Work in progress tax to hit small firms

LAW FIRMS are being warn-ed to prepare for impending changes in the way they calculate profits for tax purposes. And the Law Society predicts smaller practices will lose out under the one-off adjustment fee.

The changes contained in the Finance Act 1998 mean firms that calculate taxable profit on a cash or hybrid basis will have to change to an earnings method, which will include valuing all work in progress (WIP).

For those firms that did not previously recognise WIP in taxes, a one-off adjustment or windfall charge will be implemented for the first accounting period after 6 April.

The one-off adjustment fee is payable over a 10-year period, and will be paid by partners themselves.

Jill Hallpike, secretary of the Law Society's Revenue Law Committee, says: “Some smaller firms that never took account of WIP could be looking at trouble. The adjustment fee will go on top of other charges – for example, the Solicitors Indemnity Fund.”

She warns: “There are firms that might also not be able to afford to upgrade software to cope with the changes.”

Ted Powell, head of corporate tax at Mills & Reeve in Cambridge, which previously operated on a cash basis, says his firm has been implementing changes over the past five months.

However, he says: “We are undecided about the one-off adjustment fee. Partners could move around over the 10-year period, but we are having a partner consultation in order to deal with that.”

Kevin Poole, head of the tax department at Wragge & Co agrees that while a lot of the changes will be minimal, smaller firms will be the ones to suffer. “There will be a bit of pain. There are a lot of changes and for smaller firms it will mean a big charge.”