Many law firms will go into the new year facing worrying uncertainty over whether they will incur a large one-off tax hit next month, despite the latest attempt by the Accounting Standards Board to clear up confusion over new accounting rules.


The board's urgent issues task force last month published draft guidance in a bid to resolve the controversy over Application Note G to Financial Reporting Standard 5, which has left firms and their advisers divided over how to proceed.



The one-off hit is thought likely to arise from changes in the way revenue is shown in accounts and will mean that firms will have to include the projected profits of equity partners in their work-in-progress calculations, rather than once a matter is billed, as at present.



David Furst, head of the professional practices team at accountancy firm Horwath Clark Whitehill, said the task force has made it clear that if the guidance is adopted, the one-off tax hit will apply.



The uncertainty stems from the fact that Application Note G - which was published by the board in November last year - applied to accounting periods ending on or after 31 December 2003.



But the task force is calling for comments on its draft guidance by 11 January 2005 and has yet to say definitively when it will be applied.



This leaves firms with a year-end between 31 December 2003 and 5 April 2004 in limbo as to whether they will have to submit their return and pay tax under the new regime by 31 January 2005.



Mr Furst said: 'It is now a year after the application note was published and there is still no certainty as to what the position is. This is going to affect some firms very significantly.'



Horwath Clark Whitehill's view is that, for now, firms should proceed with their 2003/4 tax returns using their historic accounting basis.



Jeremy Boadle, director at accountants Smith & Williamson, said firms and their advisers would have to take a view. 'Some firms have prepared draft accounts on the basis of the application note and are effectively putting their accounts on the backburner until this issue is finally resolved,' he added.



However, George Bull, head of professional practices at accountants Baker Tilly, played down the application note's effect. 'We have all along said we do not believe that it imposes a one-off hit,' he said, adding that he expects the application note to apply from 31 December 2003.