Provision for tax

Definition

A provision for tax is the estimated corporation tax a company owes on its profits for the period, shown as a liability on the balance sheet until it is paid.

In plain terms

It is the tax bill your accounts recognise as owed, even though it will not be paid for months. Setting it aside in the accounts stops profit looking bigger than the cash you can actually keep.

Why it matters for your company

The tax provision reminds you — and any reader of your accounts — that a chunk of profit belongs to HMRC. Matching it with a real cash reserve, as in budgeting for corporation tax, keeps the payment painless.

In practice

Picture a UK limited company approaching its year end with a healthy trading profit. Before the directors draw any conclusions about what that profit means for dividends, reinvestment or reserves, the accountant sets aside a provision for tax — an estimate of what will be owed to HMRC once the corporation tax computation is finalised.

Because the provision is only an estimate at the point the accounts are drawn up, it may later be adjusted once the final tax computation is agreed — sometimes upward, sometimes down, once reliefs, disallowable expenses and any prior-year adjustments are worked through. Directors who treat the provision as a placeholder rather than a fixed number tend to plan more realistically, keeping a cash buffer aside rather than assuming the initial estimate is the last word.

How lenders read it

When a lender reviews a set of company accounts, a properly recognised provision for tax is generally read as a positive sign of financial discipline: it shows the business is not overstating distributable profit and has already acknowledged a liability that will fall due. A missing or implausibly low provision, by contrast, can prompt further questions, since it may suggest the accounts understate what the company actually owes.

Because provisions and contingent liabilities sit alongside other balance-sheet commitments, lenders tend to look at the tax provision in that wider context rather than in isolation — as one signal among several about how carefully the accounts have been prepared and how much genuinely free cash the business retains.