Regulation may change the way the London market handles income recognition. Geoff Boardman explains
There is some confusion surronding income recognition, or more accurately, the timing of income recognition in the broker community and how regulation will affect this.
Following my article on the impact of PS174 on the London market, (Compliance Zone 30 October), I was asked about the operation of the revised IBA accounts and the difficulties that the new rules posed for brokers.
The question concerned the final paragraph in my comment piece, which said:
"The other difficulty is that brokerage can only be withdrawn from the IBA as received. This will cause problems for many brokers who may find themselves short of cash.
I suspect it will also lead to some careful interpretation of rules on instalment business. Part of the solution is to amend the policy on recognition of brokerage as income, and get the taxman to pay his share."
The questioner was concerned about the meaning of "amend the policy on recognition of brokerage as income and get the taxman to pay his share".
In answer, London market brokers have a variety of accounting policies for income recognition, but nearly all recognise income at or about inception, at least for annual policies. This is normally in advance of the more common policy of recognising brokerage income only when the premium is received.
As a result, London Market brokers have been able to withdraw brokerage from their IBA earlier to meet expenses or to pay dividends and bonuses.
The proposed regulation will prohibit the early withdrawal of the brokerage. Therefore, if the London market broker at the same time changes the accounting policy to recognition of brokerage on receipt of premium, there will be a deferral of profit equal to the new restriction on brokerage withdrawal, and therefore a deferral of corporation tax on that profit.
Geoff Boardman is a consultant with accountant Boardman & Co