PROFESSIONAL FIRMS TO FACE EARLIER TAX BILLS

The accounting profession has done the Government a huge favour – enabling it to get its hands on tax revenues much earlier without the need for legislation and without any announcement from the Chancellor!

Historically, businesses have carried forward in their accounts the cost of work in progress at the balance sheet date, and in the case of professional partnerships, this cost has legitimately excluded the partners’ own time.

Some months ago, the Accounting Standards Board issued guidance on the subject of revenue recognition – in other words, when the business should recognise profits on work which was incomplete at its balance sheet date.

This guidance has a major impact on professional partnerships and businesses in the services industry, and will mean that solicitors, accountants, architects, engineers and anyone who ordinarily charges for their services on a time basis, will in most cases have to recognise the profit on incomplete work sooner than they would otherwise have done.

And, of course, if your accounts recognise the profits sooner, you’ve got to pay the tax sooner!

Her Majesty’s Revenue and Customs won’t talk about this issue right now – they know the accounting profession has done them a good turn, and must be rubbing their hands in glee. So too will the bank managers who will be called upon, in due course, to provide larger overdraft facilities to help pay the additional tax due.

At present, there are no arrangements to pay this additional tax over a period of years, and there is no cover scheme to avoid the situation.

So what can be done to reduce the burden on businesses? As so often, seeking professional advice is a good first step. At Broomfield & Alexander, we have a specialist professional partnership team which works with a broad range of clients from two partner firms to some of the largest professional partnerships indigenous to South Wales.

We will be advising clients that adopting techniques of proper practice management, and concentrating on a commercial approach to doing business, could mitigate the effects of this new situation quite dramatically. Successful practices will need:-

• a work in progress system that works (those in many firms don’t, because they are riddled with errors and anomalies);
• proper terms of engagement with their clients; and
• strong management to enforce a regular billing system.

If professional practices and other affected businesses fail to get these matters right, they will pay additional tax by January 2007 at the latest – you have been warned!

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