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ACCA TX: Taxation Practice Questions
45 original practice questions for ACCA Taxation (TX), written for this site with full explanations. They are original questions in the style of the syllabus - not taken from any official exam. They deliberately test mechanics and concepts rather than year-specific rates, allowances and thresholds, so pair them with the current Finance Act figures and confirm details against ACCA's official materials.
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Which statement best describes the overall structure of a personal income tax computation?
Correct answer: A. The computation follows a set order: aggregate income, deduct qualifying reliefs to reach net income, then deduct the personal allowance to reach taxable income, to which the rates are applied. Cash received is not the measure of income - exempt receipts and non-cash items break that logic. The allowance is a deduction, not an addition, and income-based reliefs reduce income, not the calculated liability. -
Why does the income tax computation analyse income into non-savings, savings and dividend categories?
Correct answer: B. Different categories of income attract their own rates and allowances and are taxed in a prescribed sequence, so misclassifying income changes the liability. All categories are reported to the same tax authority, so option A is wrong. Savings and dividend income are within the charge to tax, so options C and D are wrong - they may benefit from category-specific treatment but are not exempt as a class. -
Which factor most strongly suggests that an individual is an employee rather than self-employed?
Correct answer: C. Control over the manner of working plus a requirement of personal service are classic indicators of employment. Providing substantial equipment, bearing financial risk and profiting from efficiency all point towards self-employment, as does working for a broad range of customers on an invoiced basis. The distinction matters because it determines how income is taxed and which national insurance rules apply. -
Which statement best describes how the personal allowance operates for very high earners?
Correct answer: D. Above an income limit the allowance is tapered away, and once income is high enough it is lost entirely - which also creates a high effective marginal rate in the withdrawal zone. It is never increased for high earners, it is a general deduction rather than one tied to dividends, and although a limited transfer between spouses exists in defined circumstances, there is no automatic full transfer for high earners. -
Which of the following types of income is generally exempt from income tax?
Correct answer: B. Income and gains generated inside an ISA wrapper are exempt, which is the account's core tax advantage. Rental income is taxable property income, a cash bonus is taxable employment income subject to PAYE, and a sole trader's profits are taxable trading income. Recognising exempt items matters because they are excluded from the computation entirely rather than included and then relieved. -
In adjusting accounting profit to arrive at taxable trading profit, which treatment is correct?
Correct answer: A. Accounting depreciation is not deductible for tax, so it is added back and replaced by capital allowances, the standardised statutory equivalent. Leaving depreciation in would let each business set its own tax relief through its depreciation policy. Capital allowances are a deduction, not an addition. Private expenditure fails the requirement that expenses be incurred for the purposes of the trade, so it is added back, not allowed. -
How does a qualifying Gift Aid donation achieve tax relief for a higher-rate taxpayer?
Correct answer: C. Gift Aid works through band extension: the charity reclaims basic-rate tax on the grossed-up gift, and the donor's basic-rate band is stretched by the gross donation so more income is taxed at the lower rate. It is not a payroll deduction (that is a separate payroll giving mechanism), the charity keeps the reclaimed tax rather than refunding the donor, and the personal allowance is not doubled by donating. -
Why does the order in which income is taxed (non-savings first, then savings, then dividends) matter in the computation?
Correct answer: D. Income is stacked in a statutory order, and each slice absorbs the bands as it is layered on, so the sequence determines whether savings or dividend income falls into lower or higher bands and how category-specific nil-rate amounts interact. No income is ignored because of the ordering, the total income figure is unchanged by it, and it is emphatically not cosmetic - reordering would produce a different liability in many cases. -
An individual makes a trading loss. Which statement best describes the relief available in principle?
Correct answer: D. Trading loss relief offers choices: a claim against total income of the loss year and/or the prior year, with carry forward against future profits of the same trade as the default for unrelieved amounts. Carry forward is therefore not the only route, and when carried forward the set-off is restricted to the same trade, not all income. Losses are not wasted absent cessation, and relief against gains is only a limited extension after an income claim, not the primary route. -
Corporation tax is charged on a company's:
Correct answer: B. Companies are taxed on taxable total profits: adjusted income from trading, property, investments and other sources, plus chargeable gains. Accounting profit is only the starting point and is adjusted for disallowable items and capital allowances. Dividends paid are an appropriation of profit after tax and are not the tax base, and turnover ignores expenses entirely so it could not be a sensible measure of profit. -
Which statement about company residence for corporation tax is correct?
Correct answer: A. Residence follows two alternative tests: place of incorporation, or the place where central management and control (broadly, top-level strategic decisions) is exercised. Shareholder residence is irrelevant to the company's own status. Trading location and customer location do not determine residence either - a resident company can trade worldwide, and selling to UK customers does not by itself make a foreign company resident. -
For corporation tax purposes, profits are computed by reference to:
Correct answer: C. Companies are assessed for accounting periods, which usually coincide with the period for which they prepare accounts, so corporation tax follows the company's own reporting cycle. The fiscal year used for individuals does not govern company computations. There is no calendar-year requirement, and the period is determined by statutory rules linked to the accounts, not by ad hoc director choice at filing time. -
Which statement about dividends in a company's corporation tax computation is correct?
Correct answer: B. Most dividends a company receives fall within exemption rules, and dividends it pays are a distribution of post-tax profit, so neither normally enters taxable total profits. Treating dividends paid as deductible would let companies eliminate their tax base by distributing. Dividends received are not trading income of an ordinary company, and distributions have nothing to do with the chargeable gains computation. -
What is the purpose of capital allowances in a corporation tax computation?
Correct answer: D. Capital allowances are the statutory substitute for depreciation: they spread relief for qualifying capital spending on a uniform basis so identical assets attract identical relief whatever depreciation policy a company chooses. Accounting depreciation itself is disallowed, which rules out option A. Land generally does not qualify for allowances, and allowances are set by legislation, not granted at official discretion. -
A company prepares one set of accounts for a period longer than twelve months. How is this dealt with for corporation tax?
Correct answer: A. An accounting period for tax cannot exceed twelve months, so a long period of account is divided into a first period of exactly twelve months and a short second period, with profits allocated between them under set rules. A single long period is therefore not possible, the split is fixed by law rather than chosen, and no part of the period escapes tax - both resulting periods are fully chargeable. -
Which statement best captures the concept of group relief for corporation tax?
Correct answer: A. Group relief lets a qualifying group use one member's losses against another member's profits of the corresponding period, recognising the group's economic unity while each company still files its own return. There is no automatic consolidation into a single taxpayer. Profits are not freely shifted between members - relief works through surrendering specified losses - and a shared director creates no group link; the test is based on a sufficiently high shareholding relationship. -
How are a company's interest costs on borrowings generally treated for corporation tax?
Correct answer: C. The treatment follows the purpose of the borrowing: trade-purpose interest is a trading deduction, while non-trade debits and credits are pooled and dealt with separately in the computation. Interest is clearly deductible in principle, so option B fails. It is set against income, not chargeable gains, and the identity of the lender is irrelevant - loans from banks, group companies or individuals can all give rise to relief if the purpose tests are met. -
A charge to capital gains tax generally requires:
Correct answer: B. CGT needs all three elements: a chargeable person, a chargeable asset and a chargeable disposal. Unrealised increases in value are not taxed because no disposal has occurred. Gifts are disposals - the donor is generally treated as disposing at market value - so cash sales are not the only trigger. There is no rule limiting the charge to assets held for under a year; holding period does not determine chargeability. -
Which of the following assets is typically exempt from capital gains tax?
Correct answer: D. Motor cars are exempt assets, so gains on them escape CGT (and losses are not allowable). A let residential property enjoys no residence relief because it is not the owner's main home, so it is fully chargeable. Directly held quoted shares are chargeable assets - only shares inside tax-favoured wrappers escape. Valuable antiques are chattels that remain chargeable when their value is significant, so they cannot be assumed exempt. -
When an individual makes a gift of an asset, or sells it to a connected person, the disposal proceeds for CGT are normally taken as:
Correct answer: C. Market value is substituted for actual proceeds where a disposal is not a bargain at arm's length, which covers gifts and transactions with connected persons. Using nil proceeds would create artificial losses and let value pass out of charge untaxed. No-gain-no-loss treatment is a special rule reserved for defined situations such as transfers between spouses, not the general rule, and a privately agreed figure cannot override the statutory market value rule. -
On a part disposal of an asset, the allowable cost to deduct is:
Correct answer: C. Cost is split between the part sold and the part kept using the value-based apportionment formula, so the gain reflects only the slice disposed of; the unused cost remains attached to the retained part for the future. Deducting the whole cost would understate the gain and leave nothing for later disposals, deducting nothing would overstate it, and the retained part's market value is used in the apportionment fraction but is not itself the deductible cost. -
How are an individual's capital losses relieved?
Correct answer: A. Capital losses first offset gains of the same year and any unused balance carries forward to future gains, where brought-forward losses can be used more flexibly to preserve the annual exempt amount. Capital losses cannot normally be set against income such as salary - the loss stays within the capital gains regime. There is no cash refund mechanism for capital losses, and they do not expire; they carry forward indefinitely until used. -
Which statement best describes private residence relief?
Correct answer: D. The relief exempts the gain on the taxpayer's own home, in full where it was the main residence throughout (certain final and deemed occupation periods also count) and proportionately otherwise. It does not cover residential property generally - buy-to-let gains are chargeable, which disposes of options A and B. Temporary absences do not automatically break the relief, as specific deemed-occupation rules exist, so literal continuous presence is not required. -
Rollover relief for the replacement of business assets works by:
Correct answer: B. Rollover relief is a deferral, not an exemption: the gain on the old asset is rolled into (deducted from) the cost of the new qualifying asset, producing a bigger gain when that asset is eventually sold without further relief. Because the gain reappears later, option A overstates the benefit. The gain stays within the capital gains regime rather than becoming income, and the relief operates through the asset's base cost, not by shifting the gain to another person. -
Where gift holdover relief applies to a gift of a qualifying business asset:
Correct answer: B. Holdover relief defers the donor's gain by reducing the donee's acquisition cost below market value, so the postponed gain is taxed on the donee's eventual disposal. A market-value base cost with no consequences would describe the position without the relief claim, not with it. The donor pays nothing at the time of the held-over gift rather than paying at a lower rate, and as a deferral the relief never makes the gain permanently exempt. -
Under the VAT system, a registered trader normally pays over to the tax authority:
Correct answer: C. VAT is collected in stages: each registered trader accounts for output tax on sales, deducts recoverable input tax on business purchases, and pays (or reclaims) the difference. Paying gross output tax would ignore the credit mechanism that prevents tax cascading, while paying only input tax reverses the logic entirely. VAT is transaction-based, so a flat fee linked to headcount has nothing to do with how the tax operates. -
Who ultimately bears the economic burden of VAT in a typical supply chain?
Correct answer: A. Registered businesses charge VAT onward and recover the VAT they suffer, so the tax flows through them and settles on the final consumer, who has no recovery right. The manufacturer recovers its input tax, so it is not the bearer. A registered retailer likewise recovers input tax on purchases, so option C misstates the mechanics. The tax authority is the recipient of the revenue, not the party bearing the burden. -
What is the key difference between making zero-rated supplies and making exempt supplies?
Correct answer: D. Zero-rating is still a taxable supply, just at a nil rate, so full input tax recovery is preserved and such traders often receive repayments. Exemption takes the supply outside the credit mechanism, so related input tax is a real cost. That asymmetry is a major practical difference, refuting option A. Exempt traders charge no VAT at all, so option B is wrong, and zero-rated traders not only can register but generally benefit from doing so. -
Which statement best describes the VAT registration rules for a business?
Correct answer: A. Compulsory registration is triggered by taxable turnover exceeding the statutory threshold (tested historically and prospectively), while smaller businesses can register voluntarily to recover input tax or appear more established. Because a threshold exists, neither universal day-one registration nor permanent optionality is correct. Registration attaches to any person making taxable supplies - sole traders and partnerships register just as companies do. -
Why do the tax point (time of supply) rules matter?
Correct answer: B. The tax point allocates a supply to a return period and can also determine which rate applies if rates change. The basic tax point arises on delivery of goods or completion of services, but an earlier invoice or payment creates an earlier actual tax point, and a prompt invoice afterwards can move it later. The rules concern timing for VAT, not the customer's income tax, they do not classify the liability of a supply, and they apply to domestic supplies generally, not just imports. -
Input tax is generally not recoverable on which of the following?
Correct answer: D. Certain input tax is blocked by rule even when the cost is a genuine business expense: entertaining customers and cars with private availability are the classic examples, with narrow exceptions such as entertaining overseas customers or cars used exclusively for business. Stock for resale, services consumed in making taxable supplies and professional fees are all core recoverable inputs, which is precisely why the blocked categories stand out. -
A business makes both taxable and exempt supplies. How is its input tax treated?
Correct answer: C. This is partial exemption: directly attributable input tax follows its supplies, the residual pot is apportioned, and only the taxable share is recovered, unless the exempt input tax is small enough to fall within de minimis limits, in which case everything is recoverable. Automatic full recovery ignores the exempt activity, zero recovery ignores the taxable activity, and making exempt supplies is no ground for deregistration while taxable supplies continue. -
Under the cash accounting scheme, an eligible business:
Correct answer: C. Cash accounting substitutes a receipts-and-payments basis for the invoice basis, so output tax is never paid over on money not yet collected - which is also why a customer default needs no separate bad debt claim; the tax was simply never due. Option A describes the normal invoice basis the scheme replaces. Credit sales remain fully taxable once paid, so nothing escapes VAT, and the scheme changes the timing of accounting, not the way invoices are issued. -
On cash earnings from employment, national insurance contributions are payable by:
Correct answer: B. Employment earnings attract two parallel charges: a primary contribution deducted from the employee and a secondary contribution payable by the employer on top of gross pay. Neither single-party answer captures this dual structure, and the employer's share is a genuine additional employment cost rather than a deduction from wages. The self-employed have their own contribution rules, but that regime exists alongside, not instead of, the charges on employment. -
Which statement about the deductibility of national insurance contributions is correct?
Correct answer: D. For the employer, secondary contributions are a normal cost of employing staff and reduce taxable business profits like wages do. The employee gets no equivalent relief - contributions are deducted from pay but do not reduce taxable income, so option A fails. Employer contributions are a liability of the business itself, not of the directors personally, and option C is wrong because the employer-side deduction plainly exists. -
Which best describes the scope of national insurance contributions?
Correct answer: A. National insurance targets earned income: pay from employment and profits from self-employment. Investment returns sit outside the charge, which is one reason extracting profits as dividends rather than salary changes the overall burden. It is therefore narrower than income tax, refuting option B, and option C inverts reality. The income tax personal allowance is part of a different tax with its own thresholds, so option D confuses the two systems. -
How do self-employed individuals pay national insurance?
Correct answer: B. A self-employed person's contributions are profit-based and dealt with through the self assessment cycle together with income tax, so there is no separate employer-style payroll process. Customers are not employers and operate no PAYE on a trader's invoices. The self-employed are firmly inside the system - their contributions build entitlement to certain state benefits - and the employer (secondary) class belongs to employment relationships, not to sole traders paying on their own profits. -
How are most taxable non-cash benefits, such as a company car, treated for national insurance?
Correct answer: C. Most taxable benefits in kind fall outside the employee's contribution charge but are picked up by a separate employer-only class calculated on the taxable value of the benefits. The employee therefore does not pay on a company car the way they would on cash salary, which rules out options A and D. Option B is wrong because the employer-side charge is real - benefits are cheaper than cash for the employee's contributions, but not free of the levy altogether. -
What is the essence of the self assessment system?
Correct answer: D. Self assessment shifts the compliance burden to the taxpayer: file the return, self-calculate (or let the system calculate) the liability, and pay by the statutory dates, subject to the authority's power to enquire and correct. Pre-calculation by the authority for everyone is the opposite model, payment obligations arise from the statutory timetable rather than from a demand, and employers only operate withholding on their own payroll - they do not assess individuals' overall tax. -
PAYE is best described as:
Correct answer: D. PAYE is withholding at source on employment income: the employer applies codes to deduct tax and contributions from each payment of wages, remits them, and reports in real time, meaning many employees never need to file a return. It has nothing to do with corporation tax or VAT, which are separate regimes with their own collection rules, and it is a compulsory statutory mechanism, not a voluntary savings arrangement. -
Which statement best describes payments on account under self assessment?
Correct answer: A. Payments on account spread collection: instalments estimated from the prior year's liability are paid during and shortly after the tax year, then trued up by a balancing payment or repayment when the return finalises the figures; a claim can reduce them if income has fallen. They are compulsory where the conditions are met, not optional gestures. They are a feature of personal self assessment, and because they derive from each taxpayer's own prior liability they are anything but uniform. -
Which statement about record keeping under self assessment is correct?
Correct answer: B. The duty is to keep records adequate to make a complete and correct return, with longer retention required for business records because enquiries and capital computations reach further back. Destroying records at filing would defeat the enquiry system, which depends on evidence surviving after submission. The obligation covers individuals, partnerships and companies alike, and the authority holds what is reported to it, not the underlying invoices and workings - those remain the taxpayer's responsibility. -
Which statement best describes the tax authority's powers to check a filed return?
Correct answer: C. The system balances finality against protection of the revenue: routine enquiries must start within a set window after filing, after which the authority needs discovery grounds, and the further back it wants to go, the worse the taxpayer's behaviour must have been. Unlimited reopening would destroy certainty, absolute finality would invite evasion, and enquiries are a statutory power exercised by notice - taxpayer consent is not required. -
How are penalties for an inaccurate tax return typically structured?
Correct answer: A. The penalty regime scales with culpability: nothing for errors despite reasonable care, more for carelessness, more again for deliberate error, and most for deliberate error with concealment, with reductions for the quality and timing of disclosure. A flat penalty would ignore culpability entirely. Careless errors are penalised too, not just deliberate concealment, and option D inverts the regime - reasonable care is the safe harbour, not the most punished category. -
Which statement about interest on late paid tax is correct?
Correct answer: D. Interest is automatic and compensatory: it reflects the time value of tax paid late, accruing from the due date without any need for a notice or warning. Because its purpose is restitution rather than punishment, it is not discretionary and an apology does not remove it. Penalties serve the separate purpose of sanctioning behaviour, so interest and penalties can both apply to the same late or inaccurate payment - one does not displace the other.
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