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If you’re comfortable with quite a technical level of detail, read on…
In laymen’s terms this is a way of accounting for unbilled work. The unbilled proportion must be recognised in the accounts for tax purposes. The standard came into force from 1 Jan 2005 and applies to accounting periods ending after then.
In the previous year’s accounts a prior period adjustment (credit capital/P&L reserve Debit debtors) must be made. For tax purposes there will be an uplift of, say, £30,000.
In subsequent years the profit for tax purposes must be uplifted for the lower of 1/3 of the adjustment income (here £10,000) or 1/6 of that year’s profits until the (here) £30,000 is adjusted for.
For an example calculation please see BIM 74215 on the HMRC website.
The problem for barristers is that there is another form of adjustment income.
2. Cash accounting
Barristers/advocates were previously allowed to use the cash basis for recognising income (rather than the invoice basis). For accounting periods beginning after 6 April 1999 the income basis needed to be used. For prior years where debtors existed but were not included in taxable profits there would be an uplift in income. This is allowed to be spread over the next ten accounting years.
An exception to this rule applies if barristers are in their first 7 years of practice (unless they adopt the invoice basis of recognising revenue). Spreading rules (10 years) apply thereafter.
For more in depth calculations please visit BIM 74001 onwards on the HMRC website.