Herbert Smith v Honour

CH D 1999, 72 TC 130; [1999] STC 173

A firm of solicitors appealed against two assessments, claiming that a substantial provision for future rents, which it was obliged to pay in respect of premises which it was vacating, should be allowed as a deduction.

It was held that the deduction was allowable.  The Judge observed the provision was required on the grounds of prudence under generally accepted accountancy principles and there was no 'general exception prohibiting the deduction of sums entered in the debit side of the accounts by way of a provision in accordance with the prudence concept as set out in paragraph 14(d) of SSAP 2'.

Note:  The effect of this is that accurate provisions for foreseen losses on long-term contracts (for example, in the construction industry) made in accordance with correct accounting practice will be tax-deductible.