Solicitors do not know whether they will incur swingeing one-off tax increases next year because of uncertainty over the effects of a new accounting standard, as accountants do not agree about the extent that it impacts on professionals, the Gazette learnt this week.

The change, announced in January, could require law firms to include the projected profits of equity partners in their work-in-progress (WIP) calculations, rather than once a matter is billed, as before (see [2004] Gazette, 29 January, 4).

It affects firms for the financial year ending in December 2003 or March 2004 and was caused by an amendment to the financial reporting standards issued by the Accounting Standards Board.

Simon Mabey, chairman of accountancy firm Smith & Williamson's professional practices group, said: 'There have been different views expressed and there isn't yet a generally accepted accounting practice.

Everyone is waiting for guidance from the Institute of Chartered Accountants (ICA).'

He added: 'It will affect every professional but the extent to which it does is the issue.

Some people are hiding their heads in the sand, but the current uncertainty will be over when the ICA publishes its findings.'

Mr Mabey said the change could have most impact on sole practitioners and small firms, where there are more partners' billable hours as a proportion of annual income.

But he said: 'Many of these smaller firms haven't appreciated the change.

The shock wave has a long way to go yet.'

Edward Troup, a partner at City firm Simmons & Simmons and member of the Law Society's tax law committee, said: 'We are well aware that...

we may have to value our WIP on a different basis.

If you take the worst case scenario, smaller firms with a lot of contingency fee work done by partners will see very significant tax increases.'

Mr Mabey said attempts to persuade the Inland Revenue to allow professionals to pay for the one-off hit in instalments would only succeed if there was certainty about the effects of the tax change.

The Law Society has retained Richard Snowden QC to undertake an analysis of solicitors' retainers as a starting point for determining the applicability of the rule change.

Jeremy Fleming