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 judgement 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 accountancy principles 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 Judge quoted Nolan
J in the Threlfall case
“the overriding legal rule to be applied
is the test set out in S60, what is the full amount of profits for
the year. All else, so far as relevant, is derived from this
fundamental interpretation. It is a judge declared, or judge made,
rule that profits prepared according to generally accepted
principles of commercial accounting are a general guide to those
profits”.'
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 taxpayers accounts were not drawn
up in accordance with the then GAAP.
