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I'M NOT BREAKING my self-imposed rule of leaving the article by Robert Maas as the last word on the accounting implications of UITF 40; see 'A red herring', Taxation, 18 May 2006, page 175. However, the latest guidance issued by the ICAEW (in conjunction with the other main accounting and tax bodies and agreed by HMRC) specifically says that it is 'not intended to give guidance on the interpretation of UITF 40', merely on the tax implications of it. In particular it answers some of the problems I raised in my article 'The Anita meter', Taxation, 1 June 2006, page 245.
That article looked at one of the examples in HMRC's helpsheet IR 238 about a report being prepared by Anita, a self-employed management consultant, and her assistant. As all examples tend to, it simplifies the position — they are half way through the report, they have time records both for the opening and closing figures in calendar year 2005, they have a reliable estimate of the amount of work required to completion, and it's the only job open at year end. On that basis, the UITF 40 principle of recognising recoverable income for work that has been done is not difficult to apply. It is more difficult when some or all of these features are absent, as a greater level of judgement is required.
You are the judge
The guidance starts by emphasising that there is 'no one “correct” judgement and thus no “correct” profit figure'. HMRC are entitled to question whether your judgement has been reasonably applied; they are not entitled to substitute their own judgement for yours.
There is no requirement to start keeping time records if the business has not previously done so, and it is not necessary to look at each contract individually if you can reasonably aggregate them into a number of groups. The guidance gives an example, purely for illustrative purposes, of how a firm which mostly fills in personal tax returns might record the issue — although it does not say so, it appears that it probably has a 30 April year end. The guidance suggests that the note might start as follows:
'At the year end the work done on personal tax returns consists mainly of asking clients for information. Our experience shows that in approximately 10% of such cases information has been obtained from clients who expect the return to be completed promptly and such returns are normally completed by the year end but not yet approved by the client so no bill has been raised.'
It is estimated that there is a further 20% of the annual work to be done (checking calculations, advising on payments, etc), so 80% of the full fees was recognised in relation to these jobs. For the remaining 90% of the jobs, no information had been received by clients, so no substantive work had been performed.
Note that all this method required was a split of the jobs unbilled at year end into those for which information had been received quickly, and those where it had not. Most practitioners could probably do that from memory, as it is always the same clients who are prompt with their information. If not, it's probably simply a matter of checking the bills issued for the month or two after the year end. The guidance stresses that the percentages above are illustrative, not indicative, and you will need evidence of how you arrive at the ones you use, but it does indicate that the problem may not be so bad for those with April year ends.
When does the judgement have to be made? As always, it is the date of approval of the accounts which is the cut-off for post balance sheet events — events which provide evidence of conditions as at the balance sheet date (such as the inability of the client to pay the fees, for example). If there is no formal procedure for approving accounts, as there will not be for a sole practitioner accountant, it is suggested that when they are finalised they should be signed and dated. In practice it is probably the same as, or a few days before, the date on the practitioner's tax return!
Identifying the prior period adjustment for the opening figures in the year that the new accounting policy is adopted may be even more difficult, as the business may not have kept the necessary records. In such cases HMRC will 'accept any reasonable method of calculating this adjustment that is in accordance with UK GAAP'. It illustrates this by saying that using the ratio of closing accrued income over sales billed for a period shortly after the current year end, and applying it to the sales billed after the previous year end, would be an acceptable policy, although it is emphasised that this is only an illustration.
Work in progress
The guidance notes that, under UITF 40, 'for many, if not most, contracts that have recognised income there will be no unexpensed amount to be carried forward and thus no work in progress'. Pointing out that the accounting guidance does not state what will be left in WIP, the Taxguide then gives a list which is remarkably similar to the one in Robert Maas's article, although one amendment may indicate some of the ongoing arguments:
'iv) Cases where the point has not been reached at which there could be said to be any consideration because the work is at a very early stage.
The words in italics were in the original article but missing from the Taxguide.
If WIP is to be included, HMRC are ready to accept that, broadly speaking, the smaller the firm the fewer overheads need to be accounted for.
A sensible approach
All of this is welcome news, and is indicative of a very sensible and measured approach on the part of HMRC. They have steadfastly avoided getting into the debate on what UITF 40 means, quite rightly saying that it was for the accountancy profession to decide. The fact that it took so long for the profession to do so is not HMRC's fault.
The relaxed attitude to identification of income, and particularly of the amount to be spread, is also welcome. In particular it is very heartening to see HMRC endorse the statement that 'when accounting standards involve judgement there is obviously no one “correct” judgement and thus no “correct” profit figure'. Since the whole issue is one of timing differences, and in particular the amount allocated to adjustment income only affects whether income arises in full in the year or is liable to spreading, it is sensible to apply a broad brush approach to it. There are enough caveats in the guidance to make it clear that this is not a licence to manipulate the figures so that excessive amounts fall into adjustment income, but provided a reasoned approach has been taken it appears HMRC are not going to waste time on arguing about small amounts.
