BIM70690 - Business changes: professional work in progress at cessation

ICTA88/S101, ICTA88/S102 and ICTA88/S104 (6) & (7) contain special provisions relating to the taxation treatment of work in progress of a profession or vocation, which are designed to prevent a loss of tax on a cessation of the profession etc or on a change of accounting basis.

Accounts on a conventional basis

ICTA88/S104 (6) and (7) apply where accounts have been submitted for tax purposes on a conventional basis (see BIM80520 first sub-paragraph). They provide that:

1. on a discontinuance of the profession etc all sums derived from work in hand at the date of discontinuance shall be chargeable under ICTA88/S104 (1) to (3);
   
2. on a change of accounting basis, where the first accounts on the new basis contain an opening debit for work in progress, such debit, to the extent to which it is not counter- balanced by a closing credit in the previous accounts, shall be chargeable under ICTA88/S104 (4) and (5) for the year of assessment in which the change occurred.

As regards the dates from which ICTA88/S104 (1) to (5) operate, see BIM80520, third and fourth sub-paragraphs.

Accounts on an earnings basis

Where the accounts of a profession or vocation have been drawn up for tax purposes on the earnings basis (see BIM80505, second sub- paragraph) and the profession etc is discontinued, the normal rule is that sums realised by the transfer of work in progress are not chargeable under ICTA88/S103 (see BIM80515, first sub-paragraph, sub-head (a)). In such cases, except where the profession or vocation was carried on by a sole individual and was discontinued because of his death, the taxation treatment of work in progress at the date of discontinuance is governed by Sections 101 and 102. These Sections provide that, subject to any election by the taxpayer to be charged under ICTA88/S103 (see the following sub-paragraph), where a valuation of the work in progress has to be made for any tax purposes on the discontinuance, then:

1. if the work is transferred for money or other valuable consideration to another resident practitioner who can deduct the cost as an expense of his profession, the value is to be taken as the amount paid or other consideration given for the transfer;
   
2. in any other case, the value is to be taken as the amount which would have been paid for a transfer on the date of discontinuance between the parties at arm's length.

ICTA88/S101 (2) and ICTA88/S102 give the person carrying on the profession etc before the discontinuance, the option to elect that any excess of the value of work in progress at the date of discontinuance over its cost shall not be brought into account in computing the profits of his final period but that, instead, any amounts he receives for the transfer of the work in excess of its cost shall be chargeable under ICTA88/S103 as post-cessation receipts.

A report should be made to CT&VAT (Technical) in any case where it is contended that the full amount of the sums received in respect of work in hand at the discontinuance does not fall to be taken into account under ICTA88/S101, ICTA88/S102 or ICTA88/S103, as the case may be.