GIM6170 - Technical provisions: periods of account beginning on or after 1 January 2000: section 107 FA 2000: excesses and deficiencies

FA00/S107 (1) to FA00/S107 (3) require an amount calculated by reference to interest to be treated as a receipt or expense of the trade, where it becomes apparent in a later period that “technical provisions” were excessive or insufficient. An amount treated as a receipt is referred to in FA00/S107 (2) as an “excess” and an amount treated as an expense is referred to in FA00/S107 (3) as a “deficiency”.

The rules operate by hindsight. In each later period (beginning on or after 1 January 2001) it is necessary to look back at the provisions set in each earlier period for liabilities arising for the first time in that period (the “original provisions”). If, as a matter of fact, the original provisions exceed the discounted amount needed to settle the liabilities, an adjustment is made in the tax computations for the later period. Unlike previous approaches to taxing reserves, no judgement is needed to determine whether or not the reserves set at the time meet the criteria set out, for example, in Owen v Southern Railway of Peru. Under FA00/S107, the tax deduction for the earlier period is repeatedly recalculated in each later period, because the “discounted amount needed to settle the liabilities” in any later period includes the provisions still outstanding at the end of that later period. As time passes and the liabilities are increasingly paid, it will become apparent how accurate the original tax deduction was.

Subject to an election under FA00/S107 (4) ( GIM6180), an increase in the provisions themselves will continue to be a deductible expense of the trade (and a decrease a trading receipt). The guidance in GIM6120 (exchange gains and losses) will apply for periods beginning before 1 October 2002, and for later periods, FA96/S100 (11)(a) has the same effect.