UK Government’s IFRS Transitional Tax Arrangements Attract Criticism

by Robert Lee, Tax-News.com, London

17 December 2004

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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