ACCA Advanced Taxation (ATX) Practice Exam

What is the consequence of reducing the POA to an amount that is less than half of the final agreed amount?

1. Additional interest charges may apply

2. A late payment fee is immediately charged

3. The individual will be fined for underreporting

4. The reduction is automatically denied

The correct answer is: Additional interest charges may apply

Reducing the payment on account (POA) to an amount that is less than half of the final agreed amount can result in additional interest charges. In taxation, the payment on account is an advance payment made towards an individual's tax liability for the current tax year based on their prior year's income. If this advance payment is reduced below a certain threshold, such as half of the total liability, it may indicate that the taxpayer has underpaid their expected tax, therefore leading the tax authorities to impose additional interest charges on the outstanding balance. This approach also serves as a deterrent against taxpayers intentionally underestimating their tax payments. Since the tax system relies on accurate reporting to ensure proper funding and compliance, reducing the POA can impact the overall tax calculations and obligations, resulting in financial penalties or additional interests. Other alternatives presented, like the imposition of a late payment fee or a fine for underreporting, do not directly address the specific consequence of reducing the POA as outlined in the scenario. Additionally, the automatic denial of the reduction misrepresents the operational procedure of tax authorities regarding POAs; they may charge interest rather than outright deny the reduction.