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Business and financial advisers Grant Thornton have warned firms that the calculation of work in progress and accrued income, personal expenses, bad debt and dilapidation provisions, partner recruitment costs and a host of other payments may be scrutinised.

Adding to the weight of these investigations is the fact that the Revenue last year recruited a number of accountants to investigate professional services firms. Until now these 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 with the investigation.

Deductibility of expenses

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 the accounts were signed off.

Lenka Hennessey, director within Grant Thornton's professional practices group warned that increasing numbers of professional services clients and finance directors of other practices have been notified by the Revenue that their business is under investigation relating to the deductibility of expenses against profits.

She said that 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. Hennessey is convinced that this is a result of the recent recruitment drive by the Revenue.

Onslaught 

Firms who had enquiries last year should not think they will be left alone this year as Hennessey said she has 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," concludes 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 used it as an opportunity to discuss queries openly with HMRC.

Related links

• Grant Thornton