FRS12 requires provision to be made of liabilities under
‘onerous contracts’ as soon as a net loss is foreseen,
for example, rent payable on vacated properties (see Herbert Smith
v Honour [1999] 72TC130). The decision in Herbert Smith does not
mean that provisions for expenditure that would be otherwise
inadmissible for tax, such as capital expenditure, are permitted.
Nor does it affect the rule in FRS12 that provisions must be a
reliable estimate. For tax purposes the provision must be computed
with sufficient accuracy see
BIM46555.
Following Herbert Smith the non-anticipation principle has no
effect where the accounting treatment is required by GAAP. This
would include both provisions required by FRS12 (including most
rent provisions) and provisions for foreseen losses on long-term
contracts, which are required by SSAP9, see
BIM33155.
The allowability of provisions is subject to the overriding
capital/revenue distinction.
