BIM47215 - Specific deductions: staffing costs: redundancy payments: timing of deductions

If the right to a tax deduction is dependent on ICTA88/S579 or ICTA88/S90 then relief is due for the period of account in which the payment is made. Where the payment is made after the discontinuance it is regarded for this purpose as made on the last day on which the trade is carried on.

Where instead a deduction is due under general principles a provision for future payments may be allowed as a deduction so long as:

• the provision appears in the commercial accounts of the trade in accordance with generally accepted accounting practice, conforming in particular with the principles in FRS12: Provisions, Contingent Liabilities and Contingent Assets.

• and

• the redundancy payments are made within nine months of the end of the period of account, as required by FA89/S43.

It is unlikely that any deduction, which is claimed by way of an adjustment in the tax computation, will be allowable. Such a provision, if not included in the accounts, is unlikely to be made in accordance with GAAP.

(Guidance on the timing of the deduction for redundancy payments was initially given in the TB15E issued in February 1995.)

Accountancy practice

You should consider whether a provision for redundancy payments accords with GAAP in the light of the background information given below and advice from Revenue Accountants.

FRS12 applies to accounting periods ending on or after 23 March 1999. It gives very clear rules for provisions, see BIM46520. Until the introduction of FRS12, accountancy practice on making redundancy provisions was more relaxed unless FRS 3 was in point.

FRS3: Reporting Financial Performance applies to the accounting periods of companies ending on or after 22 June 1993. Paragraph 18 of FRS 3 will be relevant where the provision has been made as a consequence of a decision to sell or terminate an operation (which for tax purposes need not amount to the whole of a person's trade). Under the paragraph a provision for these consequential costs (including redundancy payments) is only permitted if the trader was demonstrably committed at the end of the accounting period to the termination. The commitment should be evidenced by a binding sale agreement or a detailed formal termination plan that cannot realistically be withdrawn.

Definite decision

The decision should have been taken during the period of account concerned at whatever level in the business concerned where the power to authorise the redundancies resides. A mere recommendation to the Board of Directors of a company to proceed with a redundancy programme would not be sufficient.

Accuracy

The provision must be accurately calculated using the degree of hindsight permitted by SSAP17, which concerns accounting for post (closing) balance sheet events. Such events can be taken into account in drawing up the accounts to the extent that they provide additional evidence of conditions existing at the balance sheet date. An accurate calculation of a redundancy provision will normally require the individual employees affected to be identified.

FA89/S43

The Board's view is that relevant emoluments' as defined in FA89/S43 (10), (see BIM47135), includes redundancy payments.