Professional services firms must get ready for an intense payments investigation says financial advisor Grant Thornton.
With less than three months until the launch date for investigations into 2005/06 partnership returns, professional services firms must prepare for rigorous enquiries from Her Majesty's Revenue and Customs into the calculation of work in progress, accrued income, personal expenses, bad debt and other payments.

Last year the HMRC recruited a number of accountants to investigate professional services firms, which until now have operated below the HMRC'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.

Of particular interest to the HMRC is the income reported in the financial statements following the new UITF40 accounting standard, including particular focus on contingent fees.

Partners' personal expenses and the record keeping of expenses will be investigated, accounting and tax adjustments arising as a result of UITF40 will be tested, partner recruitment costs incurred on partner hire will come under intense scrutiny. Queries regarding the effort being made to collect the debts must also to be expected. The HMRC is also keen to understand what has happened between the accounting date and the date the accounts were signed off.

PAYE and VAT inspections are to occur more frequently than before.

Lenka Hennessey, director within Grant Thornton's Professional Practices group said 'Increasingly we are being contacted by professional services clients and financial directors of other practices who have been notified by the Revenue that their business is under investigation relating to the deductibility of expenses against profits.'

'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 said.

'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,' added Hennessey.