A victory... of sorts
Six months ago we ran an item entitled "Work-inprogress: another fine mess". There, we looked at the new rules for valuing business work-in-progress. And we concluded that there were two possible — and very different — interpretations of these new rules.
- Either very many businesses are about to suffer a large one-off hike in their tax bills. That’s because work-in-progress, which used to be valued (broadly) at cost now has to be valued at full selling price.
- Or there’ll be little change because, in the real world, the selling value of work-in-progress — that is, of unfinished work — is often next-to-nothing.
Or certainly, it will be well marked down. So there is very little difference between cost and the real selling value.
We had hoped that the "real world" argument would prevail, but warned that this might prove to be an unrealistic hope. In that event, we said, shouldn’t the impact of the increased tax charge be spread over a period of years? In fact, as we pointed out in September, there’s a fairly recent precedent for this: when a change was made to some valuation rules in 1999, the Revenue introduced a facility enabling the additional tax to be paid over a period of up to 10 years.
But this time, there was nothing forthcoming from the Revenue. They were unmoved by urgent pleas from the business community.
Times move on....
Later we noted that the latest rumblings from the powers-that-be indicated that there was to be no place for common sense "real world" valuations in business. And that businesses would indeed have to start using the unrealistically high "full selling price" basis of valuing work-in-progress — work that, in reality was in no fit state to be sold!
What the Revenue decided
So would the Revenue show any sympathy here, and give way on the "spreading relief" point?
... then finally
In December, at the time of the Pre-Budget Report, it was announced that the Revenue had at last decided to allow some "spreading relief". But not over a period of 10 years. Instead, the relief is to be spread over just three years (or up to six years where the impact of the rule-change is greatest). So, as a general rule, one-third of the extra tax bill will be payable in year one, and one-third in each of the next two years. (And here, "year one" means the first accounting period of a business that ends on or after 22 June 2005.)
So we — the business community — have lost the war over work-in-progress valuations. But at least we won a small battle.
Well, it was not so much a battle, more of a tailend skirmish. And the win was anything but a resounding one — three years instead of 10. We are not happy. Especially when we recall that the change has been instigated by an ivory-towered accountants’ think-tank.
Whose side do they think they are on?
Robert Bond has been a practising chartered accountant for 20 years.
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