Tax relief for provisions

A provision is effectively an estimate of expenditure which may have been incurred or losses which may have been sustained. They do not necessarily reflect actual expenditure but are a reliable estimate in working out the cost of a particular item to a business.

Provisions are only allowable for tax purposes in certain circumstances. An important case is Owen v Southern Railway of Peru Ltd whereby HMRC only accepted a provision provided it had been specifically calculated. HMRC does not like companies simply putting through a provision in the accounts and wiping out substantial amounts of taxable profit. Where a company can show a fundamental basis for the figures computed, then the provision would be allowed. This case sets the principle that provisions are only allowable where they are specific.