Two kinds of liability tend to get lumped together under “tax and provisions” in a home-made chart of accounts. Taxes payable are amounts the business knows it owes HMRC, worked out from returns and computations. Provisions are estimates of obligations whose amount or timing is uncertain. Both are credit balances, but they follow different rules, and each tax needs its own account.
One creditor account per tax
| Account | Built up from | Cleared by | Agrees to |
|---|---|---|---|
| Corporation tax | The year-end tax charge journal | Payment to HMRC under the company’s corporation tax reference | The CT600 and HMRC’s online account |
| VAT control | Output and input VAT on every invoice | Each VAT return payment or repayment | The latest VAT return |
| PAYE and NIC | Payroll journals | Monthly or quarterly payment | FPS and EPS totals |
| CIS deductions | Deductions from subcontractor payments | Paid with PAYE | Monthly CIS return |
Each tax has its own payment reference, due date and penalty regime. Paying HMRC from one combined account makes it easy to allocate a payment to the wrong tax, and HMRC will not move the money for you unless asked. The VAT account works quite differently from the others because it moves every day; see VAT control accounts.
Corporation tax: from charge to payment
The corporation tax charge for the year is calculated after the accounts are drafted: accounting profit, add back disallowable items such as depreciation and client entertaining, deduct capital allowances. Suppose the computation gives a liability of £18,400:
| Account | Debit | Credit |
|---|---|---|
| Corporation tax charge (profit and loss) | £18,400 | |
| Corporation tax payable | £18,400 |
For most small and medium-sized companies, the payment is due nine months and one day after the end of the accounting period, which is earlier than the filing deadline for the CT600 itself (twelve months after the period end). Large companies pay in quarterly instalments, partly during the year the profit is made, and very large companies pay earlier still. HMRC sets out the rules and thresholds on its pay corporation tax page; our article on corporation tax payment dates works through the timetable.
Because the payment falls in the following year, there are often two balances in the account at once: last year’s liability awaiting payment and the current year’s estimate. Label each journal with the period it relates to, and once the CT600 is filed, adjust any difference between the estimate and the final figure through the current year’s tax charge as an under- or over-provision.
Provisions under FRS 102 Section 21
A provision is a liability of uncertain timing or amount. FRS 102 Section 21 allows one to be recognised only when all three conditions are met:
- the business has a present obligation, legal or constructive, as a result of a past event
- it is probable, meaning more likely than not, that it will have to pay out
- the amount can be estimated reliably
If any test fails, there is no provision. A possible obligation, or one that cannot be measured, is at most a contingent liability, disclosed in the notes but not booked.
Provision or accrual?
The two are easy to confuse. An accrual is a cost for goods or services already received where the invoice has not arrived; the amount is known or nearly so. A provision carries real uncertainty.
| Situation | Treatment |
|---|---|
| December electricity used, bill arrives in January | Accrual |
| Audit fee for the year just ended, quoted in advance | Accrual |
| Repairs a lease requires at the end of the term, depending on condition | Provision (dilapidations) |
| Expected warranty claims on goods already sold | Provision, estimated from past claim rates |
| A customer claim the company’s solicitors think it will probably lose | Provision |
| A claim the solicitors think the company will probably win | Contingent liability, disclosure only |
| Planned redecoration next year with no obligation to do it | Nothing |
Provisions are reviewed at each balance sheet date and adjusted to the best current estimate. A provision is used only for the expenditure it was set up for; releasing an unused warranty provision to pay for something else hides a cost. Useful related pages are warranty and returns provisions and litigation provisions.
Deferred tax in one paragraph
Deferred tax is not tax that is owed today. It recognises the tax effect of timing differences between the accounts and the tax computation, most often where capital allowances have run ahead of depreciation, so the company has had tax relief earlier than the accounts show the cost. Under FRS 102 a deferred tax liability is usually recognised for such differences; micro-entities applying FRS 105 do not recognise deferred tax at all. It sits under provisions for liabilities, not in creditors, and is normally calculated by the accountant at year end. See deferred tax for the entries.
Where these balances appear
In the Companies Act balance sheet formats, corporation tax, VAT and PAYE owed sit within creditors: amounts falling due within one year, as part of other creditors including taxation and social security. Provisions have their own heading, provisions for liabilities, split into pensions and similar obligations, taxation including deferred tax, and other provisions. Keeping the ledger accounts in the same groups means the balance sheet can be produced straight from the trial balance.