Some of our corporate clients are being presented with a ‘tax planning idea’ which goes something along the following lines:
1. Engage a team of experts to ascertain the level of risk that the company faces for non-compliance with General Data Protection Regulations (GDPR) rules.
2. This will lead to them advising a monetary amount which should be used as a provision in the company’s accounts.
3. Historical accounts are then amended to reflect this provision and consequent amendments made to the tax return to trigger a tax repayment.
4. Once the repayment is made the promoter charges a fee of up to 30% (+ VAT) of any repayment and the company therefore enjoys 70p in the pound from any ‘saving’ (assuming it reclaims the VAT).
Why extreme caution should be exercised here
This planning has several serious question marks around it. I set out below the key points that I would make to clients who are presented with this ‘opportunity’.
1. It is very easy to get a tax repayment simply by amending a tax return. If HMRC issues a repayment this does not mean that they agree the position. This has not been ‘successful’ until at least a year has passed from the date of amendment, and only then if full disclosure has been made.
2. Even if all goes to plan, this is a provision which may have to be reversed in the future, giving rise to taxable income. As things stand currently any reversal would be taxable at 25%.
3. In relation to the above, surely it would be better to recognise the provision when (and if) tax rates increase.
4. Fundamentally, it is unlikely that such a provision will generally meet the strict accounting standards requirements for recognition. The basis of Section 21 of FRS 102 is that provisions must satisfy the definition of a liability being ‘a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits’. Mere anticipation of future expenditure, however probable and no matter how detailed the estimate, is not enough in the absence of an obligation at the reporting date. Provisions are defined by Section 21 of FRS 102 as ‘liabilities of uncertain timing or amount’.
5. Even if the provision was acceptable from an accounting perspective, any provisions relating to fines or penalties for illegal actions would not be allowable under general tax principles.
6. What about the state of the company’s balance sheet? A big provision will not look good from the perspective of prospective lenders and customers.
Forbes Dawson view
Although tax relief is generally available for properly made provisions, I cannot think of a scenario when it would be a good idea to agree to a fee, contingent on a tax repayment, which is driven by a provision. This is likely to lead to many hard luck stories over the coming years when HMRC seek to claim the tax back along with interest and possibly penalties. To add salt into the wound, I also think that it is very likely that they would seek to deny any relief taken in respect of the 30% fee on the basis that it relates to a tax avoidance scheme. What next? Pandemic provisions? Nuclear war with Russia provisions……………………?
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