This guidance relates to accounting periods before the issue by the Accounting Standards Board (ASB) of Urgent Issues Task Force (UITF) Abstract 40 in March 2005. UITF 40 applies for accounting periods ending on or after 22 June 2005. Further guidance is at BIM74200 onwards. See in particular Appendix 2 paragraph 1 in BIM74275 in relation to the ICAEW’s guidance TAX30/98 (see BIM74130).
A sole trader or partnership with no chargeable staff, i.e.
fee-earning employees, and small overheads will have no
work-in-progress. This is because proprietors’ and
partners’ time is not a ‘cost’ to the business.
If a professional practice has chargeable staff, it will have work-in-progress. The starting point for valuing work-in-progress is the salary and other costs such as National Insurance and pension contributions directly attributable to productive staff that has not yet resulted in recognised turnover.
The key area of difficulty is what, if any, overheads should be
included in the calculation of work-in-progress. The only case
which appears to relate directly to the recognition, or otherwise,
of overheads for tax purposes, Duple Motor Bodies v Ostime 
39TC537 was decided before the introduction of SSAP9. In that case
the Commissioners found as a fact that the company’s policy
of including only direct costs in the valuation of its work in
progress accorded with generally accepted accounting practice. It
is unlikely that such a policy would now accord with SSAP9 and so
it would no longer accord with generally accepted accounting
Paragraph 17 of SSAP9 defines cost as including such costs of conversion as are appropriate to the stock’s condition. Paragraph 19 states that cost of conversion includes production overheads (as defined in paragraph 20) and any other overheads attributable in the particular circumstances of the business to bringing the product or service to its present location and condition. SSAP9 was issued in 1975, although it was revised in September 1988, mainly to cover long-term contracts. At that time few, if any, professional practices were incorporated. Accordingly the standard does not specifically address the question as to what extent overheads of a professional practice constitute 'costs of conversion' in relation to work-in- progress. The SSAP9 definitions are more appropriate to manufacturing operations.
It is not possible to lay down rigid rules as to what to do. There might be instances where the inclusion of overheads is appropriate even in smaller firms. If for example a sole practitioner has only one client but has rendered no fee note to that client during his accounting year, he or she may need to treat some of the overheads as work-in-progress. However, it must be remembered that overheads would not relate to the work-in-progress to the extent that the office is needed as a base from which to generate new work, carry out marketing or administrative functions such as billing, etc.
HMRC have told the tax faculty that Inspectors may wish to understand the basis on which work-in-progress has been calculated but would not expect them to dwell on it, except where it did not appear to be calculated on a reasonable and consistent basis.
Some professional firms do not maintain time records. For example solicitors and patent agents will often charge a standard fee for a job. In such cases it is not necessary for the taxpayer to introduce time records where he or she does not need these commercially. Some other method to arrive at a work-in-progress figure will need to be adopted. Where cost details are kept on individual client files a 'stock take' may be possible. Where a 'billing exercise' is carried out close to the year-end, it may be possible to record details of work not being billed. A review of invoices rendered after the year-end may provide a guide to work-in- progress. It may be possible to use statistical techniques to establish the likely number of jobs uncompleted at the year-end and an appropriate cost figure.