Law firms faced with a one-off tax hit because of changes to accounting rules will be given more time to pay, the Chancellor revealed this week in his Pre-Budget Report.

Gordon Brown said the government will legislate in next year's Finance Bill to allow 'most businesses affected' by changes to the way in which professional practices recognise income to 'spread any extra tax charge over three years'. Those businesses most severely affected will also be able to spread the charge over a period 'not exceeding six years', he added.


The hit arose following the introduction of UITF Abstract 40, an accounting statement that accelerates the way service providers such as law firms account for revenue and work in progress.



The Law Society and the Consultative Committee of Accountancy Bodies - which represents the six major accounting bodies in the UK - had earlier warned the Treasury that many high street practices could have gone out of business if they were not given extra time to pay any uplift (see [2005] Gazette, 13 October, 1).



This followed research that showed that almost one in five professional firms faces a tax bill more than double their normal bill as a result of the changes. A further one in four firms faces a bill that is more than 50% higher than normal.


Mike Hardwick, partner at City firm Linklaters and chairman of the Law Society's tax law committee, said the Chancellor's announcement was 'very good news' for solicitors and a fair outcome.


'The research that was done in the summer illustrated that there were some people who were significantly affected,' he added.


Law Society President Kevin Martin also welcomed the move. 'This will be a huge relief for many practitioners who simply don't know how they would be able to pay their tax next year,' he said.


However, David Furst, chairman of accountancy firm Horwath Clark Whitehill, warned that a lack of detail had created uncertainty, with the Pre-Budget Report failing to say which firms would be excluded from claiming relief. There is also no definition of how severe the impact needs to be before a firm qualifies for the extra three years, he said.


Mr Furst added that being forced to wait until next year's Finance Bill for more information meant it is hard to advise those firms whose 31 January 2006 tax payment is affected by the charge