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Relief for WIP tax

4 May 2006

Solicitors will be aware of the changes to the taxation of work in progress resulting from the adoption of UITF 40. Under the new accounting treatment required by UITF 40, professional services provided by lawyers and others that are unbilled or remain incomplete at the balance sheet date have to be accounted for as fees issued at selling price (i.e. including partners’ time). Adjustments can be made where it appears that not all of the work in progress on a particular matter is likely to be feed, and contigent fees do not have to be included at all.

For many firms the adoption of UITF 40 will lead to a one-off increase in profits. As a result of persistent lobbying by the professional bodies, the government has agreed to introduce a form of spreading relief so that the tax on this profit adjustment does not have to be paid in a single year The spreading relief which was introduced by Finance Bill 2006 means that solicitors’ firms and other small businesses can spread over three to six years the adjusted tax liability resulting from the adoption of UITF40.

The new spreading rule works as follows. Each year, one third of the adjustment income or positive adjustment will be taxable, subject to an upper limit of one sixth of that year’s profits from the relevant trade, profession or vocation. This continues for up to five years, or until the adjustment has been fully taxed. After five years, any untaxed balance will be fully taxable in the sixth year.

The spreading rule will only be available for accounting periods ending on or after 22 June 2005. Solicitors are advised to consult their accountants or tax advisers to establish the likely adjustment to profits arising from the adoption of UITF 40, and the spreading relief which might be available to them.

Isobel D’Inverno, Convener,Tax Law Committee