End of tax contingent fee transitional arrangements

In December 2010, a revision was announced to the APB Ethical Standards which took effect from 30 April 2011.

One of the revisions was a widening of the circumstances in which tax services cannot be provided by an audit firm to the entities they audit, on a contingent fee basis. The prohibition now extends  to circumstances in which the outcome is dependent on an uncertain, or as yet undetermined, tax law interpretation (APB Ethical Standard 5, paragraph 95).

The concern in this case is that the audit judgment as to the appropriateness of an accounting treatment might be swayed by the potential effect on the outcome of the tax service.

As a number of existing non-audit service contracts with audited entities involved lengthy tax cases with the UK and European authorities, APB agreed to an extended transitional period, provided safeguards were applied:

'…services contracted before 31 December 2010 may continue to be provided until the earlier of either:

• the completion of the specific task or the end of the contract term, where this is set out in the contract; or
• in the case of services prohibited under paragraph 95, 31 December 2014…' (APB Ethical Standard 5, paragraph 171).

The Financial Reporting Council press release has confirmed that it does not intend to extend the transitional relief further. Accordingly, any contracts with audited entities which would now be prohibited under ES5, but which continued in line with the transitional relief, will have to be terminated, amended to remove the contingent fee element, or the audit firm will need to take other appropriate action.