UK Government’s IFRS Transitional Tax Arrangements Attract Criticism
Accounting firm Ernst & Young this week expressed disappointment at the UK
government’s decision to bring forward new legislation preventing companies
crystallising tax relief for losses prior to the introduction of International
Financial Reporting Standards.
“If companies crystallise losses on financial instruments it will not
be to avoid tax but to deal with uncertainty because nobody can be sure what
the transitional rules ultimately will be", noted E&Y partner John
Muray. He continued: “A measure like the one announced yesterday may be a reasonable way to
limit turbulence in the gilts market, but it should have been coupled with a
commitment to come up with a fairer set of rules.” Muray noted that several financial institutions have significant holdings of
gilts which they will need to treat as ‘available for sale’ assets
in their accounts for 2005. In future, says Muray, such gilts will normally
be held at fair value, though gains and losses on revaluation will not be taken
through the profit and loss account. “It is bad enough that fair value gains and losses are even taxable.
It would be much better if they were only recognised for tax on realisation,
when recycled to profit and loss in the accounts. Having unfair transitional
rules compounds the problem,” added Muray. “It is possible that a company could realise a loss on selling gilts
in 2005 but have most of the loss relief spread over the period 2006 to 2011.
But even that is not sure. What we now have is taxation by press release at
its very worst,” he concluded. .
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