In view of the number of legal accounting and factual
considerations, the examination of whether a provision is an
allowable deduction can involve a considerable commitment of
Revenue resources. Inspectors should always take into account the
amounts potentially at stake.
Further where the point at issue concerns a provisioning
policy which has been consistently adopted for some years
Inspectors should also bear in mind the ‘Ahmedabad’
principle, see
BIM34030, which requires that any
adjustment to a ‘correct’ basis should be made to
opening figures as well as closing figures. Except where there is a
substantial increase in the provision during the year this may mean
that the tax adjustment may be small in tax terms. Also the
discovery position for earlier years may well be restricted (or, if
the accounting policy was fully disclosed or discussed in earlier
years, non-existent).
If a decision is taken to proceed, the first step is to
obtain all the facts relating to the nature of the provision, the
circumstances in which it was decided to make it, the exact manner
in which it has been quantified and the identity and standing
within the business of the persons involved in that process.
The requirements for a provision and the methodology of
calculating can be difficult to apply in practice. It is therefore
recommended that for all significant provisions the advice of the
Revenue accountant is obtained as to the appropriateness of the
accounting treatment adopted. The most effective way to challenge a
provision is to establish from accountancy advice that it does not
accord with GAAP.
If the making of the provision accords with GAAP the next
step should be to consider its factual accuracy and, where
appropriate, improve that accuracy. Over-conservative or
over-pessimistic provisions are unlikely to be factually accurate
(or indeed to be sufficiently reliable under FRS12).
