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