FINANCIAL STATEMENTS: Grant Thornton claims professional services firms are being targeted


Law firm partners should expect their personal expenses to be investigated by HM Revenue & Customs (HMRC), a leading firm of accountants warned this week.



Grant Thornton said HMRC has recently recruited a number of accountants to investigate professional services firms, 'which until now have in many cases operated below the Revenue's radar'. This could lead to in-depth enquiries into a range of issues, such as the calculation of work in progress and accrued income, personal expenses, bad debt and dilapidation provisions, and partner recruitment costs.



Grant Thornton predicted that of particular interest to HMRC will be the income reported in financial statements following the new UITF40 accounting standard, including a focus on contingent fees. Partners' personal expenses (and the record keeping of them), recruitment costs incurred on partner hire, provisions and bad debts are also being highlighted, with queries raised about the effort being made to collect the debts.



Lenka Hennessey, a director in the firm's professional practices group, said: 'Increasingly, we are being contacted by professional services clients and finance directors of other practices who have been notified by the Revenue that their business is under investigation relating to the deductibility of expenses against profits.



'In addition, the nature of the queries has been far more intense than previously seen in the professional services sector. The level of detail that firms must respond with is far more sophisticated and lengthy than in the past - this is clearly a result of the recent recruitment drive by the Revenue.'



With three months remaining until the deadline to launch investigations into most 2005/06 partnership returns, she predicted a surge in investigations being launched - including probes of firms which also had enquiries last year.



In a separate development, Grant Thornton reported that HMRC is also making more PAYE and VAT visits to professional practices.