Alignment good news and bad

And now this. Buried in last week’s monster Finance Bill were new provisions for the tax treatment of research and development costs. With these rather than create its own statutory definition of just what constitutes R&D, the Revenue has passed the buck and adopted the definition employed by the Accounting Standards Board.

That’s good and bad news. On the one hand it ensures compatability between the tax and accounting treatment of costs. On the other it passes a whole new responsibility to the ASB, and one that it is not necessarily equipped to take on.

Whitehall’s willingness to harmonise tax and accounting profits more closely was signalled last year when the Revenue dropped the landmark Herbert Smith and Jenners cases. At the time the government said it believed in alignment.

Alignment is good news for business, particularly for companies in industries like construction and engineering, where accounting provisions for losses on long-term contracts are essential. But it puts the ASB in a difficult position.

The board has long been responsible for the definitions that underpin accounting standards. And with the R&D decision the Revenue seems to be signalling that it believes the ASB should also decide the definitions that underpin the tax system.

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