More detailed comments on the issues arising identified from this additional review are included in the comments on those papers.

Transcription

1 May 2016 Examiners Comments Chief Examiner s Comments This session there was a marked variation in pass rates on the Advisory papers which ranged from 28% on VAT on UK Domestic Transactions to 81% on Inheritance Tax, Trusts and Estates. We also had an unusually poor pass rate on the Taxation of Owner Managed Businesses paper at 34%. Given the very low pass rates, beyond our normal review process that we undertake for every paper (see ), we undertook a further review of a sample of scripts for the Taxation of Owner Managed Businesses and VAT on UK Domestic Transactions papers to try to understand why so many candidates failed these Advisory papers. For both papers it was quite clear that many candidates were simply not properly prepared to sit the paper. This manifested itself through a poor grasp of core areas of the syllabus. More significantly however there was a failure to understand that at this level it is insufficient to just state a particular rule without then going on to explain whether or not it applies to the specific scenario. There was also a failure to communicate knowledge clearly. Putting this into a practical context, a client expects his adviser to explain the options available and to provide a reasoned explanation setting out he should do. He doesn t want a list of points, which whilst technically correct, are irrelevant to his situation and neither does he want to guess what he is supposed to do out of a range of options. More detailed comments on the issues arising identified from this additional review are included in the comments on those papers. Overall, we suspect that too many candidates sat these papers having had insufficient practical experience, both in terms of time and in terms of the range of issues they have come across. Module A VAT and Stamp Taxes General Comments Performance was generally satisfactory on this module. Question 1 The main loss of marks on this question was where candidates (incorrectly) stated that the export would be outside the scope of VAT. Candidates should remember to take care with their wording as this has an entirely different meaning to the supply being zero rated. Question 3 This question was not answered as well as anticipated. Most candidates were able to explain the point on the car but the application of the 1,000 limit was often incorrect and a large

2 number of candidates failed to realize that the replacement cost would be the VAT inclusive amount. Question 8 This was often very well answered but some candidates did not read the question properly and calculated the normal monthly installments which would apply when using the annual accounting scheme. Question 11 This was one of the lower scoring questions but those who knew about reconstruction relief answered well and often scored full marks. A significant number of candidates discussed capital gains group aspects rather than the relevant VAT relief. Module B (Inheritance Tax) General comments Candidates generally performed well throughout this module. Question 1 Candidates answered this question well. The most common errors were forgetting the annual exemptions, or not giving the nil rate band again on death thinking it had been used up during the lifetime. Question 3 This question was not answered very well. Whilst most candidates were able to comment on the availability of APR during the lifetime of David (although many did not explain why it was available), a very high proportion did not then go on to comment about the withdrawal of APR on death. In fact many candidates did not discuss the affect on death IHT at all leaving them with low marks. Question 4 This question was answered very well with the majority of candidates scoring full or almost full marks. The main error was that some candidates did not comment on the initial gift of the shares into the trust being a CLT and attracting the annual exemptions. Question 5 This question was well answered with many candidates scoring high marks. The most common omission from the answer by many candidates after they had identified the house was a gift with reservation was to fail to explain why they had made this observation. Question 7 Candidates performed well in this question with many scoring full marks. Candidates must be careful to make sure where the question asks for an explanation, that they give an

3 explanation. Some candidates simply stated Yes, 100% BPR. This did not fulfil the requirement to briefly explain. Question 8 This was the worst answered question of the paper. Many deducted the PR expenses from the savings income not dividend income. Also many candidates showed some split between income for 2014/15 and 2015/16 but did not show the amounts taxable, only showing net income which lost them some marks. Question 10 This question was very well answered. The most common error was where candidates calculated the inheritance tax due on Michelle s estate, despite not being given information to do this, and then calculating some QSR on this figure. Some candidates also used an incorrect formula to calculate the QSR: instead of using net transfer/chargeable estate, a number of students added the inheritance tax on to the chargeable estate. A minority of students also identified the wrong % for QSR. Question 12 This question was well answered with many candidates scoring full marks. The most common error was the miscalculation of the nil rate band available, with a number of candidates adding the difference of 90,000 on to the available 325,000 to get 415,000. Some candidates also failed to identify the charity donation reducing the tax rate to 36%. Module C Corporation Tax General Comments Performance on this model was reasonable, although rarely excellent. Some candidates had clearly prepared well and had a good grasp of a broad range of topics. However, there were some obvious gaps in knowledge including where treatment has changed from FY2015 onwards. A couple of questions tested simple aspects of usually popular topics, but not in the same way as the last few sittings, and this exposed weaknesses in the candidates understanding, and preparation. Question 3 Many candidates knew to compare the augmented profits of a company to an adjusted upper limit, to determine whether the company is large for the purpose of quarterly instalment payments and also to consider the previous year. However, very few knew the new rules for related 51% group companies, specifically which companies to include in respect of each accounting period. Question 4 Performance was good, but usually with one or two errors. Proceeds were not fully reinvested in the second replacement asset, and neither was the asset used fully for trading purposes. Therefore, the hardest part of the question was determining the amount of gain that

4 remained in charge. Some candidates handled this very well and many gained at least 1 of the 2 available marks. More surprising was the failure by many candidates to calculate indexation allowance correctly, if at all. Question 5 Candidates frequently gained about half of the marks for this question, involving the dates of chargeable accounting periods. Most understood the earlier periods, and that incorporation does not automatically lead to the start of a chargeable period. However, few understood the implications of the commencement of liquidation on future periods. Question 6 This question on CFCs was the most omitted question. Some candidates only attempted the calculation, and made an error or two, but others had obviously prepared well. There is a limit to what can be asked about CFCs at this level and future candidates would do well to check they understand the exemptions and the simple calculation here. Question 7 Most candidates made a reasonable, if not very good, attempt at this adjustment to profit calculation. The main errors concerned the (expansionary) removal costs and the trademark costs. Question 8 Most candidates understood that this pricing arrangement was a problem but many were too vague in articulating why. They lost marks for not adequately analysing why the transfer pricing rules apply. The learning material clearly has the key points as section headings so this was disappointing. The second requirement the implications for both companies was handled rather better. Question 9 Most candidates scored 3 or 4 marks for the capital allowances question, although many missed the write off of the small balance on the special rate pool, and some missed the annual investment allowance on the van (treating it as if it were a car). Question 10 A question like this, concerning the taxable total profits of an investment company, is asked frequently, yet some candidates insist on categorising income as trading income. Those candidates who added all income and deduct all expenses scored nil, because the question required candidates to show their treatment of all income and expenditure, i.e. to calculate the different income streams separately. Fortunately, the number of candidates who did this was lower than in previous sittings. Question 11 Candidates are usually prepared for a question on group relief, and can handle noncoterminous accounting periods, and previously for different rates of corporation tax, the best

5 use of losses to maximise tax relief. However, this question required candidates to consider the available profits of the claimant company and the available losses of the surrendering company. Candidates were not aware of the rules regarding losses and excess losses, and often deviated from the subject to discuss gains etc. Performance on this question was therefore disappointing. Question 12 Almost all candidates could calculate the deemed employment payment in relation to a personal service company, perhaps as this is frequently asked and fairly formulaic to learn and replicate. However, very few understood the simple corporation tax element, i.e. that the company can deduct the gross deemed payment in the accounting period it is paid. Module D TAXATION OF INDIVIDUALS General comments Candidates generally performed well on this module. Question 2 Many candidates gained 2 out of 3 marks in the first part of this question. The mark missed related to the mileage allowance. Some stated that it was subject to class 1A contributions, but many used the 25p rate for mileage in excess of 10,000, which is incorrect for National Insurance purposes. Most candidates made a poor attempt or no attempt at the second part of the question. Question 3 Many candidates were surprisingly poor in the first part of the question. Many added in a benefit relating to the home and a significant number grossed up the employee pension contribution by 100/80. Candidates were not precise in their use of technical language in the second part of the question. For example, many candidates mentioned better performance without mentioning customary. Question 5 Common mistakes in this question included, not grossing up the remitted property income, not deducting double tax relief and omitting/ including the wrong remittance basis charge. Question 7 This proved to be a difficult question for many candidates. Many wasted time discussing the loan benefit for Yannick, although he paid interest at the official rate. Most candidates recognised that the waiver would be treated as a distribution for him. Candidates were not as good at dealing with Wanda, with most candidates missing the 10,000 rule on the loan interest benefit and a large number incorrectly stating that the waiver would be employment income. Question 8

6 Many candidates produced good answers to this question. The most common errors were to not gross up Oliver s pension contribution in the calculation of adjusted net income and to decide that Oliver had the highest income and calculate the charge on that basis. Question 9 Candidates generally struggled with this question. Many candidates could not apply the chattels rules correctly. In addition many candidates stated that there was no gain on takeover but then calculated a gain on disposal of the QCDs as ( 12,750-12,500) or ( 12,750-7,500). Question 10 In the first part many candidates either missed the availability of instalments or did not give the rule accurately enough (ie missing the 18 month rule and the 50% rule). In the second part many candidates were not sufficiently accurate in describing how the gains would be calculated (particularly the second gain). Question 12 This proved to be the most challenging question of the module. In part 1 candidates were often inaccurate in describing the income treatment. For example the net dividend was often described as the amount received less the cost to Gordon (or no explanation of how much was treated as a dividend). Others simply said that it would be subject to income tax (with no rates mentioned). In part 2 many struggled to accurately describe the 75% rule, for example stating that the needed to reduce the NUMBER of shares by 25%. Awareness Module E Taxation of Unincorporated Businesses General Comments Performance in this module was reasonable in some of the often tested areas, for example adjustment to profits, capital allowances and NIC, but poor in other areas, such as the cash basis of accounting, change of accounting date and gift relief. Some candidates had clearly prepared well and had a good grasp of a broad range of topics and were able to cope with different ways of examining what should have been well known areas, whereas other candidates simply did not know how to approach those questions. Question 1 Many candidates scored full marks on this adjustment to profits question, whereas others either did not read the question clearly or did not understand how to approach the question and therefore got the adjustments the wrong way round. Question 2 Several candidates performed well on this capital allowances question, scoring full marks. However common errors made by others included restriction for private usage of the car used by the employee and omission of the small pools balancing allowance on the general pool. Question 3

7 Performance on this change of accounting date question was generally poor, with many candidates clearly not understanding the rules. Those that made a decent attempt quite often failed to correctly identify the overlap profits available. Most did better with the second written part, however many failed to be precise enough with the language used and therefore did not pick up the marks available. Question 4 Some candidates performed very well on this question and worked in the margin ; identifying that the employer would save income tax and NIC at her marginal rates on the employee cost and a few even then went on to recognise that she would also save further income tax due to the (now) availability of the personal allowance. Some candidates did full income tax and NIC calculations both before and after the deduction of the employee costs which although in most cases led to the correct answer, was very time consuming. Some also included the calculation of Class 2 NIC which was superfluous. Overall however, answers to this question were disappointing. Question 5 Only a few candidates managed to score full marks on this question on the cash basis of accounting, with most candidates seemingly unaware of the rules and treating it as a normal adjustment to profits question. Question 6 Performance in this partnership question was disappointing. Many candidates wasted time by calculating the appropriation of profit before Matthew joined the partnership, and in many cases the treatment of the salaries and interest on capital was incorrect. Some candidates who managed to arrive at the correct figure for Matthew for his first accounting period then failed to apply the basis period rules and lost what should have been an easy mark. Question 7 Most candidates made a reasonable attempt at this loss question. The main error was a failure to consider all options to relieve the trading loss and lack of precision in the language used. For example, it is not sufficient to state that the loss may be carried forward without also stating that this carry forward is against trading profits (of the same trade) only. Question 8 Performance in this gift relief question was disappointing. Whereas most candidates recognised that some of the gain would be immediately chargeable as it was a sale at undervalue rather than an outright gift, very few candidates correctly dealt with the fact that of the remaining gain, only part of it could be deferred due to there being investments in the balance sheet. Where this was recognised, many candidates used balance sheet values rather than market values to apportion the gain. This question was probably the most omitted question and of those candidates who attempted it, not one managed to score full marks. Question 9

8 Most candidates made a reasonable attempt at this question on incorporation relief. The main problem with the first part of the question was lack of precise language used when stating the conditions to be satisfied. In calculating the base cost of the shares in part 2, the majority of candidates calculated the incorporation relief as being the gains multiplied by the face value of the shares divided by the face value of the shares plus the amount of cash. The date required in part 3 was often either wrongly stated or not stated at all. If a question asks for a specific date, then quoting the general rule is not sufficient to obtain the mark available; a specific date should be given. Question 10 Candidates generally performed well on this NIC question, however a common error was to use the figures for the wrong tax year. Module F Environmental Taxes, Excise Duties and Stamp Duties General Comments This paper was answered well with most questions attempted by most candidates. This included the questions at the end of the paper where usually there are many blank answers. As for the VAT module, it was pleasing that candidates appeared to have noted our previous comments and studied the entire syllabus. Question 2 This was well answered candidates who were aware of the Northern Ireland Credits scheme and knew where to locate the rules. Question 3 This was poorly answered by most candidates. Marks were missed by not fully providing the information requested e.g. failing to describe the penalty for late notification. Question 4 Many candidates were unable to calculate the correct result. The decimal place on the CCL rate always causes some incorrect calculations but there were also errors in basic calculations of Climate Change Levy. Some candidates identified the exemption for use in transport but missed the point that the situation failed to qualify which lost them two of the marks available. Question 5 This was well answered but many candidates incorrectly listed date of issue as one of the required statements which is incorrect. Those candidates that included it as one of only five answers given lost a mark. However, many candidates listed date of issue along with all five correct statements so did not lose out. Question 6 Many candidates did not attempt this question. Those that did gained marks for correct identification of the equations and theory of the calculation but very few gained good marks.

9 Question 8 There were lots of errors in the mathematical calculation of the Landfill Tax credit. Better answers were given to the checks required on the landfill invoice to see if relief could be claimed. Only a few candidates listed the check that the disposal had not been to a connected party but the rest were well known. Some candidates did not list these checks but instead the required contents of a landfill tax invoice, which was not what was asked for in the question and therefore failed to gain the marks. Question 11 This was well answered by most candidates though a many missed that a fiscal mark must be applied before imported cigarettes can enter the UK. Also few candidates could identify that specifications of the fiscal mark, its content, appearance and position is contained within a Public Notice with force of law. Module G Accounting General comments Overall, candidates performed well on this module. Question 4 Most candidates dealt well with the cost of goods sold adjustment. However, a significant minority of students incorrectly deducted the salary paid to the sole proprietor in arriving at the profit and loss. Question 5 This was a difficult question for candidates with many struggling to recall the conditions for a provision to be recognised and/or thinking through the journals. A small number of candidates did not attempt parts or all of the question. Question 7 Almost all candidates dealt well with the calculation of the depreciation charge. However, many candidates were unable to fully explain the straight line and reducing balance methods of depreciation. Question 8 Overall, candidates performed well in this question, displaying a good knowledge of the rules. Although most candidates commented on the acquisition of the goodwill, and on the need to amortise it, many failed to refer to the need to carry out annual impairment reviews. Question 9 A significant minority of candidates were unfamiliar with the weighted average method of valuing stock.

10 Question 11 Most clients dealt well with this question. Where marks were lost, in many cases this was due to a failure to read the question thoroughly. A small number of candidates omitted to answer part 1 of the question. Question 12 This proved to be the most challenging question for candidates with quite a few failing to provide an answer. A significant number of candidates were unfamiliar with the method for calculating deferred tax, and some confused deferred tax with corporation tax on profits.

11 Taxation of Owner Managed Businesses General Comments The pass rate for this paper was disappointing and was significantly lower than the average in recent sittings. We did not consider this to be an unusual paper or unfair paper and it was designed so that the subject matter was mainly core topics with the expectation that well prepared candidates should find plenty of material to enable them to pass. Feedback received from the tutorial bodies immediately after the exam confirmed our view that the paper was fair. The pass rate this session of 34% was therefore surprising. This session did also show a significant increase in candidate numbers (468 compared to 365 in May 2014) although it is not clear whether this was a significant factor in the poor performance this session. We always undertake detailed statistical analysis of the results of each paper (both within the paper and compared to other papers) and also check the marking of a sample of papers to ensure that marking has been fair and consistent. As a result of the unusually poor performance on this paper, in addition to our usual extensive review and moderation process set out (see ), we asked an experienced member of our examining team to undertake a further review of a sample of papers to try and understand the reasons for that poor performance and see if we could identify specific problems or trends. Unfortunately, as a group, the candidates appeared to be poorly prepared for this exam. They did not demonstrate a firm grasp of the subjects and could not communicate their knowledge clearly. Question 1 The responses to question one were disappointing given that this covered matters which could also have been tested at ATT level. Many candidates missed the fact that the van had been acquired from a connected person. Some considered the point but wrongly assumed that as market value had been paid this negated the restriction on AIA on assets acquired from connected persons. A significant proportion of candidates had adopted an incorrect method of computing allowances i.e. by basing these on the year of assessment rather than the accounting period (and various other permutations). Mistakes were also made with regard to extending the periods for which CAs were calculated. The majority of candidates correctly identified the basis periods and many adopted the right principle as regards calculation and use of overlap relief albeit that there were many mistakes as to the number of months of overlap profits and months used for 2016/17. Some also apportioned the assessable profits between years of assessment on a time basis. Question 2 The responses to question two were patchy though candidates generally did better on this question than on other questions. Many candidates did not appreciate that an award of shares is taxable as earnings within s.62 ITEPA and not as a benefit in kind (BIK) within s.63 and therefore considered that this should be reported on form P11D and that Class 1A NIC was payable. Many also calculated the BIK regarding the loan to buy the shares under the first option and considered alternative methods of calculation, completely ignoring the exception at s.178. Similarly, many considered the implications of s.455 CTA 2010, ignoring the exception

12 at s.456. Only a small minority of candidates correctly recognised these exceptions and time was wasted discussing these issues or making calculations which were not relevant and which therefore no marks could be awarded for. A significant proportion considered that option 2 related to a CSOP, which was not stated in the question, and therefore considered the application of the CSOP rules and marks were lost. Candidates generally seemed to understand the rules regarding EMI options and also correctly stated that entrepreneurs relief was available for EMI options granted at least 12 months before disposal of the shares (and that ER was not available under options 1 or 2). A number of candidates proceeded to give the rules for qualifying EMI options, while the question clearly states that the options would be qualifying. The majority of candidates correctly identified the amounts qualifying for CT relief. The better prepared candidates also seemed au fait with the PAYE issues where PAYE is due but cannot be wholly collected by deduction from salary, making good by the employee, s.222/90 day rule and BIK consequences. Question 3 The responses to question 3 were particularly disappointing. Most candidates simply did not understand the rules and many spent most of their time considering BIK / s.455 issues with regard to loan accounts rather than answering the question. Whilst most candidates stated the various requirements in ss CTA 2010 most also seemed to think their application was self-evident and therefore only actually considered some of the requirements. Simply stating a requirement is not the same as explaining whether or not the requirement is met and so marks were lost because the answers were incomplete. Many candidates were familiar with the fundamental trade benefit test and the HMRC guidance in SP2 /82 but wrongly considered that Gary s retirement did not fall within the guidance and therefore that capital treatment did not apply. Many also considered that HMRC would not give clearance where any shares are retained, though some did appreciate that retention of a small % for sentimental reasons might be acceptable. In general, while candidates were aware of SP2 /82 many did not interpret the guidance correctly. Many candidates did not give proper attention to the substantial reduction and connection tests because they only considered Gary s holding in isolation. Some did consider that the rights of associates should be taken into account but many wrongly assumed that Gary s son Peter was an associate and so concluded that these tests could not be met. Only a few candidates considered that Wendy s credit balance on DLA meant that the connection test might not be met and only a very small number advised repayment of the loan. With regard to identification of the shares disposed of allowing for the 250 shares acquired later, the majority of candidates did say that the shares disposed of would be identified with the earlier acquisition. Disappointingly, a number of candidates recited the rules for qualifying for entrepreneurs relief even though the question does clearly state that Gary had already been advised that ER would be due. Question 4

13 Generally answers to this question were poor. Most candidates identified the opportunity for roll-over relief but very few addressed the potential for hold-over relief. Where this was noted, it was not well explained. Many candidates failed to pitch the letter to an intelligent lay professional and simply listed out a number of unconnected technical terms. Many candidates were unable to correctly calculate the capital gain arising on the sale of the property with a large number adding back the expenditure on which capital allowances had been claimed. Simply stating the words you will need to meet the pooling requirement or fixed value requirement with no clear explanation of what these terms mean is not sufficient to obtain marks in an advice letter to a client. Question 5 Again this question was answered fairly poorly A remarkable number of candidates wrote at length on the possible uses of terminal loss reliefs on the cessation of the partnership, despite there being no indication of such losses in the question and an explicit statement that it was an established successful partnership. Similarly, some candidates wrote up to two and a half pages on the details of s162 relief. Whilst in a briefing note to a partner it may be appropriate to make reference to the relief the question clearly states that the partners wished to retain the property and would therefore not qualify for s162. Question 6 A reasonable number of candidates approached this in a systematic way. 50% of the marks could be gained simply by listing out the possible uses of a trading loss and explaining the basic provisions of loss carry back. Candidates who failed to identify the need to restrict any sideways loss relief in 2014/15 scored very badly as this meant they did not consider either current year relief, carry forward or offset against capital gains. Very few candidates were able to calculate correctly the adjusted net income figure in order to demonstrate the sideways loss relief restriction. Whilst this would have lost one mark in this question it is essential that future students understand the concept of adjusted net income as this is critical in the calculation of a number of income related reliefs and particularly entitlement to the new savings income relief. A reasonable number of candidates were aware of the capacity to offset trading losses against capital gains but only one correctly calculated the interaction with brought forward capital losses. Taxation of Individuals Advisory General Comments

14 The approach to this paper was mixed. One of the skills required of candidates is to apply the tax rules to specific situation. Too often candidates waste time detailing everything they know about an area. No client would thank you for just telling them everything you know about the subject area without guiding them into which area is relevant to them. However, it was good to see a strong attention to detail and application of conditions on the numerical questions. Question 1 Rose A number of candidates failed to read the question properly and decided that 2,000 was the amount of Rose s capital gain rather than, as the question clearly stated, the tax due. It was mixed as to whether candidates correctly spotted that Rose s late payment interest ran from 31 January even though her actual filing date fell on the later date of 27 March. Clive There were many good answers about Clive s exposure to penalties for careless behaviour and good knowledge that making an unprompted disclosure within 12 months would most likely result in this penalty being reduced to nil. Only a handful of candidates correctly noted that Clive would not have the 5% surcharge penalty because he paid the tax on the same day he amended the return. Chloe Many candidates said that no penalty was due on the incorrect reduction of payments on account but credit but failed to say that this is because of an assumption that the payments were not deliberately or knowingly reduced incorrectly. Robert Many candidates fell down on Robert because no calculations were provided despite the requirement stating that calculations were required. There also seemed to be a widespread and fundamental misunderstanding about how late payment surcharge penalties are calculated with lots of candidates confusing it with the calculation for late filing penalty when the failure has continued beyond 6 or 12 months. Question 2 Most candidates correctly identified that the value shifting provisions of s29 TCGA 1992 applied here, but very few correctly identified that the value of the deemed proceeds is based on the amount of value passing into Andrew s shares rather than the value passing out of Edward s shares. There was mixed knowledge about the application of Entrepreneurs Relief (ER) to the value shifting transfer with a good number of candidates saying it just didn t qualify because it was not an actual disposal. Others failed to consider ER at all. Many candidates did, however, consider gift relief and the relevant marks were given for mentioning either ER or gift relief. There were some good answers on PPR but some candidates believed that as no rent had been charged by Edward for the use of the basement there was no need to time apportion the gain because PPR relief was allowed in full. Only some candidates correctly realised that the final 18 months of ownership could be exempted in full.

15 There were a lot of good answers to the sale of rights and Forest shares. Although a number of candidates, even those that got the calculations correct, did not mention the small proceeds rule and that the sale of the rights nil paid was outside of this rule. There was some good recognition of the order of setting of losses (against non ER gains first) and the preservation of losses by only claiming them to bring the chargeable gain down to the annual exempt amount. Question 3 This question was not well answered in general, with a number of candidates missing it out altogether. The question asked for calculations with explanations, but some candidates gave no calculations at all. Many candidates mentioned that 2015/16 would be a split year and then did not split Henrik s income in their calculations. A number of candidates added together all of Henrik s income for the year and then all of the remittances on top and calculated the tax due on the total. Many candidates did not mention either the remittance basis or overseas workday relief and simply calculated tax due on the total income for the year. On Astrid, candidates grossed up her overseas interest and seemed confused by the way the automatic remittance basis worked with the personal allowance for people with overseas income of less than 2,000. Question 4 Overall, a reasonable attempt was made by most candidates on this question. A number of candidates confused childcare vouchers with the high income child benefit charge and advised that the tax benefit would be clawed back if income exceeded 50,000. Many candidates missed out the section relating to working from home costs. Those that did answer were often confused with claims that a self-employed person could make for use of home. This part of the question was very poorly answered. Question 5 Most candidates answered this question well. A lot of candidates wasted time calculating the unused pension allowance for 2013/14 and 2014/15, because they were not aware it was first in first out for any unused allowance brought forward. If they had been, they would have realised once they had calculated the unused amount for 2012/13 that there was sufficient allowance available to cover the excess in 2015/16. This meant any unused amounts from either 2013/14 or 2014/15 were irrelevant. Others were too vague to gain full marks, making general comments such as "there is sufficient unused allowance brought forward".

16 The better candidates identified there was a parental settlement for the Clox dividends for Chloe and as a result were able to correctly calculate the total dividends taxable on Mr Allan in 2015/16. Some candidates lost marks by getting confused as to what is covered by the wear and tear allowance and what is a genuine repair and therefore an allowable deduction. The candidates who scored best in this question really focused on the details, such as the fact the loss from the shares in Bema Ltd was not eligible to be set against income under s.131 ITA 2007, as the question outlined that Mr Allan had not originally subscribed for the shares. This meant it was not necessary to consider whether it was a qualifying company, as without being the original subscriber this was irrelevant to whether a claim could be made. It was disappointing that some candidates did not know how to treat the personal pension contributions, either failing to gross them up for basic rate tax or deducting them from income, rather than extending the basic rate band. Question 6 A sizeable number of candidates did well on this question, demonstrating their knowledge when it comes to the income tax and CGT issues around different types of leases. In particular, the answers for The Plaza and Oak Cottage were very good. The majority were able to correctly split out the income and capital elements for the lease on The Plaza, then calculate the base cost to arrive at the capital gain for the year. Common areas where marks were lost on Oak Cottage included missing the one month's worth of rent taxable on Sue in 2015/16. A large number of candidates made the mistake of believing it was a qualifying asset for gift relief, just because it had been let out at a commercial rent. Some candidates thought lettings relief applied on Oak Cottage, even though there was no PPR applicable, as Sue had never occupied the property as her main residence. For Bay House, some candidates struggled to identify the years remaining at the grant of the sub-lease and correspondingly the years remaining at the expiry of the sub-lease. The better candidates identified that deducting the amount charged to property income could not create a capital loss, merely that it reduced the gain to zero. The majority of candidates successfully identified that Whitelands was the sale of a short lease, but that the original lease at the date of purchase had more than 50 years to run and so 100 was the relevant percentage from the depreciation table. However, the most common error made was that it was the sale of a long lease from a long lease, with candidates simply deducting the legal fees and total base cost as if it were a basic CGT calculation. Advisory Inheritance Tax, Trusts and Estates General Comments This was a strong sitting with a high percentage of candidates scoring consistently well across the paper. Some areas of weakness were identified especially in the area of estate taxation (a

17 common feature seen in previous years) but also easy marks were lost through failure to read the requirements of the question. Question 1 The first two parts of this question dealt with the Income Tax and Capital Gains Tax (CGT) of an A&M trust in which two of the four beneficiaries had a qualifying interest in possession (QIIP). These were answered well by most candidates with high marks awarded. Some candidates failed to recognise the QIIP interest treating the entire trust as discretionary thus applying incorrect Income Tax rates. Other common errors included the incorrect deduction of net expenses from discretionary income, overlooking the standard rate band and the failure to exclude the notional dividend tax credits from the tax pool. Weaker candidates also struggled with the R185 entries for the IIP. The CGT element suffered from rushed calculation of Private Residence Relief (PPR) with incorrect numerators and denominators in their PPR fractions. Easy marks were missed by many candidates failing to identify the correct payment dates. The second part of the question looked at the FA 2006 changes to the Inheritance Tax (IHT) treatment of the trust from 6 April 2008 and required candidates to provide a formula for calculating the principal charge arising on the upcoming ten year anniversary. Albeit most candidates failed to recognise that the value of the QIIPs should be taken into account at their initial value, stronger candidates tailored the general formula to the question particulars whilst weaker candidates answered in more general terms. Again easy marks were lost by failing to identify the need to complete form IHT100 and the due dates for form submission and IHT payment. Question 2 This question looked at IHT lifetime planning and the availability of Agricultural Property Relief (APR) and Business Property Relief on the various assets. CGT implications were also in point. This question was poorly answered by the majority of candidates but exceptionally well answered by a few. Poorer candidates failed to produce an IHT calculation on Nicholas s presumed first death and missed out on easy marks. Assumptions were made which would have been proven unfounded had the initial calculations been performed, for example, that there was unused nil rate band available on Nicholas s death to be utilised in calculating the IHT on Sharon s subsequent death. Many candidates dealt with the G N Noden Will Trust incorrectly; some failed to recognise that it was a qualifying interest in possession (QIIP) and therefore to be taxed as part of Nicholas s estate and others assumed that it would pass to Sharon on Nicholas s death despite the question clearly identifying Nicholas as the sole life tenant and Gerald as the remainderman. Some candidates failed to identify that a lifetime termination in favour of Gerald would be treated as a Potentially Exempt Transfer (PET), but rather viewed it as a chargeable lifetime transfer (CLT). This had a knock on effect for CGT with some candidates incorrectly commenting on the availability of general holdover relief (S.260 TCGA 1992) rather than business holdover relief (S.165 TCGA 1992). Candidates lost out on marks for failing to consider the potential liabilities of the trustees - IHT in the event of a failed PET and CGT in the event that the trust assets were released to Gerald without a joint holdover election being

18 signed beforehand. The farm cottage also caused some confusion with weaker candidates failing to apply APR to the same. Better candidates recognised that the Noden Discretionary Trust was an excluded settlement but lost marks for not citing any or all of the three general conditions for the same. Question 3 This question dealt with Deeds of Variation (DOV), settlor interested trusts, parental settlements and disclaimers and it was generally well answered. Candidates displayed sound knowledge of Deeds of Variation with most scoring high marks for this part of the question. Better candidates also scored well in relation to settlor interested trusts and parental settlements however most candidates seemed unfamiliar with disclaimers and this section in particular was poorly answered by all but a few outstanding candidates. Question 4 This question examined business property relief (BPR) for a holding company. Most candidates were comfortable with the BPR basics but for the weaker candidates there was a tendency to write everything they knew about BPR without applying it to the facts of the question. Candidates were happy with the look through concept to the subsidiaries, but after stating whether or not the subsidiary would qualify for business property relief very few candidates then related it back to the holding company or asked for pertinent further information. In relation to the subsidiaries, candidates were comfortable with the concept of excepted assets but too few candidates knew whether an overseas company would qualify for BPR. Question 5 This was a question on post mortem reliefs. The calculation parts of the question were generally well done, with the tricky part being dealing with the rights issue on the shares. A disappointingly large number of candidates failed to read the question which specifically asked whether or not the reliefs should be claimed and thus lost marks as a consequence. The interaction between the land relief and the related property relief on the family home was only managed correctly by the better candidates. Further, there was widespread confusion about whether the joint tenants deduction had been given originally in the death calculation (which was not the case as the deceased s wife was the joint tenant). Question 6 This was relatively straightforward IHT death calculation, with explanations needed for full marks. The question was not specific about who had inherited from the deceased s first wife but candidates were given marks for stating the assumption and then performing the calculations. The transferable nil rate band, with cap, was generally well understood although its application to lifetime transfers that become chargeable on death was less well done. A large number of candidates did not identify that gifts to pre March 2006 Interest in Possession

19 Trusts were potentially exempt, rather than chargeable transfers and this had a knock on effect on later calculations. Whilst candidates were given marks for those latter calculations, it did mean they were more difficult than they would have been had the PET been correctly identified. Similarly a large number of candidates performed unnecessary calculations to prove which of the transfers gave the higher change under the gift with reservation rules but the facts made it obvious which one would give the higher charge. The charity donation and its effect on the IHT rate was generally identified, although the number of candidates who both identified the effect and calculated the single grossing correctly was small, with most doing either one or the other. The woodland relief was identified but the explanations of the relief were weak. Advanced Corporation Tax Question 1 This question was a computational question with an emphasis on ceasing to trade and in particular terminal loss relief. Candidates performed well on the first half of the question with almost all candidates showing a good understanding of the more general computational adjustments which were required. In addition, candidates had a good understanding of the impact of ceasing to trade on the capital allowances computation. The main area candidates had difficulty with in this section was the computational rules for a long funding lease. The second half of the question focused on terminal loss relief for a short period of account. Candidates knowledge around the detailed computational rules for terminal loss relief was, in the main, insufficient. Rather than using the earliest loss first, the majority of candidates incorrectly accumulated the terminal losses, which were available from two different accounting periods, allocating them on the basis that they all arose in the earlier period. In addition, it was common for candidates to not utilise s37 claims first, only allocating terminal losses to trading profits or seeking to utilise charitable donations before terminal loss relief. Question 2 This question tested candidates understanding of research and development tax relief for small and medium sized companies. In general candidates performed well on this question. Candidates had a good understanding of the definition of research and development, the benefits of claiming and the types of costs that would qualify. However, a number of candidates incorrectly applied the test to define a SME as set out in the EC Recommendation therefore concluding that the company was large. In a number of cases, although the candidate had determined that the company was a SME, they did not go on to apply the SME test correctly. Very few candidates set out the detailed conditions within s1046 and s1052 CTA 2009 and therefore the majority of candidates failed to pick up available marks. Candidates should remember to make use of the legislation in the examination.

20 Question 3 This question tested chargeable gains computation rules for a group of companies with some consideration of group relief. In general, candidates performed strongly on this question. The majority of candidates correctly identified that SSE would not apply to the sale of the shares and calculated the gain on the sale of the shares. Almost all candidates identified that a degrouping charge would arise and noted correctly that this would be added to the sale price of the shares. Only a handful of candidates recognised that a relief under s179za would be available if a claim was made to reduce the degrouping charge. Instead a number of candidates suggested moving the degrouping charge into another group company with very few of these candidates explaining in what circumstances this might be beneficial. Only a small number of candidates discussed the fact the companies were also in a group relief group and that the sale would impact the use of these losses. Question 4 This question tested a number of technical areas. However, a number of candidates struggled on all aspects of the question, and hence scored badly. The overarching theme was the calculation of the chargeable gains and profits from loan relationships in the context of foreign currency. While this only covered the basic aspects of the foreign currency rules, many candidates had difficulty with this. For example, a number of candidates incorrectly looked to tax an exchange gain on the share capital under the loan relationship rules. Further, a sizeable minority of candidates did not identity that distributions during liquidation should be treated as capital in nature (s1030 CTA 2010). Few candidates were able to correctly calculate the chargeable gain from the part disposal. A number explained the issues of a UK company being in liquidation, without identifying that Berlin GmbH was not a UK resident company. Most candidates identified transfer pricing as being in point, with the best-scoring candidates setting out concisely the legislative conditions for the rules to apply. Many candidates did not appear to realise that London Ltd was lending to New York Inc., and so erroneously detailed issues such as UK withholding tax and the debt cap rules to restrict the deductibility of interest payments. Question 5 This question tested the administrative issues of setting up a company in the UK, eligibility for capital allowances and the intangible fixed asset rules. On the whole, candidates scored strongly on this question. The majority of candidates set out points around the duty to notify HMRC, filing deadline and tax payment dates. A large number of candidates failed to make all the basic points - the company is subject to corporation tax at 20%, the profits of the trade should be calculated in accordance with accounting principles, the cost of renting is deductible, etc.