Tax relief for provisions

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Tax relief for provisions
  • HMRC's view of provisions
  • GAAP relating to provisions
  • Obligations
  • Existence of obligations
  • Anticipation of losses
  • The Jenners case
  • International Accounting Standards (IAS)
  • Tips

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 set the principle that provisions are only allowable where they are specific.

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

See also Simon’s Taxes B2.310 (subscription sensitive).

This note does not apply to the simplified cash basis. This is because the simplified cash basis only taxes actual receipts. See the Simplified cash basis for small businesses guidance note.

HMRC's view of provisions

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

  • they relate to allowable revenue expenditure
  • they follow generally accepted accounting principles (GAAP), (discussed further below)
  • they do not conflict

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