Remember all the panic about the changes to accounting for work in progress (WIP)? Well now that the financial reporting season is in full flight, the one-off tax hit that Application Note G to FRS5 (doesn’t that name just make you feel warm all over?) will bring about is suddenly hideously close. It’s easy to imagine hordes of extremely worried partners contemplating their ever-emptying pockets.
Not content with ramping up bill issuance – an annual occurrence around March time for most firms anyway – some firms have made Herculean efforts to make the new tax hit less painful. Take Denton Wilde Sapte. By flogging off its Asian network, the City firm with the long lockup may save millions by not having to pay tax on a higher proportion of its WIP. As closures go, it’s pretty neat.
But despite law firm worries, nobody really knows exactly what the effect of this sexily-named accounting change will actually be. Finance directors have been waiting for the Institute of Chartered Accountants’ guidelines on the subject – and they’re still waiting. They were due to be published in March and, according to one accountant, “they’re still imminent”.
For those lawyers who go pale at the mention of accounts, or have had their head in a hole for the past few months, it’s worth giving a quick recap on the planned tax changes. The new regime, introduced by the Accounting Standards Board, is aimed at bringing the way professional services firms account for WIP into line with common international accounting standards.
The key change for law firms and barristers is that the profit on equity partner time will be recognised, and therefore eligible for tax, while the work is in progress and not when the bill has been delivered.
However, as revealed in The Lawyer this week, the Accounting Standards Board has received a letter from the Association of Taxation Technicians, which contains an argument suggesting that Application Note G was never intended to apply to professional practices in the first place. This would mean that all those worried finance directors may no longer have to fret.
The upshot of that is that WIP should not necessarily be valued at selling price rather than cost. And the upshot of that is that if there has been no generally accepted change, law firms should carry on with their old accounting standards. It’s as you were. Unless you’re Dentons.