The Inland Revenue is poised to clamp down on ‘excessive’ provisions which it suspects are being used by transport companies to reduce their tax bills, Accountancy Age has learned.
A source close to the Revenue warned this week that its special compliance office was preparing to target the transport industry over the size of its insurance provisions. ‘Some companies are being too optimistic about future costs and are taking an excessive debit in their accounts to reduce their tax,’ he said.
The crackdown comes despite the introduction in March of a stringent accounting standard, FRS12, designed to curb ‘big bath’ provisioning.
The move is therefore likely to alarm tax advisers who believe that the new standard takes a tough enough line already. ‘FRS12 almost does the Revenue’s work for them,’ said John Whiting, a tax partner at PricewaterhouseCoopers.
The Revenue is also locked in a high-profile legal battle over provisioning with law firm Herbert Smith. In February, it lost a high court case contesting tax relief on a £5m provision in 1990 concerning buildings that were being sub-let at a loss. Revenue solicitors have since appealed to the Court of Appeal against the ruling.
Whiting added: ‘There is a sound argument for corporate tax deductions for such provisions against taxable profits and there is a lot of support for commercial provisions like the one by Herbert Smith among the Big Five.’
Transport industry companies and trade associations reacted angrily to speculation that the sector was abusing tax provisions. A tax director at a leading motor company said increasingly comprehensive car warranties for customers explained why companies had to make large provisions.
‘The issue is all about car warranties. They’re bigger and more thorough than in other consumer products,’ he said.
Graham Stevenson, national secretary of the Transport and General Workers Union, said companies in the transport industry had to make large investments to combat widespread overcapacity and falling profits.
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