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AN ONLINE DISCUSSION forum I sometimes visit has a section entitled 'Dead horses'. It's where all the discussions which come up time and time again get sent; the ones where no-one ever has anything new to say, they just rehash in slightly different words the same arguments that have been repeated many times before, while everyone else covers their eyes and groans 'please, Lord, not again…'
And that is a phrase which probably occurred to several readers when seeing my name on an article to do with UITF 40. I'm sorry. I will, at least, not go over old ground — new readers to the subject are advised to have a look at the many articles on the subject which we have carried in previous issues. I had every expectation that I would not need to return to the subject at all. Everything seemed to have been sorted out. We had guidance on accounting practice which had been endorsed by the CCAB. We had guidance on the tax implications, issued by the ICAEW as Taxguide 08/06, but in conjunction with the ACCA, the CIOT, the ICAS, the ATT and the AAT. The guidance had been agreed by HMRC, which had also revised its helpsheet on the subject, IR 238. What more was there to say?
Unwise guidance
Then on 19 December a further guidance paper came out from the ATT and AAT. It came, apparently, as a complete surprise to the other institutes who had been involved with the earlier guidance. This is despite the fact that it had presumably been circulating for some time between the two Associations; the file for download on the ATT website is actually entitled 'final draft of 21 November', nearly three weeks before it was actually released. The explanation given by the guidance itself for why it has been issued is that Taxguide 08/06 only explained the tax consequences of UITF 40, not the accounting implications, and they 'believe that our members should have guidance in this area'.
If the tax guidance had in fact been produced before the accounting principles, that would obviously be the wrong way round. It was precisely for that reason that the tax guidance was not issued until after the CCAB had agreed the accounting principles by adopting the ICAEW guidance originally issued in April 2006. That in turn had been partly based on guidance issued by the ATT and AAT, so you would have thought that the latest guidance would want to make reference to it. It makes no direct reference to it whatsoever, which is simply ludicrous. A member of the ATT or AAT who reads the guidance issued by his Association without having followed the debate closely will not realise that he is going against the interpretation agreed (through the CCAB) by the ACCA, ICAEW, ICAS, ICAI, CIMA and CIPFA. When the question which has to be answered by any tribunal or court is 'what is generally accepted accounting practice?' it is hard to avoid the conclusion that the CCAB's view is going to trump that of the AAT.
Same again
The new guidance paper contains little that is actually new; it is a restatement of the argument which some within the two Associations have been putting forward for some time. It starts by claiming that the UITF cannot change the meaning of Application Note G, and that:
'If we regard FRS 5 as the accounting equivalent of ICTA 1988, then Application Note G is the Finance Bill which amends that Act and UITF 40 is nothing more than the Treasury's Explanatory Notes to the Finance Bill (this view has been put forward in meetings with members of the ASB and UITF, who have accepted this interpretation). It is of interest and may be of assistance in interpreting the amended Act, but it has no authority in its own right.'
Having thus downgraded UITF 40 to little more than an interesting footnote, it restates the basic principle of Application Note G (ANG), that a seller must recognise revenue to the extent that it has a right to consideration in exchange for performance. By substituting the definitions of 'right to consideration' and 'performance' the guidance gets to, though does not quote, a restatement of this principle as
'A seller recognises revenue under an exchange transaction with a customer, when and to the extent that it obtains a right to the amount received or receivable in exchange for its fulfilment of its contractual obligations.'
The guidance interprets that as meaning that 'before you can recognise revenue, you must have done that which you have undertaken to do for your client/customer', which, if the basic principle stood on its own, would not be an unreasonable interpretation. But it does not. The main point of ANG is that it tells you what happens in cases of partial fulfilment, in paragraph G6:
'A seller may obtain the right to consideration when some, but not all of its contractual obligations have been fulfilled. Where a seller has partially performed its contractual obligations, it recognises revenue to the extent that it has obtained the right to consideration through its performance.'
This was the paragraph on which the UITF was particularly asked to comment, and which it dealt with in paragraph 26 of UITF 40 by saying that:
'Where the substance of a transaction is that the seller's contractual obligations are performed gradually over time, revenue should be recognised as contract activity progresses to reflect the seller's partial performance of its contractual obligations.'
Both of these are dismissed by the new guidance as simply considering the situation where there are a number of separate contractual obligations under the contract and only some of them have been fulfilled — for example, the agreement with the client is to prepare the VAT returns and the end of year accounts, and only the VAT returns have so far been completed. According to this guidance, it is only the revenue for the VAT returns which should be recognised; the work on the accounts should all be carried forward as work in progress.
In practice
The practical implications for tax advisers preparing their own accounts, according to the guidance, will depend on the agreement with the client, but in the straightforward situation where the agreement is to prepare and submit the client's tax return, 'there would seem to be a definite point at which the obligation is fulfilled; where the return has been submitted to HMRC.' The AAT and ATT correctly point out that members with an accounting date shortly after 31 January (say, for example, 31 March) will have very few outstanding returns at that point, and therefore all revenue from them will be recognised whether billed yet or not. However:
'The only cases where revenue should not be recognised is where the return still has not been approved by the year end, in which case the cost of the work done to date should be recognised as work in progress'.
This is directly contrary to the CCAB guidance's example three, which asks what income, if any, should be recognised for a half-completed tax return, and concludes that it is an amount appropriate to the stage of completion so far reached, although 'the stage of completion is not necessarily determined on a straight-line, time incurred, basis but is influenced by the value to the client of the work done to date'. That is not an excuse for recognising no revenue on the grounds that a half-finished return is of no use, since the assumption in reaching the valuation is that the project will be taken through to completion.
Joint statement
The paragraph from the guidance quoted above is also, strangely, not in line with the joint statement we were given by the two presidents when we reported this two weeks ago (Taxation 4 January 2007, page 6). This said that, 'by the time a tax return is ready for approval by the client, value will have accrued and should be recognised, whether or not the return has been signed by the client'.
With respect to the two presidents concerned, this is yet another approach to ANG and UITF 40, which matches neither the guidance their Associations have jointly issued nor that of the CCAB. Their statement seems effectively to suggest that work should be valued on the basis of what it would be worth in its uncompleted state to the client; hence for a smaller return it will only have value close to completion whereas a more complex return may accrue value earlier.
This is not the view of the CCAB, which would value the work done so far on the basis that, and as a proportion of, the project being carried through to completion. But it is also not the view of their own guidance, which takes a contractual 'milestone' view — unless all the work comprising the, or one of the, contractual obligation(s) has been completed, no right to consideration has arisen, and therefore no revenue needs to be recognised. Within the space of three weeks, therefore, it appears that the two Associations have added two separate approaches to valuation, which are not compatible with each other, and neither of which is compatible with the CCAB approach.
Way ahead
So where do we go from here? First, I would strongly advise any AAT or ATT member to treat this guidance with considerable caution. Be aware, if you want to follow it, that you are going against the view of the senior accountancy bodies as expressed through the CCAB, and against the view of HMRC. We asked HMRC to comment and received the rather elliptical comment that they have updated their website page to refer to the CCAB guidance and to Taxguide 8/06, and that the latter was agreed with HMRC amongst others. The lack of any reference to the ATT/AAT guidance and the comment that HMRC agreed the 08/06 guidance would suggest that, so far as HMRC are concerned, the issue is adequately dealt with by the guidance previously issued. Their helpsheet IR 238 basically follows the CCAB view.
I have heard it argued that, since Taxguide 08/06 makes it clear that it is for the accountant to make the judgments required by ANG, the guidance issued by ATT/AAT will effectively give them the authority to bypass UITF 40 in a way which HMRC cannot successfully challenge. This is to misunderstand the role of judgment. Whilst it is right that HMRC cannot substitute their own judgment for that of the accountant, it does not prevent them from challenging that judgment on the basis that the accountant was not applying correct accountancy principles.
Any comment?
It would be helpful if we could get some authoritative comment on the ATT/AAT guidance. The obvious body to do so would be the CCAB, and for a time it seemed likely that it would say something, but it now appears that it does not intend to, it will simply stand by its original guidance. The view of Chas Roy-Chowdhury, Head of Taxation at the ACCA, is that 'the CCAB has a published set of tax and accountancy guidance which is principles-based and it is down to our members to exercise their professional judgment'.
The other obvious contender, and the one which I personally think should respond, is the Accounting Standards Board. It would be unusual for it to do so, but the ATT/AAT guidance rather impertinently claims to be an explanation of what the ASB's intention was when it issued ANG, and (as quoted above) also claims that the ASB agrees with its view that UITF 40 is like the explanatory notes to a Finance Bill, in that it is 'of interest, and may be of assistance in interpreting [ANG], but it has no authority in its own right'. Perhaps, at the very least, we could be told whether the ASB agrees with that interpretation.
