BIM74055 - Abolition of the cash basis: examples

Example 1

Angela is an accountant on a ‘bills delivered’ basis without work in progress and an accounting date of 30 April. She prepares her accounts for tax purposes to 30 April 1999 on this basis. At that date she had completed work worth £10,000 which she had not yet billed and uncompleted work in progress with a cost for tax purposes of £20,000. She had also issued an interim bill for £2,000 for work which remained uncompleted at 30 April 1999. The client paid the £2,000 in March 1999. The work was completed in May 1999, when the fee was regarded as ‘earned’ for accountancy purposes.

Her accounts for the year ending 30 April 2000 must be on the ‘true and fair view’ basis by virtue of FA98/S42 (1). Thus they will include ‘opening’ and ‘closing’ figures for debtors, creditors and work in progress in accordance with generally accepted accounting practice.

In particular those accounts will have ‘opening’ figures which include the £10,000 in debtors, the £20,000 in work in progress and the £2,000 as a payment in advance, with no corresponding ‘closing’ figures for the previous year.

The amount of her adjustment will therefore be a positive figure of £10,000 + £20,000 - £2,000 = £28,000.

Without the adjustment charge the debtors of £10,000 and the work-in-progress of £20,000 would not be taxed. For example, the debtors will not be taxed under the cash basis regime because nothing was paid in that period; and they will not be taxed under the earnings basis regime because they earned before this period started. So they are added in arriving at the Case VI charge.

The £2,000 interim payment, on the other hand, is deducted to avoid a double charge. The £2,000 interim payment will be taxed as part of the professional profits of both the year to 30 April 1999 and the year to 30 April 2000. The payment was made in the first of these years (which is on the cash basis) and earned in the second (which is on the earnings basis). But the double charge is eliminated by deducting £2,000 from the catching up charge taxable under Case VI. (If the £2,000 was the only item in the adjustment computation, the legislation would result in a Case II deduction, instead of a reduced Case VI charge).

Angela is entitled to spreading, so the adjustment will, unless she elects otherwise, be charged as income for the tax years 1999/2000 to 2008/09 inclusive. The amount charged for each of the first nine years, again unless she elects otherwise, will be the smaller of £2,800 and 10% of her taxable professional profits (before capital allowances) for that year. For 2008/09 any remaining uncharged amount will be charged to tax.

If Angela ceases business in 2003/04 then spreading will continue. For 2004/05 to 2007/08 (i.e. the remaining four of the first nine years) the amount charged will be £2,800 each year. The 10% profit cap can no longer apply since there are no longer any profits.

Example 2

Boris & Co is a partnership of solicitors, with an accounting date of 30 June. Thus their last accounts on an ‘old’ basis are to 30 June 1999, and the adjustment is calculated as at that date. The partners are entitled to spreading from 1999/2000 to 2008/09 inclusive.

For 1999/2000 the instalment of the catching up charge is apportioned according to the profit- sharing arrangements for the year ended 30 June 1999. For 2000/01 the instalment is apportioned according to the profit-sharing arrangements for the year ended 30 June 2000. This use of 30 June continues even if the partnership accounting date changes.

Thus, for example, the catching up instalment for 2003/04 will be charged on those (and only on those) who were partners at some time during the year ending on 30 June 2003, and in accordance with their profit-sharing arrangements for that twelve months.

Now suppose the partnership is dissolved on 31 December 2004 and the business comes to an end. For 2004/05 the apportionment is, as before, according to the profit-sharing arrangements for the year ended 30 June 2004. For the years 2005/06 to 2008/09, however, the apportionment of the catching up charge is according to the profit-sharing arrangements for the period from 1 July 2004 to 31 December 2004.