Plan now for tax hit
6 Oct 05
Advice to plan for pending changes to work-in-progress taxation, and the Society's efforts to mitigate their effect
The Law Society of Scotland is urging the profession to do some financial planning following changes in how work in progress in the current year’s accounts will be taxed.
Most work in progress in accounts ending after 22 June 2005 will be included (and will therefore be taxable) by reference to its selling price under new accounting rules brought in under UITF 40 – a change which has resulted in serious concerns across the profession that many legal firms will be hit by a significantly increased, one-off tax bill in January 2007.
The worst affected are likely to be smaller practices, with around four partners and no assistants, which could face up to a 100% increase in their tax bill. Larger firms which operate a system of interim billing are less likely to experience such a significant rise, but still need to be aware of how the change will affect them.
The Society is currently in negotiations with HM Revenue and Customs on how to mitigate the effects of new tax liabilities on professional firms for work-in-progress, following HMRC’s rejection of a 10-year, no interest payback deal.
The Society’s tax committee, in conjunction with The Law Society of England and Wales and other professional bodies including ICAS, is lobbying for an extended period of payment, as partner-based firms across many professions could face severe financial pressure if pushed to make a single payment.
The Society is advising partners to consult their accountants on how the change is likely to impact on their firm and to put in place an appropriate strategy to ensure a smooth transition.
James Ness, Deputy Director of Professional Practice at the Society said: “The year end for most firms is only six months away and it’s imperative that we raise this issue now. Firms really need to start planning ahead to accommodate this – whether or not we reach agreement with HMRC on the possibility of payment by instalments.”