Pressure is mounting for the government to scrap its controversial proposals for changes to the way partnerships calculate profits and tax.
The English ICA is the latest body to call for an urgent rethink of the plans which it claimed have ‘little overall tax benefit’ – but are set to cost partners of many small and medium-sized practices up to #100,000 in the short-term.
Dawn Primarolo, financial secretary to the Treasury, revealed in December that the cash basis for paying tax on profits would be withdrawn for tax years starting in April. She also announced plans to factor work in progress into partnership accounts.
Partnerships, including accountants and lawyers, would be forced to pay ‘catch-up’ tax charges over three years.
Peter Bickley, technical under-secretary at the English ICA’s tax faculty, agreed the earnings-based system is the most appropriate basis for preparing business accounts but argued there was little justification for the change.
‘The earnings basis involves extra work and introduces subjectivity,’ said Bickley. ‘We question the rationale of eliminating an anomaly for established businesses – merely for the sake of doing so – especially when it will have little overall tax benefit and impose a real additional burden on business proprietors.’
David Furst, Horwath Clark Whitehill’s professional practices group head, who last week hosted a conference on the proposals, said prospective partners could be put off by the changes.
‘The proposals seek to tax those partners in the firm at the accounting date in 1998/ 1999,’ said Furst. ‘This would include a partner joining on 1 April 1998 whose year-end was 31 March 1999. There is no equity or morality in taxing such a person,’ he said.
He added: ‘Designate partners in the worst affected firms may well be reconsidering their position. These firms may find it difficult to recruit new partners.’
Submissions on the proposals must be made to the Inland Revenue by Saturday.
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