Q. My two partner solicitors firm merged with a four partner practice on 1 May 2006. Both firms had 30 April year ends and the merged practice will continue to prepare accounts to that date; the succession rules will apply. Each firm reflected UITF 40 adjustments in their respective 30 April 2006 accounts. My firm had always billed regularly all work in progress at the end of each month and the impact of UITF 40 was negligible however the other firm had a material adjustment. What will be the impact of the spreading rules on the new partnership?
A. Paragraph 7 Schedule 15 of FB 2006 deals with the mechanics of spreading for partnerships but is not explicit on how to deal with mergers. Paragraph 7 says that income arising from the prior year element of the UITF 40 adjustment is allocated to partners in their profit sharing ratio (PSRs) for the 12 months before the year of the change of accounting practice. For 2006/07 this will be based on the adjustments of the stand alone firms for the year to 30 April 2006 and be in proportion with the PSRs of each firm at 30 April 2005.
For 2007/08 the spreading income will be allocated in the ratios for the 12 months to 30 April 2006; the merged firm did not exist at 30 April 2006 and the spreading adjustment will continue to be based on the PSRs of the old firms. For 2008/09 and subsequent years the allocation will be based on the merged firm PSRs and the impact for you and your partner (i.e. the predecessor firm) will be to suffer tax on profits to which you had no legal entitlement. You may wish to persuade your new fellow partners to elect to accelerate the charge.
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