Posted by Mark Hendy | March 15, 2026
It’s March. Your finance team is heads-down on FY2025 accounts, working backwards through the year to nail down tax provisions. The pressure’s immense: get it wrong, and you’re either overstating earnings or facing a nasty adjustment when HMRC questions your sums. It’s the kind of work that doesn’t make headlines, but it’s where CFOs win or lose credibility.
Let me be blunt: most companies are getting this wrong.
The Provision Paradox
A tax provision is a deferred tax liability—money you owe HMRC but haven’t yet paid. It sits on your balance sheet until the tax office either agrees with you or doesn’t.
Here’s the problem: tax law isn’t binary. It’s full of grey areas. When you prepare accounts, you’re making judgment calls. Did that R&D spend qualify for relief? Is your transfer pricing defensible? Does your intercompany loan actually have substance?
Two common moves:
Conservative: You provision heavily. Your tax charge looks bad in the accounts. Analysts question your tax efficiency. The board wonders why you’re so pessimistic.
Aggressive: You provision lightly. Your tax charge looks efficient. But if HMRC disagrees—and they often do—you’re facing penalties and a credibility hit with your auditors.
Neither works. There’s a better approach.
The “Probable” Problem
IAS 37 uses the word “probable”—meaning more likely than not, over 50%. Not certain. Not possible. Somewhere in between.
That’s where most CFOs go wrong.
Case 1: The Optimist
A company has a restructuring claim pending. Their legal advisor says there’s a “reasonable chance” of success. The CFO decides “reasonable chance” is good enough and provisions for almost nothing. HMRC disagrees. The company gets a £2M bill they didn’t plan for.
Case 2: The Pessimist
Another company provisions for every interpretation of transfer pricing rules, just to be safe. Their effective tax rate tanks. Shareholders ask why they’re so tax-inefficient. When HMRC eventually approves without challenge, the company reverses the provision and has to explain a windfall that wasn’t really one.
Both blow up eventually. One as a surprise bill, the other as a credibility problem with shareholders or auditors.
How to Get It Right
Separate probability from impact
Don’t throw all uncertain items into one provision. Break down each one. What’s the actual probability of challenge? If HMRC does challenge, how much exposure? That’s different from treating all uncertainty the same. Specificity stops surprises.
Document your reasoning
When you make a judgment call, write it down. Why does that R&D spend qualify for relief? What guidance backs that up? What are you assuming? This isn’t busywork—it’s your defence if HMRC questions you, and it shows your auditors you’ve actually thought it through.
Refresh it
Tax rules change. HMRC issues new guidance. Your business structure evolves. Don’t set a provision in March and ignore it until next year. Refresh at least quarterly. If HMRC issues new guidance that affects your position, adjust right away. Stale provisions are stealth risks.
The Practical Play
If I were in your CFO seat:
- Push your lawyers for explicit probability numbers. “Reasonable chance” isn’t good enough. You need “we assess 60% probability of success.” That’s a number you can defend.
- Build a tax position tracker. Excel is fine. Columns: what it is, amount, probability, reasoning, last updated. Update it quarterly.
- Tie it to what HMRC has actually said. If they’ve flagged something, provision heavier. If they haven’t, you can argue lower probability.
- Brief your auditors early. Don’t surprise them with a big provision in the final week. They’ll either push you higher anyway or waste time chasing your logic.
Why This Matters Now
HMRC is getting more aggressive on transfer pricing, interest relief, and CFC rules. Meanwhile, everyone wants to report clean earnings. That’s where the friction happens—and where audit adjustments come from.
A solid provision process is risk management. The difference between a clean audit sign-off and a surprise bill that kills your story.
Get it right, and you can sleep. Get it wrong, and you’re explaining yourself to HMRC or shareholders for weeks.
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Need a second set of eyes on your tax positions? That’s the kind of work I do. Whether you’re finalizing accounts or stress-testing your tax strategy, let’s talk. Get in touch.