ACCA Advanced Taxation (ATX) Practice Exam

What effect does claiming opening years loss relief have on an individual?

1. Increase tax liability

2. Repayment of income tax and class 4 NICs

3. Allows for future tax deductions

4. Establishes a tax-free status

The correct answer is: Repayment of income tax and class 4 NICs

Claiming opening years loss relief has the effect of providing a repayment of income tax and Class 4 National Insurance Contributions (NICs) previously paid. This relief allows individuals who have incurred losses in the early years of their business to offset those losses against their prior year’s income. Consequently, this can lead to a reduction in the tax liability for those years, resulting in a refund of taxes paid. This mechanism is particularly beneficial as it allows new business owners to recover some of the financial resources initially spent on establishing their business, thus improving cash flow during the critical start-up phase. By utilizing this relief, the individual effectively shifts the tax benefits to an earlier period when they had taxable income, leading to potential repayments of income tax and NICs that were previously paid based on that income. The other options do not accurately describe the immediate financial effect of claiming opening years loss relief. For example, while future tax deductions may be associated with other forms of loss relief, they do not reflect the direct impact of claiming relief in the opening years.