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Work in Progress

8.38. The fact that professional firms do not bring to account the value of work in progress or unrendered charges, except where the work performed at a year end has


  ― 85 ―
given rise to a recoverable debt, results in their net income being computed on a quasi-accruals method.

8.39. One result is that net income tends to be understated under normal conditions when activities are increasing and costs rising. An associated problem is the considerable room for dispute as to whether the services performed or work carried out at the year end have in fact given rise to a recoverable debt the value of which needs to be included in net income of that year.

8.40. Those professional firms which base their charges to clients on time incurred on the assignment by principals and staff now maintain records from which the value of work in progress is computed at regular intervals for purposes of internal management. There are probably many other firms, however, which do not now find it necessary to keep these additional records. Accordingly, to require all professional persons or firms to bring to account a value for work in progress in determining net income would be onerous and add significantly to administrative costs for at least some taxpayers. But there seems no good reason why a professional person or firm should be debarred from computing net income on a full accruals basis as a matter of choice.

8.41. The Committee recommends that professional persons or firms, whether incorporated or not, be given the right to elect to take account of the value at cost of work in progress at the beginning and end of an income year.

8.42. The Committee proposes that the principle set out in paragraph 8.24 relating to changes prior to a specified date should apply to an election to bring in work in progress.

8.43. This procedure will, it is true, result in the opening value of work in progress escaping tax. But the change in basis for treating work in progress for those firms which elect will tend in most instances to increase their net income and the taxes payable without lifting the cash flow of profits available to taxpayers. Also the change will tend to increase annual taxation revenue, despite the failure to tax the opening value of work in progress.

8.44. Where a firm makes an election to bring in work in progress after the specified date, it is proposed that the opening value of work in progress should fall to be taxed by the spreading procedure, outlined in paragraph 8.25, to be applied when a taxpayer changes from a cash to an accruals basis.

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