Owner-Managed Businesses

Tax relief for provisions

Produced by Tolley
  • 15 Dec 2021 13:22

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

  • Tax relief for provisions
  • HMRC’s view of provisions
  • GAAP relating to provisions
  • Legal and constructive obligations
  • Measurement of provisions

Tax relief for provisions

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 Southern Railway of Peru Ltd in which HMRC only accepted a provision that had been calculated in a particular way.

As a result, a general provision will not be deductible. For example, where it is estimated that 2% of bad debts will not be repaid and a provision is made for this amount, making a specific provision, such as bad debts of specific debtors on a line by line basis, is likely to be allowable.

HMRC provides some examples of specific provisions which it considers to be allowable at BIM46545.

See Simon’s Taxes B2.401.

HMRC’s view of

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