Revenue caves in on provisions cases
Tax experts are warning that the Inland Revenue's decision to drop two landmark tax cases last week is a sign that it is starting to put company's accounting policies under the microscope.
The Revenue’s decision to drop the Herbert Smith and Jenners cases on claiming tax deductions for provisions was widely applauded last week as a sign of its willingness to accept closer alignment between accounting profits and taxable profits.
Frank Haskew, technical manager at the English ICA’s tax faculty, described the decision as brave and commended the Revenue for facing the issue ‘head on’.
But he warned: ‘The Revenue is taking a much greater interest in accounting. It has been hiring more accountants so it knows what it is talking about. It has woken up to the idea that the application of accounting standards is a major area it should be looking at.’
He also predicted further changes in tax law bringing tax treatment of a company’s earnings and expenditure closer to the accounting treatment. Iain Stewart, tax partner at KPMG, said the move was particularly good news for construction and engineering companies, which often have to make provisions in their accounts for losses on long-term contracts.
The Revenue said that in future it will largely follow the accounting treatment for provisions. It has also confirmed that provisions correctly made under FRS12 are tax deductible except where there are specific rules to the contrary.
Herbert Smith, a law firm, wanted to taxable profits by forecasting losses on rental income from surplus property. Edinburgh retail store Jenners wanted to claim a tax deduction for a future repairs provision.