Schedule 15
Finance (No. 2) Bill
6:15 pm
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I beg to move amendment No. 216, in page 77, line 13 [Vol II], leave out ‘22nd June' and insert ‘10th March'.
John Butterfill (Bournemouth West, Conservative)
With this it will be convenient to discuss amendment No. 217, in page 80, line 27 [Vol II], leave out ‘22nd June' and insert ‘10th March'.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
The amendments would backdate the relief to the date of the publication of document UITF 40 on 10 March 2005. To show the rationale behind the amendments, it is necessary to set out the background to the issues that we are discussing. Clause 102 and schedule 15 deal with the taxation of work in progress and the impact of FRS 5 and UITF 40, which was issued by the urgent issues task force of the Accounting Standards Board. Affected businesses include service providers such as solicitors, marketing and advertising firms, accountants, insurance brokers and consultants of various descriptions. That covers a number of Committee members, in one way or another. I believe that one or two of the provisions in schedule 15 also impact on barristers, so I suppose that I should admit that I was one, at one stage.
In broad terms, FRS 5 is the UK accounting standard that seeks to look through legal form and account for the substance of transactions. It is one of the most complex and hard to understand of all the UK accounting standards. Application note G of FRS 5, which was issued in November 2003, sought to deal with service businesses with large contracts. It set out new rules for the accounting treatment of the period when the contract was ongoing. In the past, the profit on the contract was recognised when it was completed and taxed, which tended to be when the payment was received.
Application note G required that the amount was brought into account as soon as there was a contractual right to payment as a result of performance under contract. Problems arose because it was interpreted differently by different accountants. Some required professionals whom it affected to bring amounts into account evenly over the performance of the contract, whereas others felt that it was sufficient to bring amounts into account when performance occurred.
The urgent issues task force looks into such areas of uncertainty in relation to application of accounting standards. It issued UITF 40 to deal with the question of whether profit should be recognised as the contract progressed under the new method, or on completion of the old method. The key factor is the point at which consideration is legally due. UITF 40 considered that it accrues as time goes by, hence the new method was adopted.
The overall effect of UITF 40 is that a large, one-off tax bill arises for solicitors and other service providers affected. That caused considerable anxiety, as did the prospect of having to pay tax on ongoing work for which the firm might not yet have been paid. To its credit, the Revenue has recognised that problem by introducing schedule 15 essentially to spread that one-off tax charge over three to six years. It does not reduce the tax charge, but merely spreads the time over which it is payable.
In principle, the change provides some welcome relief, but serious concern has been expressed by the professional associations regarding the implementation dates. As drafted, the relief set out in schedule 15 applies only to businesses that adopted UITF 40 from its official start date on 22 June 2005, but many businesses adopted the approach in UITF 40 before then. That may have been because their auditors advised them to do so, or simply because they wished to follow best practice. However, paragraphs 1 and 9 of schedule 15 deny the relief to any firm that adopted UITF 40 before its start date.
The Chartered Institute of Taxation and the Law Society have both pointed out that it seems unfair to penalise such firms because they acted swiftly in seeking to apply the highest accounting standards, and the amendment seeks to backdate the relief so that those firms can claim the spreading relief.
The Institute of Chartered Accountants has stated that
“this sends out a powerful message to business that early adoption of accounting standards in accordance with the highest standards of corporate governance will be encouraged and will not result in such businesses being penalised.”
The amendments are modest, and as many firms started to amend their procedures for drawing up accounts even in advance of the publication of UITF 40 there might even be an argument for backdating the measure further, as the Law Society has suggested. The Law Society also observed that the proposal is not for a tax reduction; instead it would allow more time for firms to spread the cost of what the society has described as a one-off windfall tax for the Treasury.
As drafted, the Bill perversely rewards those who left it as late as possible to adopt best practice. Given the need to encourage high standards of corporate governance, I hope that the Government might be prepared to consider the amendments that I have proposed.
David Gauke (South West Hertfordshire, Conservative)
I declare that I am a non-practising solicitor. My attention was drawn recently to an article in Taxation magazine. I do not know whether that is a publication that should be treated with the same scorn as a tax planning magazine, but I am told that it should not. The article was by Mr. John Endacott, a partner at Winter Rule chartered accountants. [Interruption.] No, it was not by Mrs. Gauke, though Mrs. Gauke drew it to my attention; I should perhaps declare that my wife is a practising solicitor. The article, which was published in January 2006, stated that around 70 per cent. of the top 100 law firms had already decided to adopt the new standard by the end of 2004 and that it was likely that the remaining 30 per cent. would have done so by the time of publication of the article. Mr. Endacott was extremely critical of the Treasury in its approach to spreading. He stated that
“What we have here is firms being penalised for adopting good accounting practice...It is therefore a very limited relief being introduced in a mean-spirited and divisive way”
—given that most firms will already have changed their accounting systems. He added that
“firms embracing modern approaches have to suffer the tax consequences of doing so, whilst the laggards benefit from some relief.”
Schedule 15 attempts to address an unfortunate circumstance, but it fails, because for the vast majority of firms it will be unavailable. Most firms that are likely to seek to comply quickly will have been required to do so by their auditors and will already have changed their accounting systems, so there is nothing in the schedule to assist them. That is petty, and I should like to know why the Treasury has adopted that route rather than making the provision effective as of 10 March 2005 or November 2004 when the accounting standards were developed.
Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
I should make it clear that the Government are not penalising those who followed the UITF 40 interpretations in accounting periods ending before 22 June 2005. They will pay the same tax as they would have paid had the Government not included the measure in the Bill, and on the same date. They will pay the same tax as they would have paid had the Government not included the measure in the Bill, and on the same date. They will face no additional charge that they could not have anticipated when they decided on their accounting policy for a period, at which point they would have examined the matter carefully and taken advice. The amendments ask us to do something that is incredibly complicated and could result in more tax liability in years that have already been dealt with. I shall explain why.
Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
I thank my hon. Friend.
Even those who are not accountants will understand that it would be difficult to set a start date of 10 March. Income tax payers’ accounting dates are up until 5 April 2005, so we would have had to include the effect of the first year’s spreading in 2004-05 tax returns, which were due at the end of January this year. The provisions of the Bill were not available to help people at that point, and they would be able to take advantage of the new laws only by amending their returns. Spreading adjustment income from 2004-05 would also reduce taxable income from that tax year, but would consequently increase taxable income in 2005-06 and subsequent years. The amendment would therefore impose a tax charge for the first time in 2005-06, rather than in 2006-07 as would be the case with a start date of 22 June 2005.
Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
Hang on. Let me answer the points. If I have not dealt with them, the hon. Gentleman can reinforce them.
In setting dates, it is always difficult to establish who knew what when about the changes being made, but I took the view that it is fair to put the start date for spreading at the date on which the new accounting interpretations became compulsory rather than at some interim point that can be justified only because it was the start of a new tax year. That would still leave a group of early adopters feeling unfairly treated. I emphasise nobody will be penalised because they adopted early. They will not face any additional tax charge but will pay the same tax on the same date as they would otherwise have done. Even the hon. Member for South-West Hertfordshire (Mr. Gauke) can see that to go back into tax years that are already closed off would present untold problems, particularly in the case of complex partnership arrangements. It is a matter of judgment, and my judgment is that the right start date for spreading is the date on which the requirements were finally introduced. That is the decision that the Government have made.
David Gauke (South West Hertfordshire, Conservative)
I hear what the Paymaster General is saying, and I can see some of the practical difficulties involved. Is it not a fact, however, that most firms changed their accounting practices before it was compulsory to do so? If the policy objective of the schedule is to relieve the burden on firms that are changing their accounting systems and to spread out the windfall cost, did not the Treasury miss a trick a year or two ago? It should have brought in legislation equivalent to the schedule earlier, so that we would not be in a position in which there is practical difficulty and in which we cannot go back to before 22 June? Is that not the problem?
Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
No, it is not. It is not for the Treasury to anticipate when accounting standards and directions will be made and to legislate accordingly. Those companies that looked at the statements that were being made and the possible changes that were coming forward took decisions about whether or not to be early adopters. That was sound advice for their business, and they moved in that way. As long as they are not disadvantaged, which they are not, I cannot see what the problem was.
In this example, the Opposition are seeking to put phenomenally complex legislation in place that could result in a tax charge on those who currently do not face one. If the Opposition want to put their amendment to the vote I shall ask my colleagues to oppose it. If they do vote it in, I do not think that they will be thanked by those companies that might find themselves with a tax charge.
David Gauke (South West Hertfordshire, Conservative)
I hear what the Paymaster General is saying about it not being the role of the Treasury to anticipate what firms will do when it comes to changing their accounting practices. However, as we have just heard, 70 of the 100 largest law firms had already changed their accounting practices by the end of 2004. It is not a question of anticipation, as during the course of 2005 the Treasury might have noticed, received representations and acted then. Instead, it is acting now with schedule 15. Presumably its purpose is to try to help firms and there is an objective that is meant to be achieved, but that objective will not be achieved because the vast majority of firms that will be affected will not benefit from the schedule as they had already done changed their accounting by the end of 2004. We are talking about a whole year when the Treasury did not act and should maybe have done so.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I share the concerns of my hon. Friend the hon. Member for South-West Hertfordshire and think that it is unfortunate that the Paymaster General is not prepared to accept the amendment. I will withdraw it and will not press it to a vote, bearing in mind the practical difficulties with the amendment that the Paymaster General has outlined. I echo the points made by my hon. Friend; it was clear that the shift was underway and it was entirely desirable that it would be underway at an early stage. I appeal to the Paymaster General to try to ensure in future that early adoption of best practices in accounting is encouraged by the tax system and not, as in this case, discouraged. I beg to ask leave to withdraw the amendment.