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Business Newsletters - Winter 2005
Income Recognition Changes
Many businesses in the service sector may now find themselves facing accelerated tax payments as a result of changes in accounting rules for revenue recognition.
Consider the following.. Your business has negotiated a consultancy contract with a customer for an agreed fee of £20,000. The contract is halfway to completion at your 30 September 2005 year end. The total costs of providing the service are expected to be £12,000 (and this is mostly salaries) leaving £8,000 of profit. Previously, £6,000 (ie half) of the costs incurred by September 2005 would have been carried forward as work in progress and no income or profit would have been included in the accounts. |
The new rules
For accounting periods ending after 22 June 2005, income from incomplete contracts must be included in the accounts to the extent to which the contract has been performed (under the terms of UITF Abstract 40). Smaller businesses adopting the Financial Reporting Standard for Smaller Entities (FRSSE) must do the same for accounting periods beginning on or after 1 January 2005.
Now, instead of any work in progress being included, a proportion of income (£10,000) and therefore profit (£4,000) must be included in the accounts to September 2005. And...you guessed it, the tax treatment will follow suit and at the time of writing there is no provision to allow any spreading, although the professional bodies continue to push for this. |
Some thoughts if you are likely to be affected:
- given the choice, focus on completing existing contracts as your year end approaches and defer new work until after the start of your next financial year
- ensure you have efficient invoicing and cash collection procedures so that at least you have the funds to pay the tax.
To find out more please contact us.
