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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Specific deductions: provisions: risk assessment: approach

In view of the number of legal, accounting and factual considerations, the examination of whether a provision is an allowable deduction can involve a considerable commitment of HMRC resources. You should always take into account the amounts potentially at stake.

Further where the point at issue concerns a provisioning policy which has been consistently adopted for some years you should also bear in mind the ‘Ahmedabad’ principle, see BIM34030, which requires that any adjustment to a ‘correct’ basis should be made to opening figures as well as closing figures. Except where there is a substantial increase in the provision during the year this may mean that the tax adjustment may be small in tax terms. Also the discovery position for earlier years may well be restricted (or, if the accounting policy was fully disclosed or discussed in earlier years, non-existent).

If a decision is taken to proceed, the first step is to obtain all the facts relating to the nature of the provision, the circumstances in which it was decided to make it, the exact manner in which it has been quantified and the identity and standing within the business of the persons involved in that process.

The requirements for a provision and the methodology of calculating can be difficult to apply in practice. It is therefore recommended that for all significant provisions the advice of an HMRC compliance accountant is obtained as to the appropriateness of the accounting treatment adopted. The most effective way to challenge a provision is to establish from accountancy advice that it does not accord with GAAP.

If the making of the provision accords with GAAP the next step should be to consider its factual accuracy and, where appropriate, improve that accuracy. Over-conservative or over-pessimistic provisions are unlikely to be factually accurate (or indeed to be sufficiently reliable under Section 21 of FRS102).