Work in progress (WIP) in a professional firm is the value of work done for clients that has not yet been billed. How it is valued depends on the revenue rules: where the service transfers to the client over time, unbilled work is revenue and is carried at its expected fee as a contract asset; where the fee is earned only on completion, the work is carried at cost, without profit, until that point. HMRC follows whichever treatment correctly applies GAAP to the firm’s own facts.

What is work in progress for a service business?

Accountants, solicitors, surveyors, architects, engineers and consultants usually record time against client files in a practice management system. At any moment there is a pool of recorded time, plus expenses incurred on the client’s behalf, that has not yet been invoiced. Firms call this WIP. For management purposes it is often shown at charge out rates. For the statutory accounts and the tax return it has to be valued under FRS 102, and the answer may be quite different from the time ledger total.

WIP is closely linked to accrued income. The difference is that accrued income is unbilled work already recognised as revenue, while WIP in the strict sense is a cost carried forward because the revenue has not yet been earned. A professional firm’s year end figure may contain both.

Is unbilled time revenue or a cost carried forward?

The starting point is Section 23 of FRS 102, revised for accounting periods beginning on or after 1 January 2026. For each engagement the firm decides whether its performance obligation is satisfied over time or at a point in time (paragraph 23.79).

  • Over time. If one of the three criteria in paragraph 23.81 is met, revenue is recognised by measuring progress towards completion (paragraph 23.98). Unbilled work is then part of revenue and appears as a contract asset or unbilled receivable at its expected fee. Where the firm bills an agreed hourly rate, paragraph 23.103 allows revenue at the amount it has a right to invoice.
  • Point in time. If none of the criteria is met, revenue waits until control passes. Costs incurred in the meantime are accounted for under the relevant section of FRS 102 (paragraph 23.116), which for a service provider is usually Section 13 Inventories, or, if no other section applies, as a contract fulfilment cost under paragraph 23.117. Either way they are carried at cost, not at selling price.

HMRC’s Business Income Manual at BIM33165 makes the same point from the tax side: the proper valuation of professional WIP depends on the correct application of GAAP to the facts, and two firms that describe themselves the same way may properly adopt different bases if their work is different. The over time tests are explained in more depth in revenue recognised over time for contracts.

How do the tests apply to typical professional engagements?

Recurring services such as monthly bookkeeping, payroll or retained advice usually meet the first criterion, because the client receives and consumes the benefit as the work is done. Unbilled time on these jobs is revenue.

A single deliverable, such as a report, a set of accounts or a design, is less clear. The client does not usually control a half finished report, so the second criterion rarely helps. The third criterion is met only if the work has no alternative use to the firm and the firm has an enforceable right to payment for work completed to date if the client terminates (paragraphs 23.81(c) and 23.84). The engagement letter, and the law that governs it, decide this. A firm whose terms entitle it to be paid for time spent to date may recognise revenue over time; a firm whose terms only allow a fee on delivery may not.

Fees that depend on an outcome, such as a fee payable only if a transaction completes or a claim succeeds, are variable consideration. Paragraph 23.46 allows them into revenue only to the extent that it is highly probable the firm will be entitled to the cumulative revenue recognised once the uncertainty is resolved. Until then, the work is carried at cost if it meets the recognition conditions, and written off if recovery is not expected.

What counts as cost when WIP is carried at cost?

FRS 102 paragraph 13.14 says service providers measure inventories at the costs of their production. These consist primarily of the labour and other costs of personnel directly engaged in providing the service, including supervisory personnel, and attributable overheads. Labour and other costs of sales and general administrative staff are excluded and expensed as incurred, and the cost does not include profit margins or non attributable overheads that are often built into charge out rates.

In practice that means converting recorded hours into a cost rate for each grade (salary, employer’s national insurance and pension cost, divided by expected chargeable hours), adding a reasonable share of production overheads such as premises and systems used by fee earners, and excluding business development, marketing and general management. Under paragraph 23.122 a contract cost asset cannot exceed the remaining fee expected less the costs still to be incurred, so a loss making engagement must be written down.

What does a worked example look like?

Illustration only. An accountancy practice has a 30 April year end. At 30 April 2027 its time ledger shows £50,000 of unbilled time at charge out rates.

Engagement type Time at charge out rates Basis Amount in accounts
Monthly bookkeeping and payroll £12,000 Over time; historic recovery 90% £10,800 contract asset
Annual accounts, engagement letter gives a right to payment for work to date £30,000 Over time; capped at agreed fee less billed on account, gives £24,000 £24,000 contract asset
Advisory work, fee payable only if a sale completes, outcome uncertain £8,000 Variable fee not yet highly probable; carried at cost, assumed 40% of charge out value £3,200 at cost

The accounts show £34,800 of unbilled revenue and £3,200 of costs carried forward, a total of £38,000 against £50,000 in the time ledger. The gap is write downs, fee caps and the profit element on the contingent job.

How is WIP treated for tax?

Professional firms that are not on the cash basis calculate trading profit in accordance with GAAP under section 25 of the Income Tax (Trading and Other Income) Act 2005, or section 46 of the Corporation Tax Act 2009 for companies. A correct GAAP valuation of WIP is therefore the tax figure, and HMRC officers look at time ledgers, recovery rates and engagement terms when testing it.

When a firm changes how it values WIP, for example because the revised Section 23 leads it to recognise more work as revenue over time, the change of basis rules apply. HMRC guidance at BIM34040 and BIM34095 explains that, for income tax, a positive adjustment is taxed as adjustment income, usually treated as arising on the last day of the first period of account on the new basis, and is not chargeable to Class 4 national insurance; for corporation tax it is treated as a receipt arising on the first day of that period. Firms should calculate the adjustment when the new basis is adopted rather than letting the difference fall into one year’s profit unnoticed.

Sole practitioners and partnerships using the cash basis are taxed on fees received, so WIP does not enter their tax computation; see cash basis vs accruals accounting.

What must be disclosed?

FRS 102 paragraph 23.136 requires firms that recognise revenue over time to describe the output or input methods used and how they are applied, and paragraph 23.134 requires the opening and closing balances of receivables, contract assets and contract liabilities if not shown elsewhere. Small entities applying Section 1A have a shorter list of required notes, but the accounting policy for revenue and WIP should still be clear.

What mistakes come up most often?

  • Taking the time ledger at charge out rates straight into the accounts without write downs for time that will never be billed.
  • Valuing point in time work at selling price, which brings profit forward before it is earned.
  • Including administrative or business development time in cost based WIP.
  • Ignoring the engagement letter when deciding whether there is a right to payment for work to date.
  • Recognising contingent fees before the outcome is highly probable.
  • Failing to compute a change of basis adjustment when the valuation method changes.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.