What a provision must satisfy to be deductible

A customer has owed a craftsman €18,400 for fourteen months, has stopped answering, and their lawyer has announced proceedings. The provision is justified. The same craftsman also provides €5,000 for "site contingencies": that one will be added back, and the difference between the two lies in four conditions the administration checks one by one.

Four conditions, all required together

The loss or expense must be deductible in its own right: providing for a fine or for a non-deductible tax does not make the sum deductible. It must be clearly identified as to its object and its amount, measured from real evidence rather than from a flat percentage applied to turnover.

It must then be probable rather than merely possible: an identified, quantified risk resting on an event that occurred before the year end. Finally, the event making it probable must originate in the current year, not in a decision taken after the accounts were approved.

These four conditions are cumulative, and each is on its own a ground for refusal. A perfectly quantified provision whose triggering event belongs to the following year falls away, exactly like one with an indisputable trigger but measured by guesswork. The file must therefore document all four, not the most obvious one.

The evidence is assembled when the triggering event occurs, not when an inspection begins. A dated reminder letter, a written exchange with the lawyer, a remedial quotation kept in that year's file are worth far more than a reconstruction put together three years later, which an inspector always receives with visible reserve.

What the law refuses by nature

Some provisions are ruled out however well justified they may be. Self-insurance provisions, those for economic redundancies, those for corporation tax itself and those covering a merely statistical risk give rise to no deduction at all. Recognising them in the accounts remains possible, but the add-back is automatic.

The add-back does not merely cancel the deduction: it has to be tracked from year to year. Schedule 2058-B keeps a record of non-deductible provisions recognised and then released, so that the release is not taxed a second time. Losing that record means paying twice on the very same amount.

This is why a refused provision is not removed from the accounts. The books must keep reflecting the risk as the directors assess it; it is the taxable profit, and it alone, that departs from the accounting profit. Blurring the two impoverishes the information given to shareholders for a purely tax reason.

• Deductible by nature: the expense provided for must itself be deductible
• Clearly identified: a defined object and an amount measured on real evidence
• Probable: a risk resting on a fact predating the year end, not a possibility
• Arising in the year: the risk originates before the accounts are approved

The case of doubtful receivables

Impairment of a trade receivable is the commonest provision in small businesses, and the most often poorly justified. Late payment alone is not enough. There must be something making recovery uncertain: a reminder left unanswered, a formal notice, or insolvency proceedings opened against the customer.

The amount is impaired net of value added tax, and only for the share whose recovery looks compromised. Impairing the whole of a receivable of which a third has already been settled overstates the charge, and the excess is added back. The tax itself is recovered only once the debt is definitively irrecoverable.

A blanket impairment, computed by applying a uniform rate across the whole trade receivables balance, is refused even where the rate reflects the firm's own experience. The assessment is made receivable by receivable, debtor by debtor. It is tedious, and it is precisely what an inspector looks at first.