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Amendments to FRS 5, UITF 40 and the taxation of professional firms

An collection of links, citations and useful resources on revenue recognition, changes to FRS 5 and UITF 40.

Please note that this page has been archived and that links to resources may now be broken.

Accounting Standards Board

The Accounting Standards Board (ASB) issued their requirements on revenue recognition, in the form of an Application Note to FRS 5 ‘Reporting the Substance of Transactions’. Further information on this is available in the ASB press release issued on 13th November 2003, entitled ASB Issues Standard on Revenue Recognition. The full text of the amendment was published in the January 2004 edition of Accountancy magazine.

On September 23rd 2004 the Urgent Issues Task Force (UITF) issued Information Sheet 68 following ‘requests for guidance on the subject of revenue recognition in respect of contracts for professional services’. The information sheet sets out ‘matters discussed at the UITF's meeting in September’ and includes a request for further research to clarify the interpretation of SSAP 9.

A draft UITF abstract on Revenue recognition and service contracts was published by the Accounting Standards Board on 30 November 2004. The draft was announced in the press release Draft UITF Abstract on Revenue Recognition and Service Contracts (ASB PN 259).

The final version of the UITF abstract Revenue recognition and service contracts (UITF 40) was published on 10 March 2005 and can be downloaded in PDF format (6 pages). The abstract was announced in the accompanying press release UITF Abstract Published on Revenue Recognition and Service Contracts.

ICAEW and CCAB

ICAEW issued an initial 'ICAEW Statement on FRS 5' on 5 February 2004. A week later the Tax Faculty issued a news item reporting on the statement and their discussions with the Inland Revenue (headed 'FRS 5 and revenue recognition') on 10 February 2004.

On 5 March 2004 the Financial Reporting Committee (FRC) issued a working draft of guidance on FRS 5 and the valuation of work in progress, which has the title of 'Application of FRS 5 Application Note G : ‘Revenue Recognition’ to contracts for professional services' in the draft. The consultation period ended on Monday 15 March, in time for a meeting of the FRC later that day. The Library & Information Service holds a copy of the draft Technical Release - for further details see our catalogue record here. Please note, the draft is no longer available on the website.

A short update was published on the members website on 1 April 2004, which stated that ‘In the light of responses received following circulation of draft guidance on the impact of FRS 5 Application Note G on professional firms, the ICAEW is not yet in a position to publish final guidance.’ The Tax Faculty also published a short news item reporting on this 'FRS 5 and the valuation of work in progress').

On 13 September 2004 ICAEW published a short news article headed "Priority called for Revenue Recognition" which included the full text of a letter sent on September 10th 2004 encouraging the Urgent Issues Task Force to address the topic as a high priority.

Following the release of UITF Abstract 40 in March 2005 the ICAEW published Revenue recognition and service contracts: Frequently Asked Questions to help members understand the implications of the new guidance. The FAQs were revised on 7 June 2005, 10 August 2005 and 11tOctober 2005. An article on Application Note G by Alan Taylor, Institute Director of Practice Innovation, was also published.

The Tax Faculty commented on the implications of UITF Abstract 40 in the April 2005 edition of TAXline. On 5 May 2005 the Tax Faculty published FAQs on the tax aspects of UITF Abstract 40 and these were updated on 11 October 2005.

ICAEW published a range of supporting materials on UITF Abstract 40 for practising members on 10 May 2005 including two standard letters, a client work programme and a control sheet.

On 30 June 2005 the ICAEW published the press release CCAB in discussions with UK tax authorities to provide relief for businesses hit by tax charges on new accounting rules on behalf of the CCAB.

The article Practical application guidance of FRS 5 Application note G and UITF 40 to law firms, which was originally published in the July 2005 edition of Solicitors Group News, was made available in full text on the Technical Policy website.

Following the letter from the CCAB, the Tax Faculty launched a survey through their website on 16 August 2005 with the aim of collecting data to present a case to the PMG for spreading of the potential tax liability.

On 10 October 2005 the Consultative Committee of Accountancy Bodies (CCAB), together with the Law Society, published the details of a joint letter and CCAB Memorandum 'The impact of UITF Abstract 40: A memorandum from the CCAB to the Paymaster General' sent to Dawn Primarolo, Paymaster General, on 4 October 2005. The publication of the letter and memorandum was announced in the press release CCAB and the Law Society provide evidence of potential hardship caused by UITF Abstract 40.

Following the Chancellor's announcement of UITF 40 tax relief in the Pre-Budget Report on 5 December 2005, the ICAEW issued the press release ‘CCAB bodies and The Law Society welcome tax relief for providers of services’ on 6 December 2005. ICAEW's Tax Faculty also issued the news item Pre Budget Report - UITF 40 and service contracts – spreading announced on 6 December 2005.

The Institute of Chartered Accountants in England and Wales published new guidance for members on the application of UITF 40 on 28 April 2006. The Guidance on the application of UITF 40: Revenue recognition and service contracts was made available from the Istitute website and provided a series of practical examples of the application of UITF 40. The guidance was announced in the news item Revenue recognition and service contracts on 28 April 2006 and later highlighted in the press release ICAEW publishes guidance on UITF40 on 9 May 2006.

In July 2006 ICAEW's Tax Faculty published a Guidance Note on the tax aspects of UITF Abstract 40 (TAXGUIDE 5/06) which is available in PDF format from the Tax Faculty website. The revised guidance was announced in the press release Guidance Note on the Tax Aspects of UITF Abstract 40 and in TAXline weekly news update No 315 (week ended 15 July 2006).

The CCAB issued guidance on the UITF 40 on 14 August 2006 which is available through their website at CCAB Guidance on the Application of UITF 40 and can be downloaded as a 12 page PDF document. The publication of the guidance was announced in the press release CCAB guidance on the application of UITF 40 “Revenue recognition and service contracts" on 15 August 2006.

A news item in TAXline weekly news update No 321 for the week ended 26 August 2006 comments that ‘the CCAB bodies are now working on a paper covering the tax implications of UITF 40 which it is hoped will be agreed with HMRC’.

The ICAEW published the Technical Release UITF 40 and taxation (TAXGUIDE 08/06) on 2 October 2006. The Technical Release is available to download in Word format. The Technical Release was prepared by ‘the Tax Faculty of the Institute of Chartered Accountants in England and Wales in conjunction with the Association of Chartered Certified Accountants, the Chartered Institute of Taxation, the Institute of Chartered Accountants of Scotland, the Association of Accounting Technicians and the Association of Taxation Technicians. It reflects discussions that those professional bodies have had with HMRC and has been agreed by HMRC’. A further note states that the Technical Release ‘supersedes TAX 30/98 for accounting periods ending after 22 June 2005’.

TAXline weekly news update No 340 (week ended 14 January 2007) included a short article on UITF 40 focusing on the completion of tax returns.

HMRC

The minutes of the Corporation Tax Operational Consultative Committee meeting for 17th May 2004 include an item on Application Note G to FRS 5 with additional reference to the article 'Valuation of work in progress for unincorporated businesses' by Trevor Johnson (Tax Adviser, May 2004).

The HMRC issued a statement on 1st November 2005, on whether entities applying the FRSSE are required to comply with UITF 40. The details of this statement were published on the ICAEW's Revenue recognition and service contracts: Taxation Impacts & Guidance for Members' page at the time.

A helpsheet with the title 'Revenue Recognition in service contracts - UITF 40' (IR238) was published by the HMRC for the year ended 5th April 2006. This helpsheet was first included in the collection of helpsheets available from the 'Self Assessment: The Tax Return: 2005-06 forms and notes' page on the HMRC website, which was announced in the HMRC list of new pages on 6th April 2006.

Following the publication of guidance from the CCAB on August 15th 2006 the HMRC have stated that IR 238 may need to be updated and any amendments would appear on their 'Revenue Recognition in Service Contracts - UITF 40 - Help Sheet IR238' page, which provided a number of updates and information on work in progress at the time of writing (18 August 2006).

The HMRC initially provided guidance on 'How to spread UITF 40 Adjustment Income' as part of the 'Self Assessment: Additional Information and Help' section of their website on 22 August 2006. A statement on the pages at the this time noted that the guidance provided 'a basic outline and more detailed guidance will be published in the Business Income Manual.'

HMRC later updated their UITF 40 page to include links to the CCAB guidance issued in August 2006 and to the ICAEW Technical Release TAXGUIDE 8/06 issued in October 2006. At the time, the HMRC website stated that ‘This guidance has been agreed both with HMRC and a number of other accounting and tax bodies. HMRC has not reviewed or agreed any other guidance.’

In January 2007 the HMRC website stated that comprehensive HMRC guidance would be included in the Business Income Manual which is available through the HMRC website at BIM74200 - Revenue recognition and service contracts: UITF 40: contents & overview.

A helpsheet with the title 'Revenue Recognition in service contracts - UITF 40' (IR238) has been included in the collection of helpsheets available from the Self Assessment: The Tax Return - forms, notes and helpsheets section of the website. The version for the 2007-08 tax year is available at Revenue Recognition in Service Contracts – UITF 40 (Help Sheet 238, Tax year 6 April 2007 to 5 April 2008).

HM Treasury

The Pre Budget Report 2005, published by the Treasury following the Chancellor's speech on 5th December 2005 included a paragraph announcing that measures to provide tax relief to those firms affected by UITF 40 would be incorporated in the Finance Bill 2006. The announcement was made in paragraph 5.101 in Chapter 5: Building a fairer society (PDF, 203KB) of the Pre-Budget Report 2005.

The Finance (No.2) Bill 2006 was published on 7th April 2006. The bill sets out the details for the spreading of the adjustment in Clause 102: Accountancy change: spreading of adjustment and Schedule 15: Accountancy change: spreading of adjustment.

General reading

A listing of books and articles on the subject of Revenue Recognition and Professional Firms and more specifically, Revenue recognition and the taxation of professional firms. The list will automatically be updated as new articles and books on the subject are abstracted or catalogued by the LIS team.

The Library & Information Service also has a collection of books and articles relating to: Work in Progress and FRS 5: Reporting the substance of transactions.

Articles

The Times: Tax shock in store for solicitors and barristers
'Firms and chambers face cashflow problems unless they review their billing arrangements', write Simon Mabey and Jeremy Boadle. Published in The Times, City Law section, on 20 January 2004
This article is available online through the Times Online Archive for a charge.

Taxation: More Bad Tax News for the Professionals – view summary of article
22 January 2004 (Volume 152, Issue 3941)

Legal Week: Accounting changes threaten law firms with £10m tax hit
23 January 2004

The Lawyer: Leader
26 January 2004

The Lawyer: Tax overhaul leaves law firm futures under threat
26 January 2004

The Daily Telegraph: Tax relief sought
29 January 2004
This article includes an estimate of the impact from the ACCA.

Accountancy Age: One-off tax bill could be crippling.
29 January 2004

The Lawyer: Tax change impact could be less than expected
2 February 2004

The Birmingham Post: Legal & Finance: Gordon makes pips squeak for lawyers
6 February 2004

Taxation: The WIP Wrangle – view summary of article
12 February 2004

Financial Times: Lawyers urge rethink of heavy one-off tax charge
13 February 2004

The Herald: Lawyers demand clarity on looming tax hike
8 March 2004
This article is available free online for an initial period. After this time the article can be accessed for a charge through Back Issue, an archive of news articles from three Scottish newspapers.

Valuation of work in progress for unincorporated businesses – view summary of article
May 2004

The Lawyer: New accounting standard is left hanging as firms cite confusion
12 July 2004

The Lawyer: Law Society lobbies Accounting Standards Board over FRS5
11 August 2004

The Lawyer: Law Society calls for FRS5 clarification
16 August 2004

Legal Week: Management: Setting the Standard
2 December 2004

Legal Week: Accounting ruling hands UK firms 30% tax hike
9 December 2004

Legal Week: Management: Tax hike or not?
13 January 2005

Legal Week: Firms braced for tax-hit after ASB ruling
15 March 2005

The Lawyer: Urgent Issues Task Force clears up Application Note G confusion
21 March 2005

Taxation: Crisis? What crisis?
28 April 2005

Taxation: WIP RIP?
5 May 2005

Accounting Web: Practice Tip – WIP is the big issue for the next year
5 May 2005

Accounting Web: UITF Abstract 40: Tax body seeks relief for firms
6 May 2005

Accounting Web: Practice Tip: WIPing your clients into action
31 May 2005

Taxation: Unfinished Business?
2 June 2005

Accounting Web: Practice Tip: WIP and Practice Assurance
10 June 2005

Taxation: Still work in progress?
23 June 2005

Accountancy: Government urged to mitigate AN G tax impact
30 June 2005

Accounting Web: UITF Abstract 40: Accountancy bodies seek tax relief
1 July 2005

Legal Week: The art of billing
7 July 2005

Accountancy Age: Treasury throws lifeline over Abstract 40
11 August 2005

Accounting Web: Tax Faculty pushes for UITF 40 spreading relief
17 August 2005

Accountancy: Firms can mitigate AN G tax hit
18 August 2005

Taxes- the weekly tax news: Accountancy's new clothes – view summary of article
29 August 2005

Accounting Web: UITF 40 – it’s not going away!
1 September 2005

Accounting Web: UITF 40: Overtaxed and under-represented
20 September 2005

Taxation: The last word
29 September 2005

Accountancy Age: CCAB steps up pressure over Abstract 40
6 October 2005

Accounting Web: Hard evidence of hardship from UITF 40
11 October 2005

Accounting Web: Tutorial: UITF 40
21 October 2005

Accountancy Age: PBR05: Firms get Abstract 40 relief
5 December 2005

Accounting Web: Brown offers UITF 40 relief
6 December 2005

Accountancy: Accountants welcome change to UITF 40
7 December 2005

Accounting Web: UITF 40 Spreading – Tutorial
12 December 2005

Taxation: Spread and mutter
5 January 2006

Financial Times: Struggle to head off a high-street rebellion
26 January 2006

Taxation: UITF 40 – what now? (requires subscription) – view summary of article
2 February 2006

Taxes- the weekly tax news: UITF 40? They think it's all over; it is now! – view summary of article
6 February 2006

The Lawyer: The sum of all parts
6 February 2006

Accounting Web: UITF40: – new and straightforward advice
10 February 2006

Taxation: More on UITF 40 – view summary of article
16 February 2006

Accounting Web: Any Answers: UITF 40 adjustments – who else has lost the plot?
31 March 2006

Accounting Web: Final spreading rules bring relief for partners
10 April 2006

Accounting Web: Spreading provisions – some finer details
18 April 2006

Accounting Web: ICAEW issues UITF40 guidance
11 May 2006

Taxation: A red herring?
18 May 2006

Taxation: The Anita meter (requires subscription) – view summary of article
1 June 2006

Accounting Web: How to actually make the UITF40 adjustment
8 June 2006

Accounting Web: UITF 40 – ICAEW releases further guidance for tax
24 July 2006

Accounting Web: Company accounting ' Revenue recognition and UITF 40
25 September 2006

Accounting Web: Disclosing UITF 40 adjustments: Use of estimates with "best judgment"
9 October 2006

Accounting Web: WIP post UITF 40
23 October 2006
In this article a link is provided to a dedicated Archive of Accounting Web articles on UITF 40.

Taxation: Judgement Call
26 October 2006

Taxation: Thinly spread? (requires subscription) – view summary of article
26 October 2006

Accounting Web: Company accounting ' Revenue recognition and UITF 40
22 November 2006

Taxation: More on UITF 40 (requires subscription)
30 December 2006

Accounting Web: HMRC revise and update their guidance on UITF 40
17 January 2007

Taxation: Dead horses
18 January 2007

Commentary and responses from firms

BDO Stoy Hayward

In Summer 2005 BDO Stoy Hayward published an 8 page guide entitled 'Avoiding WIPlash: FRS5 and UITF 40 - what they mean to your numbers' which is available to download in PDF format from Revenue recognition - the implications for professional service firms. The guide includes a 'revenue recognition - service contracts' flowchart and two case studies.

Horwath Clark Whitehill

Revenue Recognition and Valuation of Work in Progress - briefing paper (2 pages, PDF format) published in March 2005.

PKF

PKF published the article Who's afraid of Application Note G ? Revenue and profit recognition for professional firms on 31st August 2004 which included an Application Note G decision tree. Available from Taxjournal to magazine subscribers only

Smith and Williamson

A short news item entitled 'FRS 5 - Tax Shock for Professional Practices!' was published on the Smith & Willamson website in January 2004 which stated that their Professional Practices team had 'prepared a briefing to outline the accounting implications and the broader issues that the application note raises'. Further updates on application note G were published in their Professional Practices newsletter.

Commentary and responses from professional bodies

Association of Chartered Certified Accountants

The ACCA sent a letter to the Urgent Issues Task Force on 26 March 2004 calling on the task force to consider the differing interpretations of Application Note G.

In June 2005 the ACCA published guidance in UITF Abstract 40 – Revenue Recognition and Service Contracts.

On 20th January 2006 the ACCA published Technical Factsheet 130: UITF 40 as a follow up to their earlier factsheet. Technical Factsheet 130 sets out to ‘consider if there is any scope for not having to apply UITF 40’ and to ‘note the ways of mitigating the impact including the tax spreading concessions recently announced’.

Association of Taxation Technicians

The ATT issued a paper entitled ‘Association seeks clarification of FRS 5 imbroglio’ on 4 March 2004 requesting an urgent ruling from the ASB on FRS5. The association published guidance for members and their clients on 24 March 2004.

On 1 February 2006 the Association of Taxation Technicians and the Association of Accounting Technicians issued Guidance for small and unincorporated businesses In respect of FRS 5, Application Note G and UITF Abstract 40. This guidance was discussed in the article 'More on UITF 40' in Taxation on 16 February 2006, which noted that ‘it would seem that the ATT and AAT's interpretation of the UITF 40 is somewhat different from that of the CCAB’ (the CCAB includes the ICAEW, ICAS, ICAI, ACCA, CIMA and CIPFA). A summary of this article is available through LibCat, our online catalogue.

Chartered Institute of Taxation

Higher Tax Bills for Professionals: FRS 5 - warning from David Collison, Chairman of the Personal Taxes Sub-Committee of the Chartered Institute of Taxation (CIOT) on 13th January 2004.

The CIOT published a news item ('Application Note G and UITF Abstract 40') on 8th April 2005 requesting that CIOT members send feedback on the tax position relating to UITF Abstract 40 to the ICAEW Tax Faculty.

General Council of the Bar in England and Wales

The General Council of the Bar in England and Wales published 'Taxation of Barristers’ Income: Accounting Standards Board’s Application Note to FRS5 (Revenue Recognition)' on 5th March 2004, a short news article setting out the opinion of a working party established by the Bar Council. The article referred readers to Section 1B of the Taxation and Retirement Benefits Handbook which is titled ‘Computation of Barristers' Profits for Tax Purposes’.

In May 2006 the Bar Council issued Computation of profits for income tax purposes: Application of UITF 40 to barristers' earnings. The Bar Council states that these documents update the guidance given in the guidance note published on 10 March 1999.

Institute of Chartered Accountants in Ireland

The Institute of Chartered Accountants in Ireland published Interim Note for Guidance : UITF 40 and RoI Tax on 21st October 2005 which provides interim guidance on the tax impact of UITF 40 in the Republic of Ireland. The interim guidance summarises the actions taken by the ICAI and CCAB-I to date. On the same day the ICAI issued the press release 'ICAI raise issue of tax problems arising from new accounting statement with UK Government'.

Following the Pre-Budget Report 2005 the ICAI published the press release ICAI welcomes progress on taxation of 'work in progress' on 13th December 2005.

Institute of Chartered Accountants in Scotland

ICAS published FRS 5 application note – recognition and valuation of work in progress (WIP) on 4th February 2004. On August 10th 2004 a further update was published under the heading FRS 5 application note “revenue recognition” and work in progress (WIP) . Following the publication of UITF Abstract 40 ICAS published the press release Professional firms face accelerated tax bills on 29th March 2005.

Law Society

On 12th March 2004 the Law Society responded to the draft Technical Release published by the ICAEW. The Law Society response was published as Draft Technical Release on FRS5 Application Note G – Institute of Chartered Accountants in England and Wales: Comments of the Law Society of England and Wales (8 pages, PDF format).

The Law Society sent a Letter to the Chairman of the Accounting Standards Board on 9th August 2004 and issued the press release 'Tax confusion could hit solicitors' on August 11th 2004, highlighting their call for Application Note G to be referred to the Urgent Issues Task Force.

In October 2004 the Law Society published Revenue recognition and work in progress in the context of professional services: How FRS 5 Application Note G applies to solicitors’ firms (15 pages, PDF format) as a submission to the Urgent Issues Task Force, giving the Law Society interpretation of Application Note G.

Following the publication of a draft abstract on Application Note G by the Urgent Issues Task Force in November 2004 the Law Society published their response as Draft Abstract on Revenue Recognition and Service Contracts: Urgent Issues Task Force - Comments by the Law Society of England and Wales in January 2005.

On 5th May 2005 the Law Society published a 'summary of the accounting standards relevant to the profession as a result of Application Note G to FRS 5, in particular the calculation of work in progress' in the document Revenue Recognition and Service Contracts: A summary of the accounting rules applicable to solicitors’ practices (7 pages, PDF format).

The Law Society added a campaign page to their website on 12th May 2005 tackling the issue of accounting for solicitors' work in progress. The page provided a timeline of developments and the text of a letter sent to the profession in May 2005 with the intention of gathering 'information on the impact of the rules and the cashflow implications'. The campaign pages included a number of relevant documents such as the the Law Society Guidance Note on the withdrawal of the cash basis (Accounting for solicitors’ work in progress).

On 5th December 2005 the Law Society issued the press release 'Chancellor softens tax blow for firms' following the announcement by the Chancellor in his Pre-Budget Report that professional firms, and many other small businesses will be able to spread the adjusted tax liability, resulting from the adoption of UITF 40, over 3 to 6 years.

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