§ Mr. Michael Shaw
asked the Chancellor of the Exchequer whether he is aware that the merger of professional firms in the interests of greater efficiency and economy may be inhibited by income tax and surtax liability on the debtors and work in progress of one of the merging firms; and whether he will make a statement.
§ Mr. Patrick Jenkin
Yes. If one of the firms has to change the basis of its accounting to conform to that of the other, there may be an immediate additional tax liability under Section 144(2), Income and Corporation Taxes Act, 1970, 367W in respect of the debtors or work in progress or both of the firm making the change without there being any inflow of additional cash. This was neither envisaged nor intended when the Section (originally 18(2) of Finance Act, 1968) was enacted and is manifestly unfair.
Accordingly in such circumstances by the device known as "top-slicing", the additional surtax attributable to the Section 144(2) liability will be reduced to six times what it would have been if only one sixth of the amounts in question had been liable to tax. There will be appropriate modifications for firms which have not existed for as long as six years. In the first place this arrangement will be an extra-statutory concession, but my right hon. Friend the Chancellor of the Exchequer will seek a suitable opportunity to propose legislative provisions to make it statutory.
I realise that this proposal will not solve all the difficulties, but as a further measure of assistance the Inland Revenue will be willing to consider proposals for the payment of the income tax and surtax involved by instalments. For the avoidance of doubt, this extra-statutory concession does not apply to individuals who change their basis of accounting without joining a partnership or to partnerships which change their basis of accounting without merging with another partnership.