The cost of hiring and firing employees in the normal course of
business is allowable. Where under the rules of UK GAAP a trader is
required to provide for a future expense then such provision will
be allowable in the circumstances described in
BIM31050+.
Under Peruvian law Southern Railway of Peru Ltd (36TC602) was
required to pay its employees in Peru prescribed compensation
payments upon the termination of their services with the company,
subject to the fulfilment by the employee of certain conditions.
The amount to be paid depended on:
It was contended on behalf of the company that upon proper
principles of commercial accountancy amounts of compensation
calculated to have accrued due to each employee from year to year
as deferred remuneration should be allowed as a deduction. The
Special Commissioners held that it was a matter of correct
accountancy practice to make provision in the accounts for the sums
in question, and allowed the appeal.
In the House of Lords judgement was given in favour of the
Crown.
The majority of their Lordships were of opinion that, where a
number of similar contingent obligations arise from trading, there
is no rule of law which prevents the deduction of a provision for
them in ascertaining annual profits if a sufficiently accurate
estimate can be made; but that the provision claimed by the company
throughout the proceedings was not permissible by reason of the
absence of discount and other factors.
In this particular case the deduction was disallowed because
it was insufficiently accurately computed. In such a case you
should invite the taxpayer to refine the provision to secure the
necessary degree of accuracy.
