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Law Firm Partners Face HMRC Expenses Investigations

by Robin Pilgrim,, London

08 November 2007

Business and financial advisory firm, Grant Thornton is warning law firms and other professional services firms in the UK to expect "intense" enquiries from HM Revenue and Customs into the calculation of income and expenses, ahead of the deadline for investigations into 2005/06 partnership returns.

According to Grant Thornton, with less than three months until the deadline to launch investigations into these returns, items including work in progress and accrued income, personal expenses, bad debt and dilapidation provisions, partner recruitment costs, and a host of other payments will come under scrutiny.

The advisor says that last year the Revenue recruited a number of accountants to investigate professional services firms, which until now have in many cases operated below the Revenue's radar. HMRC is expected to target law firms, architects, consulting engineers, surveyors, accountants and a host of other professional services firms in its investigation.

Of particular interest to the Revenue is the income reported in the financial statements following the new UITF40 accounting standard, including a particular focus on contingent fees. Partners' personal expenses (and the record keeping of the expenses), recruitment costs incurred on partner hire, provisions and bad debts are also being focused on, with queries being raised about the effort being made to collect the debts. HMRC is also keen to understand what has happened between the accounting date and the date that the accounts were signed off.

Lenka Hennessey, Director within Grant Thornton's Professional Practices Group warned that: "Increasingly we are being contacted by professional services clients and FD's of other practices who have been notified by the Revenue that their business is under investigation relating to the deductibility of expenses against profits."

"In addition, the nature of the queries has been far more intense than previously seen in the professional services sector. The level of detail that firms must respond with is far more sophisticated and lengthy than in the past - this is clearly a result of the recent recruitment drive by the Revenue," she continued. "Also, firms who had enquiries last year should not think they will be left alone this year as we have already seen a new round of notices being issued in the past month."

"We now expect to see the number of firms being investigated increase significantly over the next few weeks due to the timescale that HMRC has to open enquiries, so it is essential that financial directors anticipate and prepare for this onslaught," concluded Hennessey.

Separately, HMRC is making more PAYE and VAT visits to professional practices. Some professional practices have taken comfort from the minimal adjustments that have resulted from these visits, and have reportedly used it as an opportunity to discuss queries openly with HMRC.

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