this does indeed seem to meet the criterion of a provision.
An entity has a present obligation as a result of a past event : Yes, supply has obligated payment.
It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation : Yes, you know that payments will be required to settle this.
A reliable estimate can be made of the amount of the obligation : Yes, you know the amount that needs to be paid to settle this.
Sure that you know the way it works, take as a provision to P&L and then take only adjustments to P&L in subsequent periods as the origininal provision will be carried in retained earnings.
Make sure that the provision is documented in the notes to the accounts and also ensure that good documentation is kept in relation to the provision.
HMRC feeling on the tax treatment of provisions is summarised in BIM46510. See here :
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Kind of get the impression the OP is hoping the supplier might not eventually invoice them but are making provisions in case they do.
It's a bit like if I was in a shop and noticed they have given me the wrong change or charged me too little I will mention this to them. If I don't bother checking my change and just shove the change in my pocket and notice later I'm not going to back to the shop and point out their error. Does this make me a bad person? Probably yes but I'm not going to lose any sleep over it.
How would HMRC view things if a provision was made and then the supplier didn't notice their mistake and the following year an adjustment made? Why am I complicating things?
EDIT : This post was made without looking at the links provided. Maybe my answers lie therein.
-- Edited by Peasie on Friday 3rd of June 2011 10:05:51 AM
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Never buy black socks from a normal shop. They shaft you every time.
Hi Peasie, Eventually the provision is either going to have to be realised or reversed at which time the tax situation sorts itself out. However, there's a worry with this that certain people might use provisions to smooth profits which is why I was saying that everything has to be documented to the nth degree to appease HMRC when they come a calling.
Totally off subject but on the change thing where feasible I would actually go back to the shop. I also put the money back into coffee machines where the person before forgot to take their change.
Nothing to do with me being a moral goody goody but I've found through my life that every time I get something for nothing shortly afterwards I end up losing at least twice as much.
In the situation we have here I would probably be the only person on the planet who would actually phone the suppliers and tell them that they had forgotten to invoice me!
Silly superstition I know but guess that's just one of the things that makes me, me.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks for the explanation and agree that this certainly would meet any HMRC criteria.
I am sure that the supplier will notice the error very soon and send corresponding invoice, but as Peasie says I guess there is a chance they won't as they are a large outfit and things do get missed.
Alas, reason for my question was more on how to post this than concerns with HMRC, as this is a very clear-cut missing invoice for a service that took place last Financial year.
The cost concerned is a transport/delivery cost, so can anyone walk me through how I post a cost to last years books (i.e. assume this should be in correct nominal for transport/delivery)?
Probably being dim here, but do I just raise a journal (with recorded reason) to:
DR - Transport/Delivery CR - Accruals/Accrued Expenses
Then when Invoice arrives do the reverse at date of invoice?
What then happens in the event that invoice doesn't come by next year end (unlikely and a long way off), but out of interest how would you reverse accrual in new year to correct tax for HMRC?
I am sure you are interested in just the journals rather than all the other stuff mentioned in the replies so will walk you through. Assume invoice is £100 + VAT at 20% ie gross £120
Last Year Accounts.
Dr Transport £100
Cr Accruals £100
to recognise the cost of service you have received last year
Current Year
Firstly reverse the accrual from last year
Dr Accruals £100
Cr Transport £100
If you get the invoice you will process it with the invoice date (assuming dated in current year. The supplier may date it back into last years accounts in which case you should process as normal provided you havent closed down last years accounts and also reverse the posting above). Assume the invoice dated in the current year
Dr Transport £100
Dr VAT £20
Cr Creditors/Bank £120
This will cancel out the Cr balance in transport
If you never receive the invoice then you will just reverse the accrual above and do nothing else. So you are showing a cost of £100 in last years accounts and a cost of minus £100 in the years accounts. Or taking the two years combined a cost of £nil which is the correct outcome if you never receive an invoice. Effectively you will be getting tax relief on the cost in last years accounts but this will be offset in the current year by paying tax on the "income" ie the minus cost.
From HMRC viewpoint they will be losing out on interest on a year based on the tax rate of your net cost. ie £20 (based on CT of 20%). Given the current rates of interest i am sure they wont be to bothered about the loss of interest.
