BIM74135 - Abolition of the cash basis: annex B to ICAEW note
EXTRACT FROM INLAND REVENUE MARCH 1998
BUDGET PRESS RELEASE IR 29.
Use of ‘true and fair view’
- The aim of the proposals is to apply the earnings basis to professionals on the cash and conventional bases. The earnings basis is already the basis which applies under the existing law to some professionals and to traders. We believe the use of the accountancy concept of a ‘true and fair view’ does the job in a concise yet flexible way because:
- accounting standards as they currently operate are applied and so the tax treatment can adapt automatically to changes in those standards; and
- the accountancy concept of ‘materiality’ is imported, which means a practical view can be taken of the time when immaterial amounts are recognised.
- The materiality concept is particularly relevant in arriving at work-in-progress. It permits a broad-brush approach in small cases or for small amounts. Although there may be occasions where accountancy practice is displaced by a rule of tax law the Inland Revenue do not consider such an approach to materiality in the valuation of work-in-progress, if sanctioned by accountancy practice, to be inconsistent with tax law.
The ‘true and fair view’ approach is concerned only with the computation of taxable profits or losses. For these proposals it:
- makes no difference to the law under which traders compute
business profits;
- does not require accounts to be drawn up on any particular
basis; for example, cash basis accounts could still be prepared
provided adjustments are made to convert the profit to an earnings
basis profit in the tax computations;
- does not require accounts to be audited;
- does not require additional disclosure or require a true and
fair view balance sheet to be prepared.
