UK: Spreading The Burden Of UITF 40

Last Updated: 7 May 2006
Article by Colin Ives

Government concedes need for spreading relief but inequalities remain In response to pressure from various consultative bodies with whom we have been actively involved, the Chancellor has accepted the need to introduce a ‘spreading relief ’ to help firms combat the negative tax effects resulting from the change in accounting practice under UITF 40.

Prior to the concessions announced in the Chancellor’s Pre Budget Report, all affected businesses would have been obliged to pay the advanced tax charge in a single installment. Clearly, this could have been very damaging for some firms bearing in mind that no additional cash would actually have been generated in order to pay the advanced tax.

Measuring the impact

Research carried out by the CCAB (Consultative Committee of Accounting Bodies) has showed that following the introduction of UITF 40, a quarter of businesses face an increase in their tax bill of more than 50 per cent, and about one in six will see their tax bills more than double. If a firm’s ‘normal’ tax bill is in the region of £100,000, then to be suddenly faced with a tax bill of £200,000, could be extremely detrimental from a working capital perspective.

How will spreading work?

Final details are expected in the Finance Bill, however HMRC has indicated that the additional tax resulting from the adoption of UITF 40 will be spread over three years or, for those firms most severely effected, over up to six years.

Each year, one-third of adjusted trading profit will be taxable, subject to an upper limit of one-sixth of that year’s taxable trading profits. This continues for up to five years or until the adjustment has been fully taxed. After five years, any untaxed balance will be fully taxable in the sixth year.

On the whole it is hoped that this new spreading relief will alleviate the problem that would have otherwise caused some firms considerable hardship.

Problems remain

The flipside is that, ironically, the proposed spreading relief does not apply to ‘early adopters’ of UITF 40. (i.e. those firms which have implemented the new accounting policy in accounting periods ending prior to 22 June 2005). This seems somewhat unfair for those firms which have acted in good faith and implemented the change ahead of the 22 June 2005 compulsory deadline. It is worth noting that UITF40 encouraged early adoption! Such firms are understandably aggrieved and it seems wholly unreasonable that the tax system should seek to penalise them.

Another consequence, which seems to have been overlooked by the Government, is the interaction of these new spreading rules with the payments system for selfassessment. In the case of a firm spreading the charge over three years, the tax payments will actually only be spread over an 18-month period, with 50 per cent of the liability being paid as a first installment.

We continue to petition against these inequitable decisions by the Government and we remain closely involved in the talks with the CCAB and Association of Partnership Practitioners who are trying to ensure that all firms, regardless of when they implemented UITF 40, qualify for the spreading relief.

We are working with a number of clients affected by these changes.


Firm A’s adjusted turnover is increased by 20%, from £100,000 to £120,000. The taxable profit uplift will be £6,667 for three years (the lower of one-third of the total uplift (£6,667) or onesixth of total profits (£20,000)). No further spreading relief applies as the adjustment has now been fully taxed.

Firm B is more severely affected by the adjustment required by UITF 40: adjusted turnover increases from £100,000 to £150,000, with taxable profits for years 1 to 6 of £75,000 per annum. The profit uplift for years 1 to 5 will therefore be £12,500 pa (i.e. the lower of one-third of the total uplift (£50,000) or one-sixth of profits (£12,500). In year 6 the balance is £87,500 (upward adjustment of £150,000 less £62,500 already paid)).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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