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Replies to Queries -- 4 - Clearing up the past

07 March 2001
Issue: 3797 / Categories:
Replies to Queries – 4

Clearing up the past
The move from the cash basis to the earnings basis is still causing problems for some professional firms. In a minority of instances, firms moved from an earnings basis to a cash basis in the past, and faced a double tax charge where Inland Revenue Statement of Practice SP/A27 applied.
Replies to Queries – 4

Clearing up the past
The move from the cash basis to the earnings basis is still causing problems for some professional firms. In a minority of instances, firms moved from an earnings basis to a cash basis in the past, and faced a double tax charge where Inland Revenue Statement of Practice SP/A27 applied.
Moving back from a cash basis to an earnings basis gives rise, of course, to a further double tax charge. Can the minority of firms who face this situation claim relief, on the basis that they have already suffered a double tax charge in the past?
(Query T15,767) – B.R.

In the consultative process which led up to section 42, Finance Act 1998, the Inland Revenue had initially adopted a fairly robust approach to the change. It perceived that the abuse of the cash basis was extensive and it was unsympathetic to representations made.
During the process of confidential consultation, the Revenue officials began to realise that many businesses would face serious cash flow problems and would suffer a double charge to tax. To give credit where credit is due, they listened and as a result they softened what was enacted to allow special provisions for barristers (section 43) and published helpful statements. The Revenue also enacted the change in such a way that businesses had an option to spread the additional charge to tax.
One of the arguments which persuaded the Revenue officials was that aspect of double taxation. The short answer to 'B.R.'s' query is that the minority of clients who face this double charge again on reverting to earnings basis had been warned at the time they decided to go onto a cash basis that the double charge was possible. Thus the relaxations enacted and the spreading provision is all that they will get.
Tax is not fair and there is no doubt that a small minority of firms have suffered an unfair treatment. Life is tough but the effect of the double charge is legal and was anticipated. 'B.R.' and his client have no chance of success. – Railtrack.

The Inland Revenue Statement of Practice A27 required a new business to start on the earnings basis before switching to a cash basis. Only rarely would a long-established business wish to switch.
Accordingly, professionals adopting the cash basis would probably have been those in the early stages of their career when cash flow considerations would have been preponderant. However, the (former) rules of Schedule D, Case I or II could have provided a favourable start where the first year's profits (on an earnings basis) were low. Admittedly, there would have been a double (or triple) assessment of those initial results but this would be recompensed by low tax bills for the first three years, with the ultimate prospect of a high year's profits falling out of assessment with a structured retirement.
Having regard to accelerated payment dates, the latter facility was recognised by the transitional provisions in Schedule 20 to the Finance Act 1994. However, it was never a facility available on a cash or conventional basis because of sections 103 and 104, Taxes Act 1988 which caught the amounts deferred during business life.
Where tax planning should now be applied is in the choice of such accounting dates as are permitted and advantageous, having regard to profit fluctuations and idle overlap relief. See also 'A Path Through The Maze' by Carla Edgley and Roy Chandler in Taxation, 21 January 1999 at pages 382 to 385. – Elder.



Issue: 3797 / Categories:
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