Budget will scupper partners' tax schemes

BUDGET tax avoidance measures to be announced this week will heavily penalise partnerships if they attempt to manipulate their accounts during the 1996-97 assessment changeover.

Berwin Leighton tax partner Ron Downhill says the big warning to all partnerships will be: if in doubt, don't do it.

“There will be a penalty which will be more substantial than mere interest,” he warns.

Ancilliary provisions will be announced this week on the coming changes to Schedule D self-assessment system.

The big difference will be moving from a preceding year to current year basis – that is, taxation on last year's earnings rather than the earnings of two years ago. To achieve the changeover in the 1996-97 bridging period, earnings will be averaged by adding those for 1994 and 1995, then dividing by two.

However the tax avoidance measures aim to prevent temptation to manipulate accounts.

The biggest temptations are billing clients prematurely, deferring an expense that might have occurred or changing the method of valuing work in progress, says Downhill.

Profit-related pay schemes, popular with lawyers and accountants, may be restricted because of government concern that they have become a method of tax avoidance, says David Furst, tax partner at accountants Clark Whitehill.