Provision for 'Water ingress'

Building company want to make a provision for possible 'water ingress' claims

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Hi All. Client (non-audit) is a building company who has made some decent profits this year (£350k). When I told them the tax bill, they suddenly remembered to tell me they "can be vulnerable at any time for a claim for water ingress" and want to put in a hefty provision for this. So there is no specific obligation that they are going to have to rectify past work and I imagine their customers hope it is not probable the cost will be incurred! Before I go back to them, I want to be clear of my argument as to whether this is acceptable practice and, if there is an argument for such a provision, whether it is tax deductible. Many thanks in advance.

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By WhichTyler
28th Nov 2018 17:47

CMH wrote:

I want to be clear of my argument as to whether this is acceptable practice and, if there is an argument for such a provision, whether it is tax deductible.

What is your professional opinion (that you would like us to check)?

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Replying to WhichTyler:
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By CMH
28th Nov 2018 18:05

(a) It does not meet the criteria per section 21.4 FRS 102 and hence cannot out such a provision through, and
(b) The directors do not like their tax bill

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Accountants & Business Advisers
By Gladstone
28th Nov 2018 18:05

Depends on what they've agreed with customers.
If there is a clause in T&C to rectify any future issue up to a certain period (usually 10 years for building sector), then yes you can estimate based on some logic and put through via P&L and recognize a liability to be reviewed on each balance sheet date. Another sensible approach would be to have a policy of making a provision but then this depends on past claims. If past claims were none, it will be difficult to justify current provision for future claims.

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By Montrose
28th Nov 2018 18:14

Are you talking about residential property? This would be covered by NHBRC and is no different from any other claims for faulty building.

Does the client have a history of what such claims might typically be?

Tax treatment of provisions for warranty claims generally is a well known issue.

See https://www.accountingweb.co.uk/any-answers/warranty-provision-1

which covers the issues.

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RLI
By lionofludesch
28th Nov 2018 18:14

Why don't they just do a decent job in the first place ?

Water ingress claims - zero.

Job done.

Alternatively, are they happy to go on public record saying "We expect loads of people to claim against us because we've done a carp building job so we've made a huge provision."

It's a Ratners solution, isn't it ?

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Replying to lionofludesch:
paddle steamer
By DJKL
28th Nov 2018 19:23

Gerald did me nicely, he trashed the price, I bought, price recovered a little, I sold.

Apart from stagging BT etc one of my earliest stockmarket excursions- good ol Gerry.

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Replying to DJKL:
RLI
By lionofludesch
28th Nov 2018 19:32

Great stuff. See if CMH's builder client will sell you a few shares to repeat the process.

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By CMH
28th Nov 2018 19:44

Thanks guys!

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