The ‘opening’ figures for the first accounts on the
new basis will be different from, and normally larger than, the
‘closing’ figures for the final accounts on the old
basis. For example, they will include opening work in progress,
which probably was not recognised at all in the closing figures,
and opening debtors, which may or may not have been fully
recognised in the closing figures.
The difference between the two figures (‘the adjustment’) is subject to a special, ‘catch-up’, tax charge. The charge works by deeming the adjustment to be Case VI income received on the first day of the first period of account on which the new basis is adopted - FA98/SCH6/PARA2 (2).
For barristers the change of basis may take place in later year (BIM74020). The provisions of FA02/SCH22 apply where a change of basis takes effect in the period of account ending after 1 August 2001 -FA02/SCH22/PARA16 and, for the purposes of the charging provision, the amount chargeable to income tax is treated as income arising on the last day of the first period of account for which the new basis is adopted -Para 4(2)(a). For years to which ITTOIA applies the adjustment income (see below) is again treated as arising on the last day - the relevant legislation is at ITTOIA05/S232.
In the BIM74015 example, 1 May 1999.
This charge will normally be spread over ten tax years - FA98/SCH6 (4).
For 1999/2000 to 2008/09 inclusive - FA98/SCH6/PARA4 (3), (4) and (5) applies.
In each of the nine years of assessment beginning with the year in which the amount is deemed to arise a proportion of the adjustment is treated as arising and chargeable to tax - FA98/SCH6/PARA4 (4). In the tenth year the balance of the catching up charge is treated as arising and chargeable to tax - FA98/SCH6/PARA4 (5).
Although the catching up charge is deemed assessable under Case VI of Schedule D, for loss relief the catching up charge is treated as profits of the trade, profession or vocation for the chargeable period for which it is charged to tax. This follows from FA98/SCH6/PARA2 (2)(d). The catching up charge cannot therefore be used to cover Case VI losses.
The FA98 legislation applies when the cash basis was first abolished and at that time the charge was assessable under Case VI. However where the spread is still running in 05/06 and following the assessable income is now called adjustment income – see ITTOIA05 Chapter 17. The same considerations as in the paragraph above apply.