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 [1961]
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
practice.
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.
