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MIKE TRUMAN introduces the first of two planned articles on Application Note G, and stakes out a claim for a change to the law.
IT'S A RELIEF, in a sense, when something that you have been concerned might happen finally does. Ever since the issue of Application Note G to FRS 5 at the end of 2003, the line I have taken in lectures has been that service providers did have to recognise most of the unbilled fees 'on the clock' at the end of the year as income for that year.
MIKE TRUMAN introduces the first of two planned articles on Application Note G, and stakes out a claim for a change to the law.
IT'S A RELIEF, in a sense, when something that you have been concerned might happen finally does. Ever since the issue of Application Note G to FRS 5 at the end of 2003, the line I have taken in lectures has been that service providers did have to recognise most of the unbilled fees 'on the clock' at the end of the year as income for that year.
Many people disagreed, however. The leading proponent of the alternative point of view was Robert Maas, (' The WIP Wrangle ', Taxation, 12 February 2005, page 477), and Robert will be writing the Comment piece for next week's issue. I wouldn't dream of trying to anticipate his views in detail, but it is fair to say that he disagrees with some of the implications in the article by Mark Lee that we publish this week (page 94) who concludes that there will be a one-off tax hit from the change in accounting practice, whilst stressing that the precise identification of income to be recognised is still an accounting issue.
What has changed, of course, is the publication by the Urgent Issues Task Force of Abstract 40, which gives guidance on how Application Note G should be interpreted. This is an area where accounting practice is paramount, and there is no substitute for a close and careful reading of the relevant paragraphs of Application Note G and of Abstract 40, in particular noting the difference between a right to consideration (which may include future payment) and a right to immediate payment.
What happens now?
Several issues now need to be addressed urgently. The first is that the Inland Revenue need to take soundings and produce new guidance — it appears from the FAQ on the ICAEW website that this is already in progress. In particular guidance is needed on when the Inland Revenue accepts that the new practice should be applied, particularly now that it has been incorporated into the FRSSE.
Second, and in parallel, attention needs to be given to how the increase will be taxed. As explained in Mark's article, the legislation both pre- and post-ITTOIA 2005 currently appears to provide for the whole adjustment to be taxed in one year. In ITTOIA, this is dealt with as 'adjustment income', and where there have in the past been successful representations for a spreading provision to be applied this is separately enacted. It would perhaps make more sense to provide in F(No 2) A 2005 a general provision under ITTOIA 2005, s 229 that in particular cases the income charged can be spread over a number of years if provided for by regulation. The general rules for taxing adjustments on the ending of the cash basis, in ss 238 to 239, could be amended to govern all such spreading provisions, with the regulations simply needing to specify the circumstances in which spreading could apply and the number of years over which it could be claimed.
Finally, there needs to be some faster way of dealing with accounting issues such as this. It was plain by February or March 2004 that there was a significant difference of opinion about the effect of Application Note G, which only the Accounting Standards Board could resolve. That was the reason for referring the issue to the Urgent Issues Task Force. For that body to take a year to produce an answer is simply not acceptable.
