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Spread the tax!
The Consultative Committee of Accountancy Bodies (CCAB) has written to the Government and also had preliminary discussions with HMRC about the tax problems that will be caused by Urgent Issues Task Force Abstract 40, the new accounting statement which changes the way that service providers may need to account for revenue and work in progress.
Ian Morris, chairman of the CCAB, said: 'For those affected, the new rules will cause major hardship for suppliers of both professional and trade services. This change could affect many ordinary businesses including for example builders and electricians'.
Ian Morris continued: 'Many firms will now need to recognise turnover in respect of ongoing professional work as that work progresses by reference to the proportion of the work completed, rather than only when contracts are completed. This will result in a one-off uplift in reported profits and the corresponding tax charge. The change in the basis of accounting produces an uplift to the taxable profit in the year of change without generating any additional cash to pay the tax. For some businesses, the change could cause a real crisis and erode their working capital, adversely affecting the business' competitive position and ability to survive'.
The CCAB wants to minimise the tax impact of any change under UITF 40, and has made three recommendations:
- In respect of partnership changes, the existing rules should be amended so that individuals are not faced with a tax bill on income that they never received.
- There should be a relief to spread the impact of any tax charge arising under Abstract 40 over ten years.
- In order to provide flexibility for the future, there should be an enabling provision in primary legislation (ideally in the Finance (No 2) Act 2005) that allows the Treasury to make regulations for spreading relief where there are changes in generally accepted accounting practice that result in financial hardship.
