Free ICAEW ACA Tax Fundamentals Practice Questions

Sample Practice Questions

Try these 10 sample questions from the ICAEW ACA Tax Fundamentals practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1How does Making Tax Digital software support accuracy before an Income Tax return is submitted?

   1. A.It removes the need to check expense claims.
   2. B.It helps identify possible errors for correction.Correct answer: B
   3. C.It treats every bank receipt as taxable profit.
   4. D.It replaces the tax return with bank statements.

   Explanation: The official guidance states: "identify and avoid possible errors early, so you can check and correct them before sending your tax return". Early error detection supports accurate reporting; it does not remove checks or change the taxable profit rules.

   Reference: HMRC Benefits of Making Tax Digital — Take advantage of digital records

2. 2A sole trader files the relevant Self Assessment return on time. What is the minimum normal period for retaining the supporting business records?

   1. A.Five years after the relevant 31 January filing deadline.Correct answer: A
   2. B.Five years after the business first began trading.
   3. C.Six years after the date each invoice was issued.
   4. D.Twelve months after the tax return was submitted.

   Explanation: HMRC states: "You must keep your records for at least 5 years after the 31 January submission deadline of the relevant tax year.". The normal retention period runs from the submission deadline, not business commencement or each invoice.

   Reference: HMRC — how long to keep your records — How long to keep your records

3. 3What is the normal UK Income Tax treatment of income arising within a valid Individual Savings Account (ISA)?

   1. A.It is exempt from Income Tax.Correct answer: A
   2. B.It is always taxed as employment income.
   3. C.It is charged only when reinvested.
   4. D.It is subject to Corporation Tax.

   Explanation: HMRC states: "income from tax-exempt accounts, like Individual Savings Accounts (ISAs) and National Savings Certificates". The ISA exemption differs from employment taxation and company taxation.

   Reference: HMRC — income tax — Income not subject to Income Tax

4. 4An individual sells a personally owned private motor car at a gain. They are not trading in cars. What is the normal Capital Gains Tax treatment?

   1. A.Chargeable because cars are tangible movable assets.
   2. B.Chargeable because the seller realises an actual gain.
   3. C.Chargeable only if the proceeds exceed £6,000.
   4. D.Exempt because this is the individual's private car.Correct answer: D

   Explanation: HMRC states: "most personal possessions worth £6,000 or more, apart from your car". The private car is excluded; the personal-possession threshold does not remove that exclusion.

   Reference: HMRC — what you pay it on — What you pay it on

5. 5A company remains actively trading throughout an 18-month period covered by one set of accounts. Why must it normally prepare two Company Tax Returns for that period?

   1. A.Each return must cover exactly nine months of trading.
   2. B.Each Corporation Tax accounting period is limited to twelve months.Correct answer: B
   3. C.Each set of annual accounts must be accompanied by two returns.
   4. D.Each return must follow the tax year ending on 5 April.

   Explanation: The source states: "You must file 2 returns to cover the period of your accounts because your accounting period cannot be longer than 12 months.". An 18-month set of accounts spans more than the maximum Corporation Tax accounting period. The split is normally twelve months plus six, not two compulsory nine-month periods; two returns are not required for every set of accounts and corporate periods need not follow 5 April.

   Reference: HMRC — corporation tax accounting period — If your accounts cover more than 12 months

6. 6Which VAT classification normally applies to qualifying children's clothing sold in the UK?

   1. A.Zero-rated supplyCorrect answer: A
   2. B.Reduced-rated supply at 5%
   3. C.Standard-rated supply at 20%
   4. D.VAT-exempt supply

   Explanation: HMRC states: "Zero rate 0% Zero-rated goods and services, for example, most food and children’s clothes". Qualifying children's clothes are zero-rated. Reduced rating, standard rating and exemption are different classifications; zero-rating remains a taxable supply.

   Reference: HMRC — vat rates — VAT rates for goods and services — Zero rate

7. 7What is a stated business-planning benefit of sending quarterly updates under Making Tax Digital for Income Tax?

   1. A.A final assessment that cannot change at year end.
   2. B.A requirement to pay the entire annual bill quarterly.
   3. C.An updated in-year estimate of the likely tax bill.Correct answer: C
   4. D.An exemption from keeping underlying income records.

   Explanation: The official guidance states: "Every time you send a quarterly update, you’ll be able to see an updated in-year estimate.". An estimate assists planning and is not a final assessment, a new payment frequency or a records exemption.

   Reference: HMRC Benefits of Making Tax Digital — Stay on top of your tax throughout the year

8. 8A company's records concern only one completed financial year. No longer-retention exception applies. What is the normal minimum retention period?

   1. A.Five years after filing the Company Tax Return.
   2. B.Six years from the end of that financial year.Correct answer: B
   3. C.Six years from the company's incorporation date.
   4. D.Twelve months after settling the Corporation Tax.

   Explanation: HMRC states: "You must keep records for 6 years from the end of the last company financial year they relate to, or longer if:". With the stated exceptions excluded, the six-year clock runs from the relevant financial year end.

   Reference: HMRC — company and accounting records — How long to keep records

9. 9Which statement describes the State Pension for Income Tax purposes?

   1. A.It is excluded because it is paid by government.
   2. B.It is taxable income, subject to available allowances.Correct answer: B
   3. C.It is taxable only if paid into a company account.
   4. D.It is a capital gain when received each month.

   Explanation: HMRC states: "You pay tax on things like: money you earn from employment profits you make if you’re self-employed, including from services you sell through websites or apps - you can check if you need to tell HMRC about this income some state benefits most pensions, including state pensions, company and personal pensions and retirement annuities". State Pension is within taxable income; allowances may mean no tax is ultimately payable.

   Reference: HMRC — income tax — Overview — You pay tax on things like

10. 10Assume the annual exempt amount has been used and no disposal-specific relief applies. Which investment gain is exempt from UK Capital Gains Tax because of the asset type?

    1. A.A gain on UK government gilts.Correct answer: A
    2. B.A gain on ordinary shares held outside an ISA.
    3. C.A gain on a commercial investment property.
    4. D.A gain on a non-wasting antique sold for £20,000.

    Explanation: HMRC states: "You do not pay Capital Gains Tax on certain assets, including any gains you make from: ISAs or PEPs UK government gilts and Premium Bonds". Gilts are within the explicit exemption; the other assets are normally chargeable subject to their own rules.

    Reference: HMRC — what you pay it on — What you do not pay it on