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HMRC internal manual

Business Income Manual

Specific deductions: staffing costs: redundancy payments: timing of deductions

S77, S79 Income Tax (Trading and Other Income) Act 2005, S77, S79 Corporation Tax Act 2009

If the right to a tax deduction is dependent on the statutory rules at BIM47205 or BIM47210, then it is given for the period of account in which the payment is made. Where the payment is made after discontinuance of the trade (or part of the trade) it is regarded for this purpose as made on the last day on which the trade or part trade is carried on.

Where instead a deduction is due under general principles a provision for future payments may be allowed as a deduction so long as:

  • the provision appears in the commercial accounts of the trade in accordance with generally accepted accounting practice (GAAP), and
  • the redundancy payments are made within nine months of the end of the period of account, as required by the rule at BIM47135 onwards.

It is unlikely that any deduction, which is claimed by way of an adjustment in the tax computation, will be allowable. Such a provision, if not included in the accounts, is unlikely to be made in accordance with GAAP.

Accountancy practice

You should consider whether a provision for redundancy payments accords with GAAP in the light of the background information given below and advice from an HMRC Compliance Accountant.

FRS100, FRS101 and FRS102 (‘new UK GAAP’) apply for accounting periods beginning on or after 1 January 2015 (early adoption is permitted). Provisions are dealt with in Section 21 of FRS102. The equivalent accounting standard under IFRS is IAS37. The main requirements of Section 21 of FRS 102 are broadly similar to previous GAAP standards FRS12 and IAS37. Further guidance on provisions is at BIM46520.

A provision for redundancy payments will only be appropriate under Section 21 of FRS102 when, at the reporting date, an obligating event has taken place. That is, when the business has a detailed formal plan and its main features have been announced to those affected or the plan has started to be implemented. As a minimum, the plan should identify the part of the business concerned, the locations affected and the function and approximate number of employees who will be compensated. It should also include details of when it will be implemented. Where a detailed formal plan has been approved before the reporting date, but has not been communicated to employees, there is no obligating event and no provision can be made.


The amount of the provision must be capable of being estimated reliably, using the degree of hindsight required by Section 32 of FRS102 ‘Events after the end of the reporting period’. Such events must be taken into account to the extent that they provide additional evidence of conditions existing at the balance sheet date. A reliable calculation of a redundancy provision will normally require the individual employees affected to be identified. However, in cases where a redundancy plan has been announced and the numbers determined but the specific employees have not been identified, it may still be possible to quantify a provision by, for example, calculating the legal minimum that would have to be paid. If it is not possible to make a reliable estimate, no provision should be made and the obligation should instead be disclosed as a contingent liability.