BIM74095 - Abolition of the cash basis: practical aspects

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).

Valuation raises issues where there may be no unique ‘right’ answer

This section is intended to give guidance to Inspectors on the approach to enquiries into the valuation of professional work-in-progress for tax purposes.

The valuation of work-in-progress is now of more practical significance following FA98. This removed the previous ‘cash basis’ practices and imposes normal accruals accounting for all Case I and II activities. Such accounts will include appropriate entries for work-in-progress. However, we do not intend that this change should, of itself, call for substantial further enquiries into work-in-progress valuation. As explained in the guidance below, valuing work-in-progress is a difficult exercise and there are often no simple, black-and-white ‘right’ answers. Where firms and their advisors appear to have adopted reasonable procedures in valuing work-in-progress we do not expect enquiries to yield significant net adjustments.

The proper valuation of professional work-in-progress depends on the correct application of accountancy principles to the facts. There are no tax law rules that override the correct application of accountancy principles in this field.

This has a number of consequences. The first is that a proper basis of valuation must take into account the particular circumstances of the individual firm. Different firms in what may appear to be the same line of business may properly adopt different bases of valuation if their circumstances are different. For example, Firms A and B may both describe themselves as ‘estate agents and chartered surveyors’ but this does not necessarily mean that they must adopt the same basis for valuing work-in-progress. If Firm A does mainly surveying and valuation work and Firm B does mainly property sales then a basis of valuation that is acceptable for A may well not be acceptable for B.

Second, the valuation of work-in-progress requires an element of judgement by those responsible for preparing the business accounts. This means that in many cases there is no unique ‘right’ answer to valuing work-in-progress. Instead there may be a choice of possible bases, any of which might be acceptable. Even when a basis is adopted there may well be room for further exercise of judgement as to how that basis should be applied to the facts each year. It follows that just because an Inspector, properly advised, might have come up with a value of work-in-progress that is different from the one shown in the accounts, this does not mean that the value in the accounts is wrong or can be disturbed.

Third, any enquiry into the valuation of work-in-progress is likely to involve not only a thorough fact-finding exercise but also advice from a Revenue Accountant. It is most unlikely that any enquiry can be concluded by applying some simple ‘rule’.

Fourth, any Commissioners’ hearing on the valuation of work-in-progress is likely to require expert accountancy evidence. It follows that a report under IM5098 to CT&VAT (Technical) must be made before the case is listed for a contentious hearing.

Fifth, the ‘Ahmedabad’ principle (see BIM34105 - BIM34115) applies to changes in the basis of valuing work-in-progress just as it applies to trading stock, except for work-in-progress included in the ‘catch-up’ adjustment (see below). This means that where profits for a year are required to show a ‘true and fair view’, and the closing figure for work-in-progress is adjusted so that they do so, the opening figure for the year must be adjusted on the same basis. So there is usually no question of simply securing an increase in the closing valuation. You cannot ignore this principle.