A provision is an estimate of expenditure which is expected to be incurred in a trade in respect of a particular item. A provision does not necessarily reflect the actual expenditure to be incurred, but allows for a reliable estimate of the costs to be reflected in the accounts, thereby reflecting a more realistic financial picture of a business.

Provisions are only allowable for tax purposes where certain conditions are met, otherwise there would be a danger that a deduction could be claimed for expenses that had not actually been incurred or were never going to be incurred, thereby reducing taxable profits without justification. An important case on provisions is Owen (HM Inspector of Taxes) v Southern Railway of Peru Ltd in which a provision was disallowed because it was too inaccurate. HMRC accepts that sometimes absolute accuracy is impossible, but if the business has exercised judgement in a reasonable manner and arrived at a result that accords with generally accepted accounting practice (GAAP), HMRC will not seek to substitute a different figure.

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