Inland Revenue's stance on the year 2000 problem will cause uncertainty in the market at a time when companies need firm direction, the head of the government's Y2K Readiness Commission, Basil Logan, believes.
Logan says that when the Task Force drew up its initial brief for the government it looked at this issue of taxation but decided companies would have to fix the problem regardless of Inland Revenue's stance. Now, however, Logan feels the position should be reviewed as it creates uncertainty at the worst possible time. "The process is one of finding the problem and fixing it, then testing it, then fixing it again. The boundaries are unclear."
Inland Revenue's "public-binding ruling", announced last month, follows the line IRD has taken from the start — that the majority of Y2K expenses must be listed on its "capital" account, says Martin Smith, IRD's adjudications and rulings general manager. He says expenses must be appreciated rather than listed as revenue and allowed as deductions.
Areas that can be included under the revenue heading, and are therefore deductible, include training staff in "the new four-digit programming method"; correcting or testing software for Y2K problems where the software was originally compliant but has been "erroneously modified" to be non-compliant; and fixing Y2K problems in goods held as trading stock. Every other part of a Y2K-compliance programme must be appreciated under the capitol account. The US, Australia, the UK and Canada take the general view that Y2K compliance programmes should be tax-deductible.
Meanwhile, law firm Bell Gully Buddle Weir has published a document in which it states that Inland Revenue's position may be flawed and could be challenged in court.
The report, entitled "Managing the Millennium Bug", looks at the legal and tax implications of Y2K, and was written when Inland Revenue was still drafting its ruling. "The legal position is not as clear-cut as the draft ruling would suggest," says Bell Gully's report. "It seems likely that the Inland Revenue's interpretation of the law may be tested in the courts."