ACCA SP Advanced Taxation (UK) 2 — Questions and Answers
Question 1: For UK inheritance tax (IHT), business property relief (BPR) at 100% applies to:
- Shares quoted on a recognised stock exchange
- Unquoted shares in a qualifying trading company (Correct answer)
- Agricultural land owned for more than two years
- Cash held in a business bank account
Correct answer: Unquoted shares in a qualifying trading company
BPR at 100% is available for unquoted shares (including AIM-listed) in qualifying trading businesses, removing them from the IHT estate if held for at least two years.
Question 2: Under UK tax law, a 'permanent establishment' (PE) in another country typically gives rise to:
- UK corporation tax on worldwide profits only
- Tax liability in the country where the PE is located on profits attributable to that PE (Correct answer)
- VAT registration obligations in the UK
- An immediate CGT charge on the company's shares
Correct answer: Tax liability in the country where the PE is located on profits attributable to that PE
A permanent establishment (e.g., fixed place of business or dependent agent) in another jurisdiction creates a tax presence there, and profits attributable to the PE are taxed in that jurisdiction under most tax treaties.
Question 3: The UK's 'diverted profits tax' (DPT) targets:
- Companies that do not register for VAT
- Arrangements where multinationals use contrived structures or a lack of UK PE to divert profits from the UK, avoiding UK corporation tax (Correct answer)
- UK companies paying dividends overseas
- UK companies that fail to file corporation tax returns on time
Correct answer: Arrangements where multinationals use contrived structures or a lack of UK PE to divert profits from the UK, avoiding UK corporation tax
DPT (25%) applies to multinationals that use artificial arrangements (including avoiding a UK PE or using entities lacking economic substance) to divert profits that would otherwise be taxed in the UK.
Question 4: In UK corporation tax, 'group relief' allows:
- Dividends to flow tax-free within a group
- One group company's current-year trading losses to be surrendered to and offset against the profits of another group company (Correct answer)
- Capital gains to be deferred on intra-group asset transfers
- All group companies to be assessed on a consolidated basis
Correct answer: One group company's current-year trading losses to be surrendered to and offset against the profits of another group company
Group relief (CTA 2010) allows a surrendering company's current-period trading losses to be offset against taxable profits of a claimant company, both being members of the same 75% group.
Question 5: Which of the following is subject to the UK 'disguised remuneration' rules?
- Bonus payments made through payroll
- Arrangements where an employer provides loans or assets through a third party to avoid income tax and NICs on remuneration (Correct answer)
- Share option schemes approved by HMRC
- Expenses reimbursed at HMRC-approved mileage rates
Correct answer: Arrangements where an employer provides loans or assets through a third party to avoid income tax and NICs on remuneration
Disguised remuneration rules (Part 7A ITEPA 2003) target arrangements that use third parties (e.g., trusts, EBTs) to provide loans, assets or other benefits to employees that are not subject to PAYE/NICs.
Question 6: The UK 'transfer pricing' rules require transactions between connected parties to be priced:
- At cost, to avoid any profit on intra-group transactions
- At arm's length, as if the parties were independent, to prevent tax base erosion (Correct answer)
- At the lower of cost and market value
- At a discount to market price to reflect the related-party relationship
Correct answer: At arm's length, as if the parties were independent, to prevent tax base erosion
UK transfer pricing rules (TIOPA 2010, Schedule 4) require transactions between connected or related parties to be priced on arm's length terms, preventing the artificial shifting of profits between jurisdictions.
ACCA SP Advanced Taxation (UK) 2
For UK inheritance tax (IHT), business property relief (BPR) at 100% applies to: