The AAT Indirect Tax unit on AQ2016 was one that students did well on, in fact in the latest set of AAT national pass rates it had the second highest pass rates at level 3 at 82.9%.
On Q2022, Indirect Tax was replaced with the Tax Processes for Businesses unit. The pass rate for this unit, however, has dropped dramatically to 52.9%. The main difference between Indirect Tax and Tax Processes for Businesses is the addition of Payroll. This has been highlighted in the interim Examiner’s report as being an area where students are struggling.
Those who know me are aware that I am a massive fan of tax! I believe that payroll is a great addition to the qualification. After all, no matter what you do for a living you will pay tax and understanding this, benefits everyone.
There are several calculations students may be asked to make, for example, calculating the wages cost to the employer. This is not as simple as adding up what the employees get paid. If an employer offers someone a job paying £25,000 it will cost the employer more than this, as the employer will also have to pay employer pension contributions and employer National Insurance contribution.
Note that you will not have to calculate these figures as this will come in later at level 4, but you will need to know what to add or what not to add. There is one additional part to this calculation which, in my experience, catches many out and that is: the employment allowance. This is an allowance the government introduced to reduce the cost of taking on your first employee. Students may be given a figure for the employment allowance and they will need to know to take this off the cost of wages to the employer as well as the amount owing to HMRC.
Another figure students might need to calculate is the employee’s net pay, which is probably the figure most students are interested in! Students need to know which deductions are to be taken off a person’s gross salary to leave them with their net pay. They also need to know which are compulsory and which are voluntary. Employees have to pay income tax (PAYE) and they will also have to pay their own National Insurance Contributions, their own pension contributions and may have to make student loan repayments. Employees may also choose to make charitable donations under payroll, repayments to a loan they have taken out from their employer and maybe the payment of trade union fees. Once these are all taken off the employee’s gross salary, it will leave the employee with their net salary, i.e. the amount they receive in their bank to spend.
One thing that has not changed in Tax Processes for Businesses from Indirect Tax is the availability of a large amount of information in the reference material. This is information that you will have access to in the exam. Therefore, make yourself familiar with it but you do not need to spend too much time on it as the information is available in the exam.
An example of this is Task 8 in the first AAT sample assessment. Here you are asked what date the payment to HMRC should be made and you can see under section 23 of the reference material it should be made on the 22nd. A simple case of just looking the date up in the reference material saves time and avoids losing easy marks! Likewise, with penalties for late submission/payment, you do not need to learn these, just be aware they are in the reference material.
Full Payment Summary (FPS) and Employment Payment Summary (EPS)
Something that is mentioned in the reference material that students do need to know more about than is covered, is the difference between a Full Payment Summary (FPS) and an Employment Payment Summary (EPS). If you pay anyone in the payment period you MUST submit an FPS at the same time as, or before, you pay your staff. This informs HMRC who you are paying, how much they are being paid and how much in the way of deductions you are taking off them.
You only need to submit an EPS if there is anything out of the ordinary. For example, you are not paying anyone in that payment period, you want to reclaim some statutory payments such as maternity or paternity pay, or you are claiming back the employment allowance.
Practice, Practice, Practice
Another thing that has not changed from AQ2016 to Q2022 is that if you want to maximise your chances of success in this exam, the best thing you can do is attempt exam standard questions in the form of mock exams. When you do mock exams for this unit, you should do them with the reference material to hand as this same information will be available on the big day. The more you practice, the more likely you are to pass the exam.
AAT Mock Bank!
AAT mock assessments and resources are available for AAT level 2, 3 and 4 units. Online mocks offer the opportunity to attempt a full mock exam with model answers and detailed explanations.
If you have bought our AAT Online or Online Live package then these Mocks are already included.