Analysis – Look out for young talent with power.

The Revenue’s June tax bulletin states it has recruited over 40 accountants in the past two years. Many practitioners, particularly those dealing with the Revenue Large Business Offices, will have come across some of these working with their inspector colleagues. They are part of the series of changes the Revenue has introduced over recent years in response to changing legislation and case law.

The article proffered reasons why the new recruits will benefit practitioners – in brief, a more speedy resolution of accounting issues, and a greater empathy with practitioners’ problems. Good news, perhaps, but are there any threats, especially to taxpayers?

A review by a more appropriately trained and better organised Revenue team may, in some cases, be advantageous to taxpayers. Equally, it creates new concerns. One issue is that no one yet knows how far convergence between accounting profits and taxable profits will go. We live in a world of ever-changing accounting standards and new developments. We may see the Revenue accountants seeking to argue points which stretch current thoughts in unacceptable ways.

My firm has already seen some signs that some of the Revenue accountants will have a desire to argue that the accounting policies decided by a company’s directors, and accepted by the auditors as part of their true and fair view, may not be the most appropriate for tax purposes.

Does the Revenue have the power to argue such points?

There must be many cases where the boards of two otherwise identical companies could, legitimately, choose different accounting policies for the same item.

One company might, for instance, match revenue and cost by deferring revenue to the next period when related costs arise, another choosing to recognise revenue currently and accrue for costs. Other companies might choose different bases for valuing stock. It would be my view that provided the companies’ boards complied with legislation and GAAP, and provided the auditors gave a true and fair opinion, the Revenue should not have the power to second-opine on the appropriateness of the companies’ declared accounting profits. I believe such suggestions should be resisted.

The June bulletin also alludes to the Revenue accountants seeking to assess the quality of audit work. This should, I think, give the profession and business cause for concern. The bulletin states (I am abstracting somewhat) that in the majority of cases the Revenue accountants are satisfied with the standard of the audit work, but in other cases they have been surprised by the poor quality. Industry and the profession should be alert to attempts by the new recruits to seek greater access to audit files.

It shouldn’t be part of the Revenue’s powers to be another audit regulator.

Another emerging area may be the appropriate measure of materiality.

This is a key component of the assessment of the truth and fairness of a set of financial statements, and is a matter of considerable professional judgement. It is a matter of fact that any two experienced, knowledgeable, accountants will on occasion take a different view on whether a matter is, or isn’t material; and other accountants might validly have different views.

Equally, each auditing firm will have its own set of criteria used by its professionals as the first basis of assessment of materiality. My fear, and again it has been seen already in practice, is that some Revenue accountants might, in their eagerness, suggest adjustments to taxable profits on the basis of their own assessment of materiality.

If the present position can be summarised as ‘accounting profits should equal taxable profits, except where there are statutory or judicial reasons for adjustments’, then industry should resist adjustments on the basis of someone else’s view. This is not out of disrespect for their views, which no doubt will be honestly and fairly held, but rather because to accept such attempts would be to depart from the current legislative and judicial position.

Meanwhile, there is no doubting the heightened importance of GAAP for taxation practitioners!

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