Tax relief for provisions

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Tax relief for provisions
  • Tax Bulletin 44
  • GAAP relating to provisions
  • Obligations
  • Existence of obligations
  • Anticipation of losses
  • The Jenners case
  • IAS
  • Provisions for repairs

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.

Owen v Southern Railway of Peru Ltd [1956] 36 TC 602 (subscription sensitive)
Tax Bulletin 44

HMRC’s bi-monthly publication, Tax Bulletin issue number 44 (now incorporated into Business Income Manual) released in December 1999, sets out HMRC’s views on the deductibility of provisions. BIM46510 states that HMRC will accept provisions as deductible if they:

  • relate to allowable revenue expenditure
  • follow GAAP, discussed below
  • do not conflict with any specific tax rule given by statutory provisions or case law
  • can be estimated with sufficient accuracy

The entity must prove that all four of these criteria have been met bef

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