceeds of crime.
10 C Timescale involved
The other three are explicitly stated in the ICAEW Code as factors to consider.
11 A Offence committed by Steven
C Offence committed by Trevor
Steven has committed an offence under the legislation as he has acquired criminal
property, the criminal property being the proceeds of tax evasion.
Trevor has committed the offence of tipping off as he is aware that a suspicious activity
report (SAR) may have been made by his firm's MLRO.
12 C Advocacy threat
13 B Self-review threat
14 B The relationship that her firm has with the client
The other three are explicitly stated in the ICAEW Code as factors to consider.
15 A Tax evasion is illegal and tax avoidance is legal.
16 A If the threat cannot be sufficiently reduced, the only acceptable course of action is to
cease to act.
This question is from the sample paper issued by ICAEW.
17 C This is an example of legitimate tax planning so is tax avoidance. The others are all
examples of tax evasion.
This question is from the sample paper issued by ICAEW.

120 Principles of Taxation: Question Bank ICAEW 2019

Chapter 2: Introduction to taxation
1 B HMRC statements of practice
A Finance Act is an Act of Parliament and is therefore a source of law. Case law
generally sets a precedent which must be followed unless overruled on appeal or
superseded by legislation. Statutory instruments are a form of delegated legislation
which are a form of law. Statements of practice are merely a statement of HMRC's
interpretation of the law.
2 A Progressive taxation
C Direct taxation
A system whereby the overall proportion of taxation increases as income rises is known
as a progressive system. Originally income tax represented 15% of Pauline's income.
After her pay rise it had risen to 20%.
National insurance contributions are a form of direct taxation.
This question is from the sample paper issued by ICAEW.
3 B Efficiency principle
D Indirect taxation
The efficiency principle is concerned with the cost (to a government) of collection of tax
being low in relation to the tax raised. The ability to pay principle is concerned with the
ability of the taxpayer to pay the tax.
VAT is a form of indirect taxation.
4 C Unit principle
This is an example of a unit tax as opposed to VAT which is a value based tax. A unit tax
is levied at a flat rate per item regardless of value. It cannot be considered a neutral tax
as only supermarkets have to charge it.
5 B Statutory instruments
While the Budget forms the basis for the Finance Act each year, it is not in itself a form
of legislation. Statutory instruments are the biggest single source of tax law each year.
Extra-statutory concessions, as their name implies, are not statutory documents.
Neither are statements of practice.
6 C (1), (3), (4) and (5) only
As an employee Diana will be liable to income tax and national insurance
contributions. As an individual Diana could pay capital gains tax on the disposal of an
asset. As an individual Diana must incur VAT in her day to day life as the final
consumer. As an individual Diana cannot personally pay corporation tax.
7 C (2), (3) and (5) only
Each partner is liable to tax on his share of income and gains of the partnership, but not
for tax on the shares of income and gains of the other partners.
8 C (1), (2) and (4) only
(1) Collect and administer direct taxes
(2) Collect and administer indirect taxes
(4) Collect repayments of student loans
This question is from the sample paper issued by ICAEW.

ICAEW 2019 Chapter 2: Introduction to taxation 121

 9 C Case law can be superseded by further statutory legislation.
Many judgements from tax cases are precedent for future cases which means they
must be followed unless superseded by legislation or the decision of a higher court.
Therefore, this is not guidance. There is also no 12-month time limit and subsequent
legislation can change the law.
10 D Tax legislation, commonly in the form of Regulations, containing detailed provisions
HMRC manuals are published by HMRC primarily for the guidance of its own staff.
Statements of practice set out HMRC's interpretation of tax legislation.
Extra-statutory concessions provide a relaxation of the strict legal position of tax
legislation.

122 Principles of Taxation: Question Bank ICAEW 2019

Chapter 3: Introduction to income tax
1 What is his personal allowance for 2018/19? £ 2,975
£
Personal allowance 11,850
Less (£117,750 – £100,000) = £17,750  1/2 (8,875)
Reduced personal allowance 2,975

2 What is Mackenzie's total income for tax liability for 2018/19? £ 5,133
£
Tax on non-savings income £25,565  20% 5,113
Tax on savings income – savings income nil rate band £1,000  0% 0
Tax on savings income £100  20% 20
Income tax liability 5,133

3 The married couple's allowance due to the couple for 2018/19 will initially be
B given to Grainne (as Grainne has the higher net income)
The allowance due to the couple to give relief at 10% is
F £8,695 (available based on the age of the elder spouse)
4 A £1,692
Extend BRB by Gift Aid = £34,500 + (£720  100/80) = £35,400
Tax on non-savings income £
£35,400  20% 7,080
£130  40% 52

Tax on dividend income

£2,000  0% 0
£4,200  32.5% 1,365
£41,730 8,497
Less tax already paid
PAYE (6,805)
Tax payable 1,692

5 C £19,988
Tax on dividend income £

£2,000  0% 0
£32,500  7.5% 2,438
£54,000  32.5% 17,550
£88,500 19,988

6 B £797
£8,695 (MCA available as one spouse is at least 84 by 5 April 2019)  11/12 (restricted
for complete tax months prior to marriage)  10%

ICAEW 2019 Chapter 3: Introduction to income tax 123

 7 What is Glenn's total income tax liability for 2018/19? £ 6,798
£
Tax on non-savings income £33,500  20% 6,700
Tax on dividend income – dividend nil rate band £2,000  0% 0
Tax on dividend income £300  32.5% 98
Income tax liability 6,798

£300 of dividend income is taxed at 32.5% as the cumulative income taxed so far is £35,500
(£33,500 + £2,000) which utilises the basic rate band of £34,500.
8 What is Mabel's income tax liability for 2018/19? £ 7,336
Taxable income (all savings) £39,000
Tax £
£5,000  0% 0
£500  0% 0
£29,000  20% 5,800
£1,320 (£1,056  100/80)  20% (extended band) 264
£3,180  40% 1,272
£39,000
Income tax liability 7,336

9 B He receives basic rate tax relief at source by paying net of basic rate income tax
F He receives higher rate tax relief by extending the basic rate band
10 B £10,485
£
Personal allowance 11,850
Less abatement
1/2  (£102,730 – £100,000) (1,365)
Reduced personal allowance 10,485

11 C £600

£ £
Tax on non-savings income 3,000  20% 600
Tax on saving income:
– in savings starting rate band 2,000  0% 0
5,000
– savings income nil rate band 800  0% 0
5,800
Tax on dividend income:
– dividend nil rate band 1,500  0% 0
7,300
Income tax liability 600

12 B £7,000
Of the £9,000 dividend £500 falls into the basic rate band, albeit covered by the
dividend nil rate band and a further £1,500 which falls into the higher rate band is
covered by the dividend nil rate band. £9,000 – £500 – £1,500 = £7,000.
13 C In 2018/19 the Gift Aid payment will have no impact on Maalik's income tax liability.
Maalik is a basic rate taxpayer in 2018/19 so increasing the upper limit of his basic rate
band will have no impact on the calculation of his income tax liability.

124 Principles of Taxation: Question Bank ICAEW 2019

 14 What is Bussola's income tax liability for 2018/19? £ 7,366
£ £
Tax on non-savings income 210  20% 42
Tax on saving income:
– in savings starting rate band 4,790  0% 0
5,000
– savings income nil rate band 500  0% 0
– in savings basic rate band 29,000  20% 5,800
34,500
– in savings higher rate band 3,810  40% 1,524
38,310
Income tax liability 7,366
15 What is Manav's income tax liability for 2018/19? £ 3,563
Tax £
£17,015  20% 3,403
£1,000  0% 0
£800  20% 160
Income tax liability 3,563

16 What is Frederick's income tax payable under self-assessment for 2018/19?

£ 63
Taxable income £15,815
£
20% on £15,815 3,163
Less PAYE (3,100)
Income tax payable 63

This question is from the sample paper issued by ICAEW.

17 A £0 – Allocated to Bertha as she has the higher net income.
This question is from the sample paper issued by ICAEW.
18 What is Darcy's personal allowance for 2018/19? £ 0
The personal allowance will be zero for any additional rate taxpayer.
19 D £62,823
£
Non-savings income 133,000
Savings income 27,600
Dividends 15,000
Taxable income 175,600

£34,500  20% 6,900

£98,500  40% 39,400
£133,000
£17,000  40% 6,800
£150,000
£10,600  45% 4,770
£2,000  0% 0
£13,000  38.1% 4,953
£175,600
Income tax liability 62,823

Dave has no savings income nil rate band as he is an additional rate taxpayer. He does
benefit from the dividend nil rate band.

ICAEW 2019 Chapter 3: Introduction to income tax 125

 20 What is Diane's personal allowance for 2018/19? £ 2,850
£
Personal allowance 11,850
Less (£118,000 – £100,000) × 1/2 (9,000)
Restricted personal allowance 2,850

The personal allowance is abated due to the level of net income.

21 What is Sandra's personal allowance for 2018/19? £ 0
With net income exceeding £123,700, the PA is reduced to zero.

22 What is Geoff's income tax liability for 2018/19? £ 2,652

£
Non-savings income £14,450 × 20% 2,890
less tax reducer for marriage allowance £1,190 × 20% (238)
Geoff's income tax liability 2,652

The election is possible because Geoff is a basic rate taxpayer and Jessica pays no income
tax.

23 D No election can be made to transfer any part of Richard's personal allowance to

Leanne as she is a higher rate taxpayer.

24 What is Sarah's married couple's allowance for 2018/19 on which 10% tax relief is given?
£ 8,195
£
Married couple's allowance 8,695
Less (£29,900 – £28,900) × ½ (500)
Reduced married couple's allowance 8,195

The MCA is given because of Arthur's age. However, Sarah is the taxpayer entitled to claim
the MCA since she has the higher net income in 2018/19 and the couple were married on
or after 5 December 2005. The MCA is restricted because of the level of Sarah's income.

25 What is Shelia's married couple's allowance for 2018/19 on which 10% tax relief is given?
£ 3,360
£
Married couple's allowance 8,695
Less (£40,200 – £28,900) × ½ = £5,650 but restricted (5,335)
Reduced married couple's allowance 3,360

The MCA is given because of Archie's age. However, Shelia is the taxpayer entitled to claim
the MCA since she has the higher net income in 2018/19 and the couple were married on
or after 5 December 2005.
The MCA is restricted because of the level of Shelia's income, but cannot be less than
£3,360.

126 Principles of Taxation: Question Bank ICAEW 2019

Chapter 4: Employment income
1 A 606L
£
Personal allowance 11,850
Less taxable benefits (4,558)
Less underpaid tax £246  100/20 (1,230)
6,062
PAYE code 606L

2 A 730L
£
Personal allowance 11,850
Less underpaid tax £910  100/20 (4,550)
7,300
PAYE code 730L

3 PAYE code K604

£
Personal allowance 11,850
Less taxable benefits (17,900)
Net allowances (6,050)
Remove the last digit (gives 605) and deduct 1.
PAYE code K604

4 A K126
£
Personal allowance 11,850
Less taxable benefit (13,125)
Net allowances (1,275)

Remove the last digit (gives 127) and deduct 1.

Hence the code is K126.
5 What is Jacob's PAYE code for 2018/19? 694 L
£
Personal allowance 11,850
Less taxable benefit (4,910)
Net allowances 6,940

Remove the last digit and add L

6 B 842L
£
Personal allowance 11,850
Less deduction (£1,372  100/40) (3,430)
Net allowances 8,420

Remove the last digit and add L.

This question is from the sample paper issued by ICAEW.

ICAEW 2019 Chapter 4: Employment income 127

128 Principles of Taxation: Question Bank ICAEW 2019
Chapter 5: Trading profits
1 A Amy has just sold a house that she bought three months ago. She has spent £40,000 to
make the property more attractive to potential purchasers. Amy has not lived in this
house.
D Dante has an interest in vintage cars. He has just sold a car that he has been renovating
for the last six months. This is the seventh renovated car that he has sold in the last two
years.
This question is from the sample paper issued by ICAEW.
2 B Provision of own equipment
E Correction of own work
3 A The number of transactions
C Changes to the asset
Interval of time between purchase and sale – a short length of ownership would
indicate trade.
Correction of own work – this is not one of the badges of trade.
4 D To be sold at a profit
The nature of the asset would suggest a trading motive.
5 D £300
When receipts are greater than £1,000 the taxpayer may use the normal rules for
calculating their tax-adjusted profits (£1,300 – £750 = £550). Alternatively they may
elect to treat the trading allowance as one single allowable deduction which makes
Marina’s taxable trading profit £300 (ie, £1,300 – £1,000).

ICAEW 2019 Chapter 5: Trading profits 129

130 Principles of Taxation: Question Bank ICAEW 2019
Chapter 6: Capital allowances
1 B The maximum capital allowances that Nina will receive in respect of the purchase of the
photocopier in the year ended 31 December 2018 are £2,070.
£2,300  90% = £2,070
F The maximum capital allowances that Nina will receive in respect of the purchase of the
car in the year ended 31 December 2018 are £373.
18%  £2,300  90% = £373
2 A The maximum capital allowances that Aasia will receive in respect of the purchase of
the photocopier in the period ended 31 December 2018 are £3,000 as it is covered by
the AIA (pro rated to £200,000  10/12 = £166,667).
F The maximum capital allowances that Aasia will receive in respect of the purchase of
the car in the period ended 31 December 2018 are £450.
18%  10/12  £3,000 = £450
3 A The maximum capital allowances available on the computer in the period to
31 December 2018 are £5,000 as it is covered by the AIA (pro rated to £200,000  4/12
= £66,667).
F The maximum capital allowances available on the car in the period to 31 December
2018 are £792.
£13,200  18%  4/12 = £792
4 C The maximum capital allowance claim available to Barbara for the period is £10,560.
£13,200 (covered by AIA)  80% = £10,560
5 Expenditure on new cars emitting CO2 of not more than 50 g/km qualifies for the annual
investment allowance (AIA) of 100%.
B Incorrect
The expenditure qualifies for a first year allowance (FYA) of 100%.
Capital expenditure is not allowable in computing trading profits but will always result in
capital allowances.
D Incorrect
It will often result in capital allowances but not always (eg, cost of a new office building)
6 What are Murphy's maximum capital allowances for the period ended 31 December 2018?
£ 219,020
FYA Main pool Allowances
Y/e 31.12.18 £ £ £
Acquisitions (FYA):
1.9.18 Low emission car 16,500
FYA @ 100% (16,500) 16,500
0
Acquisitions (AIA):
1.7.18 Machinery 214,000
AIA (200,000) 200,000
14,000
WDA @ 18% (2,520) 2,520
TWDV c/f 11,480
Allowances 219,020

ICAEW 2019 Chapter 6: Capital allowances 131

 7 What are the partnership's maximum capital allowances for the year ended 31 March 2019?
£ 3,236
£
Murray's car £17,000  18%  60% 1,836
Nuri's car – balancing allowance (£8,000 – £6,000)
Balancing allowance £2,000  70% 1,400
3,236

8 C £3,600
The balancing allowance for full business use is £4,800 (£15,000 – £10,200)
This is restricted to the business proportion £3,600 (75%  £4,800)
9 Capital allowances £ 20,000
FYA Main pool Allowances
Y/e 31.12.18 £ £ £
Acquisitions (FYA):
20.3.18 Low emission car 8,000
FYA @ 100% (8,000) 8,000
0
Acquisitions (AIA):
12.2.18 Computer 10,000
1.5.18 Office furniture 2,000
AIA (12,000) 12,000
TWDV c/f 0

Allowances 20,000

10 Capital allowances £ 1,458

Car ≤ 110 g/km Allowances
1.9.18 – 31.5.19 £ £
Addition 18,000
WDA 18%  9/12 (2,430)  60% 1,458
15,570

This question is from the sample paper issued by ICAEW.

11 C Balancing allowance of £1,750
y/e 31.3.19 Private use car Allowances
£ £
TWDV brought forward 17,000
Disposal (14,500)
Balancing allowance 2,500  70% 1,750

12 What is the maximum amount of capital allowances that can be claimed in the year ended
31 May 2019 relating to this car? £ 3,240
The car has a writing down allowance of 18% per annum as it will go in the main pool. This
is not restricted for private use by an employee.
13 B £1,440
1.10.18 – 31.3.19 (six months) Main pool Allowances
£ £
Addition 16,000
WDA @ 18%  6/12 (1,440) 1,440
TWDV c/f 14,560

132 Principles of Taxation: Question Bank ICAEW 2019