RSS feedsMy client prepared accounts to 30 November and I am looking at the tax liabilities that will be due over the next few years. Of particular concern is the tax payable by 31 January 2007. The further income recognised as a result of applying UITF40 for the year ended 30 November 2005 was £126,000. The clients profit levels are typically £180,000. Can you confirm that the tax liability on the £126,000 (£50,400) can be spread over six years please?
The spreading rules are detailed in Schedule 15 of the Finance Act 2006. They permit the adjustment income (the further income recognised on the adoption of UITF40 in the accounting period ending after 22 June 2005) to be spread over a period. The precise period depends upon the relative size of the adjustment income and future profitability. If the adjustment income is no more than 50% of the normal profit levels, the period of spreading is only three years. If, on the other hand, the adjustment income is 100% or more of the normal profit levels, or profitability declines steeply, then the spreading will be over a six-year period.
The legislation provides that the amount taxable in the first three years is the lesser of one-third of the adjustment income and one-sixth of the business profits of that year. In your client’s case this would be the lesser of £42,000 and £30,000 and, in consequence, an additional £30,000 would be taxed in each of the first three years (2005/06 to 2007/08). For year four (2008/09), the amount taxable is the lower of the sum still untaxed (£36,000), one-third of the adjustment income (£42,000) and one-sixth of the business profits (£30,000). This results in a further £30,000 being taxable. The same test is applied in year five as in year four and this results in the remaining £6,000 being taxed in year five (2009/10).
Where a taxpayer has to make payments on account of their tax liability, the advantage of being able to spread is reduced. In particular, on the 31 January 2007, taxpayers are required to pay the balance of any tax due for 2005/2006 plus a payment on account (50%) of the tax liability for 2006/2007. As a result, the taxpayer will pay tax on adjustment income charged in year one and, in effect, half of the income for year two.
Tax on the other half will be paid on the 31 July 2007. In your client’s case, tax on £45,000 of adjustment income will be paid on the 31 January 2007 and on a further £15,000 on 31 July 2007.
Lakshmi Narain is director, tax services in the national tax function at Baker Tilly – lakshmi.narain@bakertilly.co.uk – and chairman of the CIoT corporate tax sub-committee
