ACCA Advanced Taxation (ATX) Practice Exam

How is the deemed salary for services provided by a Personal Service Company (PSC) to a small client calculated?

1. Net income from ENGAGEMENT - expenses related to the client

2. Amount received from relevant engagements minus employer's NICs

3. Amount received from relevant engagements less allowable expenses

4. Total income minus statutory 5% deductions, employer's NICs and expenses

The correct answer is: Total income minus statutory 5% deductions, employer's NICs and expenses

The deemed salary for services provided by a Personal Service Company (PSC) to a small client is calculated using the total income minus certain deductions, which include statutory requirements like the standard 5% deduction, employer's National Insurance Contributions (NICs), and allowable expenses. This approach reflects a comprehensive method of assessing income from the PSC's operations while acknowledging necessary expenses and contributions that would normally be associated with running a business. The statutory 5% deduction accounts for a margin that is presumed to cover the business costs that cannot be explicitly itemized, ensuring that the calculation is fair and realistic. Employer's NICs are also included as they represent a statutory cost incurred by the employer, which in this context is the PSC making use of its taxable income. By subtracting these elements from total income, the calculation arrives at a deemed salary that is considered a reasonable amount payable to the individual working through the PSC. This method prevents the manipulation of income reporting by associating the salary with actual earnings after considering essential deductions. This option captures the necessary elements that must be considered in determining the deemed salary, making it the appropriate selection.