One part of the CeMAP paper one syllabus that gives many students particular difficulty is that relating to taxation. The IFS study manual begins by working through income tax, capital gains tax and inheritance tax before moving on to consider VAT, stamp duty and business taxation. While the coverage of each is broad rather than deep, there is a lot to learn and marks can be lost through simple errors or omissions. The purpose of this article is to highlight some of the more common of these.
Tax tables are provided in the examination and it is essential candidates familiarise themselves with the contents before answering any of the questions. The contents of the tables include, for example, income tax rates and bands, personal allowances, capital gains tax rates and inheritance tax rates, together with exempt lifetime transfers and the taper relief available on potentially exempt transfers. It is not unusual to get an occasional exam question that can provide a mark by referring to the tax tables for the answer.
The definition of an easy examination question is, of course, one where you know the answer. However, there are some questions that may appear in the CeMAP exams that should be regarded as simple by all candidates. One of these asks for the dates of the tax or fiscal year. Does the tax year run, for example, from April 5 to 6? April 1 to March 31? or April 6 to 5? The answer, of course, is April 6 to the following April 5. Candidates sometimes fail to read the question carefully, or to think clearly, and answer April 5 to April 6 which is obviously wrong as this period is only one day!
The need to read each question carefully cannot be over-emphasised. When dealing with an income tax calculation question, for example, note whether the question is providing you with the gross income, in which case the personal allowance will have to be deducted before taxing the income, or the taxable income where the personal allowance will already have been taken off.
The same principle applies to capital gains tax. A chargeable gain needs to have the annual exemption allowance deducted before calculating the tax liability, whereas the taxable gain has already had the allowance deducted.
When answering a tax calculation question, candidates should ensure they learn and follow a clear step-by-step process to avoid making basic errors. Regular practice is essential here. Once mastered, the process should be followed in the exam. Take a basic income tax liability calculation, for example. One common error is to fail to deduct the individual's personal allowance from their gross income before calculating the tax liability. Adopting a step-by-step approach should avoid this kind of mistake.
Using mnemonics is a good way of memorising key points for the examination. COKE, for example, should immediately bring to mind the tax-free National Savings and Investments products, in addition to the obvious cash and TESSA ISAs.
Certificates (National Savings Certificates)
Ordinary Account (First £70 of interest each year) Kids (Children's Bonus Bond)
Ernie (Premium Bonds).
Detail is important and must be mastered through structured revision. Remember, for example, the goods and supplies that are exempt from VAT as opposed to those that are zero-rated. An important example of the former is the provision of insurance policies and certain financial transactions, while the latter includes books and newspapers and children's clothing and footwear. The net effect on the consumer is the same – no VAT is payable. The distinction is important, however, if you are a CeMAP paper one candidate!
With so many different forms of taxation to deal with, it is easy to confuse the details of one tax with another and, here again, organised study is vital. For example, some candidates confuse the list of assets that are exempt for capital gains tax purposes with the list of transfers that are exempt for inheritance tax purposes. Drawing up two lists and labelling them clearly is a good start. But remember, as mentioned earlier, most of the exempt transfers for inheritance tax are given on the tax tables provided in the examination so that should help as well – provided that you remember to read the tax tables before beginning the exam.
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