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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Tax and accountancy: timing of receipts and expenditure: anticipation of loss

There was a long held rule of tax law that neither a profit nor a loss could be anticipated. Lord Reid described this principle in BSC Footwear Ltd v Ridgway [1971] 47TC495 as ‘well-established though non-statutory’, but Nolan LJ (in Threlfall v Jones and Gallagher v Jones [1993] 66TC77) suggested that it might equally be described as ‘a re-statement in a particular context of the statutory rule taxing the ‘full amount’ of profits’.

The judgment in a case heard in 1999, Herbert Smith (A Firm) v Honour [1999] 72TC130, re-examined what was meant by anticipating a profit or loss.

Herbert Smith establishes that where accounts are drawn up on generally accepted accounting practice there is no overriding rule of tax law which denies relief for losses or expenses which will only be paid in the future.

The case concerned a provision made in the accounts for losses for later years. This was in respect of rent for leased properties which were to be vacated by the firm. The accounts were prepared in accordance with generally accepting accounting practice. The court held that the only conclusion on the evidence was that the making of the provision was required by GAAP, even though it was required by prudence and not by the matching principle. The inclusion of a provision for future costs did not anticipate losses, instead it properly allowed the full amount of profits for the year to be ascertained.

Herbert Smith can be contrasted and compared with Threlfall in so far that in Threlfall the taxpayer’s accounts were not drawn up in accordance with the then GAAP.