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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Specific deductions: provisions: accounting standards and GAAP: unacceptable provisions

Prior to the introduction of FRS12 in 1998, there was no guidance in UK GAAP on the general principles underlying provisions. As a result many provisions which, prior to the introduction of FRS12, accorded with UK GAAP no longer do so. It follows that those provisions, even if they were formerly allowable for tax purposes, will no longer be. In our view there is no rule of tax law that permits provisions made on a superseded basis to be ‘run off’ on that basis for tax purposes.

For example it is no longer acceptable to make:

  • Provisions for ‘future operating losses’ that is, losses that will or may arise from obligations entered into subsequent to the balance sheet date. For an example of a future operating loss see Meat Traders Ltd v Cushing (1997) SPC131.
  • Restructuring provisions, unless the business has a ‘detailed formal plan’ for the restructuring and has raised a ‘valid expectation’ in those affected that it will carry it out.
  • Provisions where the only event that might require them is an unpublished decision of the directors.
  • Provisions for future expenditure required by legislation where the business could avoid the obligation by changing its method of operation, for example by stopping doing whatever is affected by the legislation.
  • Provisions for future repairs of plant and machinery owned by the business (i.e. the accounting policy adopted by Britannia Airways (Johnson v Britannia Airways Ltd[1994] 67TC99)). Instead, under current accounting standards, to the extent that a significant part of an asset requires regular replacement or overhaul, this part should be capitalised separately and depreciated over the period to the next replacement date. However, whilst provisions for future repairs of owned assets are not permitted, a provision may be appropriate where the asset is held under an operating lease which contains a repairing obligation (for example, tenants’ repairing leases of property). The lessee has a legal obligation to repair the asset and so it would be appropriate to include a provision for the expected cost of undertaking any necessary repairs at the reporting date.