Accounting Provisions and Tax

Taylor Keeble
24 minutes ago
2 min read

In business, there are often situations where future costs are likely, but the exact amount or timing is uncertain. These are recognised in the accounts as provisions.

A provision is an estimate set aside in the accounts to cover an obligation that has already arisen but has not yet been settled. For example, this could be a warranty on goods sold, an expected legal claim, or a debt that is unlikely to be recovered.

Are provisions deductible for tax purposes?

Tax authorities are cautious about provisions because they want to ensure businesses do not use broad estimates to reduce taxable profits. However, provisions are normally allowable for tax purposes if they meet certain conditions:

They relate to genuine business expenditure.
They are recognised in line with accepted accounting standards.
The figures can be estimated with a reasonable degree of accuracy.

Where a provision is specific and supported by evidence, it is more likely to be accepted. Broad general provisions are very likely not to be accepted.

Specific vs. General provisions

Specific provisions — These relate to identified obligations, such as a known customer debt that will not be paid. These are generally acceptable.
General provisions — These are broad estimates, such as assuming a percentage of all debts will go unpaid without identifying which ones. These are not acceptable under current accounting rules and will not be deductible for tax.

Understanding obligations

The recognition of provisions depends on whether an obligation exists. Obligations can arise in two main ways:

Legal obligations — for example, commitments under contracts, leases, or warranties.
Constructive obligations — where a business’s past actions or published policies create an expectation that it will meet certain responsibilities, even if not strictly required by law.

If an obligation exists, and the related cost can be measured reliably, then a provision is required in the accounts. This usually means tax relief will also follow.

Why this matters

Correct treatment of provisions is important for any business. Understating them may mean missing out on legitimate tax relief, while overstating them can lead to challenges from HMRC. Ensuring provisions are accurate and supported is therefore essential for both compliance and effective tax planning.