Fire returned after `Dawn raid' over partners' time

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The Independent Culture
Accountants have become well used to the Inland Revenue slipping out potentially important announcements when the rest of the world's attention is otherwise engaged. So, the appearance just before Christmas of a statement from Dawn Primarolo, Financial Secretary to the Treasury, over plans to change the "favourable" basis on which they and other professionals can pay their taxes falls very much under the category of business as usual.

What is rather more extraordinary, though, is the coverage that this rather obscure item received in what was admittedly a thin week for news. Labelling the move "a windfall tax on professional partnerships", Coopers & Lybrand, the Big Six accountancy firm that is in the throes of a merger with the rival operation Price Waterhouse, suggested that requiring partnerships to come into line with corporates and account for their work in progress could restrict their numbers to those with the funds to buy in rather than be awarded their positions on merit. The move could increase tax revenue by up to pounds 200m, it added.

At the heart of the matter is whether a firm prepares its accounts on a cash or accruals basis. Under the former, the partnership regards as income only work that has been paid for, while under the latter, work in progress has to be recognised.

Since companies have to account for such work, Ms Primarolo says her proposal is simply an attempt to "level the playing field for all businesses and correct an anomaly for which there is no justification".

And she has a point. Other large firms contacted at the time of the announcement were quick to point out that they had moved from the cash to accruals basis some time ago. Which is, after all, what one would expect from multi- million-pound, international organisations. So are we to conclude that Coopers is not so sophisticated, or is it merely waving the flag for the little guys and just using big numbers in order to dramatise the case?

Whatever. The more interesting point is, as David Williams, tax partner with the accountants Smith & Williamson, points out, deeper within the short press release. This says partnership profits should be computed according to accounting standards.

On the face of it, that looks reasonable enough. But, says Mr Williams, it brings to a head the thorny problem of partners' time. At the moment, professionals have a certain amount of leeway on how they deal with this on the basis that - as owners of the business - they cannot treat their own drawings or pension contributions as expenses.

Any change in this area would be likely to have a far greater impact than the one-off charge facing firms still operating on a cash basis, which can at any rate be phased over three years.

If all this - coming on top of the ending of previous tax advantages and the decision by some firms to publish information about their finances - appears to strengthen the hand of those planning to abandon partnership status in favour of incorporation, it is not as simple as that.

Accounting for partners' time as an element in work is also a potential stumbling block to the plans issued last year for firms to be able to set up as limited liability partnerships - and so avoid ruin as a result of litigation.

With barristers likely to seek an exemption on the grounds that being unable to sue for payment of court-related work makes it hard to account for work in progress, expect a heavy lobbying campaign as professionals - in Mr Williams' words - "help the Government to recognise" the complications.

- Roger Trapp

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