By now most accountants should be up to speed on the topic of UITF 40 Revenue recognition and service contracts. If you are still uncertain on whether to accrue half the fee for a half-finished tax return, then look no further than the latest guidance issued by the ICEAW.
The guidance gives practical examples on how one accounts for the new Abstract. The examples provided by the guidance are:
A TV personality with uncertain repeat fees
A song writer and performance royalties
A tax accountant and half a tax return
An accountant and advisory work
Accountancy work and resignation
Barristers ' no win, no fee
Barrister - pay at the end
Barrister ' fixed fees
Barrister ' legal aid
A joiner and a half completed bookcase
Tax planning points
One key point to remember is that one must apply the provisions consistently year on year. As a degree of judgement is required, an adjustment under UITF 40 may be open to scrutiny, and will be routinely checked in enquiry cases.
In the past, HMRC have been less focused on the valuation of work in progress, as sole traders and partnerships did not have to account for the cost of a proprietor's own time.
Remember to review and record details of each client's working and billing practices for UIFT 40 valuation purposes. These need to be kept on file to provide a detailed record of the accounting policy for each client business, together with any assumptions made year on year.
The opening adjustment
As the opening or prior year adjustment for UITF 40 effectively takes that part of income out of the current year profits, allowing the tax liability on the adjustment to be spread over the next three to six years, there is tax relief in the form of a deferred tax bill. The temptation may be to include as large as an adjustment as possible to defer tax liabilities.
The problem of course with this tactic is that one has to consider what income should also be recognised at the year end. As the basis must be applied consistently, this may lead to a higher adjustment at the year end which totally defeats the tax advantages of the deferred tax bill.
Nichola Ross Martin