Tax relief on cost
TP writes: My business tends to go in cycles with good profits for two years followed by two years of poor profits and sometimes losses. This trend has occurred for the past 12 years. Six years ago I entered into a lease for our premises. This insists I redecorate the outside every four years. The last time I had to redecorate it cost me £48,000. It coincided with a year of no profit and I did not get corporation-tax relief until the following year when my business returned to profit. Can I make annual provisions for this spending and get tax relief in the year I make the provision?
In the past a provision for future spending has not been allowed as an allowable deduction in calculating a company´s taxable profits, as such a provision does not necessarily represent an incurred spending. The Inland Revenue has only allowed the deduction when the money has been spent. But a new accounting standard (FRS 12) has recently been introduced governing accounting provisions and this could be used to your benefit. If you have a legal obligation to incur spending in the future (the signing of the lease gives this legal obligation) the standard states you may provide for the decoration costs as long as it is possible to make an accurate estimate of them. You have the previous cost as an indication of future costs and if you assume 10% inflation over four years an estimate would be about £52,000. It would then be possible to provide £13,000 in each year´s accounts to meet this cost at the end of the fourth year. The Revenue has said that when a provision has been made in accordance with FRS 12 it will allow tax relief on the provision. In your case this will enable you to build up a tax-allowable reserve in your good years to help you when the spending is needed.