Public Sector – Cash basis abolition costs ‘millions’

New rules dictating how accountancy firms calculate their tax liability for work in progress are costing the Inland Revenue millions of pounds a year, tax experts claimed this week, writes Nick Huber.

Last December the Revenue abolished the ‘cash basis’ calculation for taxable profits of professional partnerships. It introduced a new system requiring companies to produce true and fair accounts for taxable profit and losses.

The controversial rules, which came into force earlier this year for accounting periods from 6 April, include a ten-year ‘catching-up’ charge to allow firms to spread any extra tax charge. Ongoing work will also have to be calculated on a cost basis rather than based on billing price.

But according to Mark Lee, tax partner at BDO Stoy Hayward, the reform has backfired from the government’s point of view by generating a lower level of taxable profits compared to the cash basis system.

‘The old system sometimes resulted in unnecessarily high figures for calculating work in progress,’ he said. ‘But there are occasions when the true and fair valuation will lower the work in progress figure and taxable profits.’

Lee believes that firms should let their accountants check true and fair valuations before submitting them to the Revenue to minimise the prospect of being challenged.

But Frank Haskew, technical manger at the English ICA, stressed the complex new valuation system would not benefit all practices. ‘The Revenue has always admitted there would be some winners but quite a few losers,’ he said.

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