Revenue Note for Guidance

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Revenue Note for Guidance

95A Change of basis of computation of profits or gains of a trade or profession

Summary

This section provides for the spreading of a tax charge over a 5-year period where the charge arises from a clarification of accounting treatment in relation to the value of certain work-in-progress.

The issue arises from the application of a statement know as “UITF Abstract 40”, issued by the Urgent Issues Task Force of the Accounting Standards Board concerning the basis of valuation of work-in-progress in the case of contracts to provide services.

The statement clarifies that profits on such contracts, to the extent that the contracts are completed, should be taken into account in valuing work-in-progress. The effect of such inclusion is to increase the value of closing work-in-progress. This results in profits being recognised earlier than in the past. This earlier recognition of profits will result in a higher tax charge in the year of change than would arise in the normal course.

The section confirms that the uplift in the value of the work-in-progress is chargeable to tax and then provides that the additional charge is to be spread forward over a five-year period beginning with the year of change. One-fifth of the additional charge will be taxed in the year of change and one-fifth will be taxed in each of the following four years.

Details

Definitions

(1) “Accounting Standards Board” is defined.

“Chargeable period” is given the same meaning that it has in section 321 of the Taxes Consolidation Act 1997. In the case of an individual, it means a year of assessment. In the case of a company, it means an accounting period.

Application

(2) Where for any year there is a change in the basis of valuation of work-in-progress and a different basis of valuation was used in the previous year, any uplift in the value of work-in-progress will be taxable in the year of change. Where there is a change (say) in 2005 the opening and closing work-in-progress will be valued on the new basis in the 2005 accounts. However, if the closing value of work-in-progress in the 2004 accounts is less than the opening value in the 2005 accounts, some profits could fall out of the charge to tax. The provision ensures that this will not happen.

Change in basis of work in progress

(2)(a) Two criteria are to be met if the charge to tax is to apply. The first of these is that there is a change in the basis of valuing work-in-progress for the purposes of computing profits or gains of a trade or profession. A reference to section 94(3) ensures that there can be no double charge to tax. Any charge to tax that is covered by section 94(3) will not be charged again under section 95A.

(2)(b) The second criterion to be met if the charge to tax is to apply is that the opening work-in-progress on the new valuation basis for the year of change is allowed as a deduction in computing profits or gains for tax purposes. That is the case where opening work-in-progress on the new valuation basis is added to purchases for the year.

The charge to tax is imposed in the year of change to the extent that no counter balancing credit in connection with the work-in-progress is taken into account in computing profits or gains for tax purposes in the previous year. This means that the charge will apply if the closing work-in-progress for the previous year is lower than the opening work-in-progress for the year of change.

Partnerships

(3) A charge arising by virtue of subsection (2) in the case of a partnership trade of profession is to be treated for tax purposes as profits or gains of that trade or profession.

Spreading of charge

(4) The charge to tax is to be spread over a number of years where the conditions in subsection (4) are met. The spreading applies where the change in the basis of valuation of work-in-progress arises by virtue only of the guidance in UITF Abstract 40 and the change is made in the 2 years beginning on 22 June 2005. (UITF Abstract 40 is a guidance statement issued on 10 March 2005 by the Urgent Issues Task Force of the Accounting Standards Board.)

(4)(a) Where the spreading applies, the full charge is not to be made in the year of change. Where the taxpayer is an individual, the charge is spread on the following basis:

  • one-fifth of the amount is to be charged in the year of change and one-fifth is to be charged in each subsequent year until the amount has been fully accounted for; but
  • if any of those years is the year of discontinuance of the trade, any remaining charge will be taxed in that year.

(4)(b) Where the taxpayer is a company:

  • the charge is to be spread over accounting periods falling into the 5 year period beginning at the start of the accounting period in which the change in basis of valuation is made, and
  • if any of those accounting periods is the last accounting period in which the company carried on a trade or profession, any remaining charge will be taxed in that accounting period.

Relevant Date: Finance Act 2021