BKM206100 - Bank compensation restriction: unwinding provisions: overview

CTA09/S133A-M does not provide an explicit methodology for unwinding unused provisions. This is consistent with HM Revenue & Custom’s approach in other areas where there are expenses which are disallowed; any later unwind is effectively treated as an adjustment to an expense.

Example: Business entertaining

Company M has a 31 December year end. It hosts a Christmas party for clients on 23 December 2015, but does not receive the bill until 10 January. The company expects the party to cost £10,000 and accrues this figure as a provision in its year end accounts. When the bill arrives, it is actually £9,000. The expenditure is disallowable for tax purposes.

In this case, company M’s accountancy is to reverse the £1,000 of unused provision out of the balance sheet and through the profit and loss as income. For tax, the treatment follows the original provision, and the income is not taxable because the expense was not allowable.