The inclusion of a provision in accounts is not conclusive that
it is allowable trading deduction. For tax the provision must be
estimated with sufficient accuracy. Case law shows that the factual
accuracy of a provision, like any other entry in accounts, is a
matter to be determined by the Commissioners (see Owen v Southern
Railway of Peru Ltd [1956] 36TC602).
Although factual accuracy is a matter for the Commissioners,
Johnston v Britannia Airways Ltd [1994] 67TC99 shows that the
opinion of accountants is relevant as to factual accuracy. The
decision in the case of Herbert Smith v Honour does not mean that
Inspectors have no right to enquire into the factual accuracy of
entries in company accounts that have been signed off by the
directors and auditors.
For SA tax years or accounting periods Inspectors have an
explicit right to enquire into any tax return to check that it is
correct and complete. For pre SA periods the Inspector had to be
satisfied that a return was correct and complete before making an
assessment. Usually the only way to check that a return is correct
and complete is to look at the underlying evidence.
It must be accepted that sometimes absolute accuracy is
impossible, so that there is no single right figure. Directors and
business proprietors have a responsibility when preparing accounts
to make judgements, and there will often be a range of possible
answers within which their own business expertise will be the main
factor in deciding the final answer. What we expect them to do in
arriving at an estimate is to exercise their judgement in a
reasonable manner, taking into account the information reasonably
available to them and other relevant factors including their own
business expertise. If they have done this, and arrived at a result
that accords with the requirements of GAAP, then Inspectors are not
entitled to substitute a different figure just because they might
have exercised their own judgement differently.
In Owen v Southern Railway of Peru Ltd [1956] 36TC602 the
whole provision was disallowed after the House of Lords had decided
that it was too inaccurate to stand. However Lord Radcliffe made it
clear that this was because any examination of factual accuracy
would require a remission to the Commissioners, in effect starting
the appeal all over again, with no guarantee that a more accurate
method would emerge. The House of Lords was not prepared to take
this course, which in any case neither side had asked for.
Whether entries in accounts accord with GAAP is, so far as
relevant to the computation of taxable profits, a question of fact
for the Commissioners. If there is a dispute on this issue the
Commissioners would expect to hear expert accountancy evidence, as
they did in Johnston v Britannia Airways [1994] 67TC99. Whatever
certificates or reports appear on accounts are not conclusive as
far as the computation of taxable profits is concerned.
Whether provisions and other estimates included in accounts
are sufficiently accurate is ultimately a question of fact for the
Commissioners, to be determined by them after considering all of
the relevant evidence. This means that it is in the first instance
a matter for Inspectors, in the course of any enquiry they make
into a return, to consider the accuracy of provisions and other
estimates. Inspectors may wish to ask what factors the directors or
business proprietors took into account in arriving at the figure,
and what information was available to them.
In practice Inspectors should not regard inaccuracy as
grounds for disallowing the whole of the provision. Instead a more
accurate estimate based on the facts should be proposed. Our view
is that it will nearly always be possible to arrive at a
sufficiently accurate estimate. This also accords with the
Accounting Standards Board’s view in FRS12 that it will be
extremely rare for quantification of an obligation to be genuinely
impossible. FRS12 suggests some ways in which provisions can be
estimated. Advice from the advisory accountant should be taken in
appropriate cases.
The allowability of provisions is subject to the overriding
capital/revenue distinction.
