Confusion continues as FRS5 tax burden is spread

Many law firms were celebrating this morning after the chancellor, Gordon Brown, relaxed the rules relating to a major tax uplift in his pre-Budget statement. However, the position of larger or more profitable firms was still unclear.
The additional tax liability had been created by changes to the way professional partnerships account for revenue and work in progress. It was first highlighted in a note from the Accounting Standards Board in December 2003, Application Note G to FRS5.
The changes created a significant uplift in the tax firms paid because they were obliged to recognise revenues from certain types of work earlier than before. This increased a firm’s total revenues for a year and therefore the level of tax.
The most significant problem for firms was that the uplift had to be paid entirely in the year a firm adopted the new standards. Now the Chancellor has proposed a relaxation of this rule, to be introduced in the Finance Bill 2006. It says it will allow “most” firms to spread the extra tax burden over a minimum of three and a maximum of six years.
What still remains unclear is what the statement means by “most” and how firms that have already adopted the new accounting policies will be affected.
As Baker Tilly’s George Bull pointed out, “There is no promise here of spreading for the larger firms but equally there is no guidance as to what ‘big’ means. The change shows the Revenue has listened to the pleadings made by the legal community and it is good news for smaller firms, but it appears to be bad news for larger firms.”
Additional confusion has been created by the statement which relates to a “March 2005” change in income recognition. As Bull pointed out, the initial change was introduced in December 2003 and the rules became mandatory in July 2005.