EU gives right to override tax rule

GR writes: My company uses equipment that has to be taken out of service for maintenance. For many years we have set funds aside to meet maintenance costs and have been allowed tax relief. Will new accounting rules end this?

Answer

The accounting rules for provisions are contained in FRS12 (Financial Reporting Standard). This new standard prevents you making provisions for costs unless there is an unavoidable, legal obligation to incur them. Instead, you are required to capitalise the costs and write them off against profits of subsequent accounting periods during which the benefit of the spending is expected to accrue. You have had tax relief on the provisions in the past so a change in the way you prepare your accounts would involve a one-off tax charge. This would arise on both the elimination of provisions previously made and the introduction of a new asset representing undepreciated past spending. But it may be possible to argue that FRS12 rules conflict with the European Union´s fourth accounting directive, which forms the basis of UK company law. This requires companies to take account of all foreseeable liabilities and potential losses immediately. The directors could possibly invoke the "true and fair" override, which allows FRS12 to be ignored to leave existing accounting policies unchanged. The Inland Revenue ought to accept such accounts for corporation-tax purposes and therefore the provisions will continue to attract tax relief. This area is complex so take specialist advice.