Provisions for liabilities: recording, increasing and releasing them

Short version. There is no journal or manual adjustment screen in SimpleCompanyTax. The software works from your final summarised figures rather than individual bookkeeping transactions, so a provision is entered as a closing balance in each year’s column of the balance sheet. To release a brought-forward provision, enter last year’s figure in the prior-year column and the remaining balance, or zero if it has been fully released, in the current-year column. Then make sure the effect of the release is reflected in your Profit and Loss expense figures, because the balance sheet entries do not calculate it for you.

What counts as a provision

A provision is a liability of uncertain timing or amount. FRS 105 lets you recognise one only when the company has a present obligation from a past event, settlement is probable, and the amount can be estimated reliably. Typical examples are warranty costs on goods already sold, an onerous contract such as a lease the company cannot exit and will not use, a probable legal claim, and dilapidations under a repairing lease.

Two things are commonly mistaken for provisions. Accruals, meaning goods or services already received but not yet invoiced, belong in Creditors within 1 year. Contingent liabilities, where the obligation is only possible rather than probable, are not recognised on the balance sheet at all.

Where the field is

Provisions for liabilities is hidden by default, because most micro-entities never need it. In the Balance sheet section of the financial data step, click the link that reads + Add intangible assets / investments / called-up share capital not paid / provisions for liabilities and the row appears, with a current-year cell and a prior-year cell. Enter the provision as a positive number. We deduct it automatically in the net assets calculation and tag it correctly in the filed accounts.

Where Companies House holds your previous accounts and they carry a provision, we read the brought-forward figure, pre-fill the prior-year cell and open the row for you, so you should not need to go looking for it in the year of a release.

Recording a new or increased provision

Enter the closing balance in the current-year cell. If the provision existed last year as well, enter last year’s closing balance in the prior-year cell. The cost of creating or increasing the provision must also sit inside your Profit and Loss expense figures, normally within Administrative expenses, because the accounts we file report your summarised totals exactly as you enter them.

Releasing a brought-forward provision

A release is entered as the movement between the two columns. Enter last year’s provision in the prior-year cell, and the balance still needed at this year end in the current-year cell. For a partial release that is the reduced figure. For a full release it is zero. The filed accounts then present the current and comparative balances correctly, and a nil closing provision with a prior-year comparative is handled properly in the iXBRL we submit.

The prior-year cell matters even when this year’s figure is zero. The comparative column of your accounts must match what was filed last year, so we ask you for the brought-forward figure rather than assuming it away.

The Profit and Loss side

Entering the balances does not calculate the release. Under FRS 105 the release of a provision is normally recognised in profit or loss, so its effect must be included in the expense figures you enter. In practice that means netting the credit against the expense heading where the original charge sat, which for most companies is Administrative expenses. This works whenever the resulting expense figure is zero or positive.

The micro-entity Profit and Loss we file uses summarised statutory headings, so there is no separate line for the release itself. If you want to understand why we ask for fewer expense figures than other software, see why we ask for fewer expense figures.

The Corporation Tax position

If the original provision was allowed for tax when it was made, the release is taxable. Netting the credit against your expenses gives the right taxable profit automatically, and there is nothing else to enter.

If the original provision was disallowed for tax when it was made, for example a general provision that was added back as a disallowable expense in an earlier return, the release should not be taxed on the way back out. The software does not currently have a field for that deduction and we are reviewing support for this case. Before you file, tell us what the provision related to, whether it was allowed for tax, and the amount being released, and we will confirm whether your release fits the supported route. For the general rules on add-backs, see accounting profit vs taxable profit and disallowable expenses.

Cases that need a closer look

The straightforward cases, creating a provision, increasing it, reducing it and releasing it in full, are supported through the two balance sheet cells plus your expense figures. A few situations do not fit that route yet:

• The release is larger than the expense figure it would be netted against, which would need a negative expense we cannot file.
• The release needs to be presented separately as other operating income rather than netted within expenses.
• The provision was previously disallowed for Corporation Tax, as above.
• The provision was originally included in the cost of an asset rather than charged to profit or loss.

If any of these applies to you, contact us with the provision details before filing and we will confirm whether it fits within the supported route. We are reviewing support for the remaining cases.

This article is general guidance, not tax or legal advice. Provisions involve judgement about whether the recognition conditions are met, and an accountant can also confirm the treatment for your circumstances.