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A provision is an estimate of expenditure which is expected to be incurred in a trade in respect of a particular item. A provision does not necessarily reflect the actual expenditure to be incurred, but allows for a reliable estimate of the costs to be reflected in the accounts, thereby reflecting a more realistic financial picture of a business.

Provisions are only allowable for tax purposes where certain conditions are met; otherwise, there would be a danger that a deduction could be claimed for expenses that had not actually been incurred or were never going to be incurred, thereby reducing taxable profits without justification. An important case on provisions is Southern Railway of Peru Ltd in which HMRC only accepted a provision that had been calculated in a particular way.

As a result, a general provision will not be deductible, for example a £40,000 estimate of building repairs. Making a specific provision, such as a warranty provision based on the actual warranty costs of a product in previous years, is likely to be allowable.

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