Government plans to abolish the cash basis for paying tax on profits and to factor work in progress into partnership accounts will cost firms hundreds of thousands of pounds.
The controversial proposals, announced just before Christmas by Dawn Primarolo, financial secretary to the Treasury, could force many firms to incorporate. Experts forecast this week that the government will cash in on a #200m windfall over a three-year period as firms, including solicitors, pay a ‘catch-up’ charge.
ACCA warned that many small accountancy practices could face bankruptcy if the new measures were implemented.
Mark Lee, BDO Stoy Hayward’s professional practices tax partner, said that partners would each pay between #5,000 and #15,000 more in tax over the next three years.
He urged accountants to make representations to the Inland Revenue before the 14 February deadline, but warned: ‘This is going to happen, it’s just a question of damage limitation.’
Lee added: ‘This proposal will increase paper profits and tax liability without any extra cash being generated or received. Following the recent change to current year accounting, the additional tax charges could pose a major cashflow problem for partners.’
Chartered accountant Bruce Lawson, managing director of Self Assessment Ltd, added: ‘It will provide a wonderful opportunity for the Revenue to look in the books to see if we have work in progress at a sensible value.
Firms should adopt a prudent approach to their accounting policies and stick to their guns if questioned by the Revenue.’
From April, professionals will be unable to compute tax profits by bringing into account only money received or paid out. Work in progress will be included in the business accounts as if accounting principles had been applied, creating the catch-up charge.
The government defended the change, insisting it was merely ‘levelling the playing field’ for all businesses, and correcting a tax anomaly that lacked justification.
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