Spreading Relief: lawyers call for clarity following Chancellor's Pre-Budget Report

Law firms that changed their accounting practices early to cope with new rules will not be given more time to pay the resultant one-off tax hit, it has emerged.


The fear that some firms will be 'penalised' arose after Revenue & Customs released further details on how the spreading relief unveiled by the Chancellor of the Exchequer earlier this month will work (see [2005] Gazette, 8 December, 1).


Gordon Brown announced in his Pre-Budget Report that 'most firms' would have three years to spread any extra tax charge caused by the introduction of UITF Abstract 40, an accounting statement issued by the Accounting Standards Board's urgent issues task force. It accelerates the way law firms and other professional practices account for revenue and work in progress. Those most severely affected will have up to six years to pay, he added.


The Revenue told the Law Society and accounting bodies last week that the extra time will be made available to all businesses, allaying concerns that it would only be open to small and medium-sized enterprises.


Each year, one-third of a firm's uplift - or 'adjustment income' - will be taxable, subject to an upper limit of one-sixth of that year's trading profits. This will continue for up to five years, or until the uplift has been fully taxed. After five years, any untaxed balance will be fully taxable in the sixth year. This means that a firm's tax charge will increase if its profits increase.


With UITF 40 applying to accounting periods ending on or after 22 June 2005, the majority of firms will not have to account for the uplift until their tax payment in January 2007 or January 2008.


However, law firms and other professional practices that adopted the changes early for their accounting periods ending 31 March 2005 or 30 April 2005 - as they were encouraged to do by UITF 40, which was published in March this year - face paying the uplift next month with no prospect of spreading relief.


These 'early adopters' are thought to include a number of limited liability partnerships that changed their accounting practices early so as to avoid having to alter them in the second year after conversion.


David Furst, chairman of accountancy firm Horwath Clark Whitehill, said many firms still do not know how much tax they should be paying on 31 January 2006. He said: 'This is yet another instance of confusion surrounding an unwelcome accounting principle. Clarity and equity are needed urgently.'


Colin Ives, director at accountancy firm Smith & Williamson said: 'The good citizens are the ones being penalised. It looks very harsh.'


Law Society President Kevin Martin said: 'We are aware of the difficulties facing firms who adopted the standards before 12 June 2005. The Law Society is lobbying the government to change this.'


However, a Revenue spokesman defended the decision. He said: 'Businesses that changed earlier would have been able to plan ahead to meet their obligations.'


For guidance, visit the Web site: www.lawsociety.org.uk.