BKM206350 - Bank compensation restriction: unwinding provisions: example including provision for administration costs
Bank R has a long-running compensation issue. At 31 December 2014 it had a provision of £1bn for remaining compensation. Over the course of 2015 it makes the following adjustments to this provision:
- 31 March 2015: £200m paid out, no further provision required, £800m carried forward
- 30 June 2015: £250m paid out, further provision of £100m made of which £12m is for administration costs, £650m carried forward
- 30 September 2015: £250m paid out, further provision of £150m made of which £18m is for administration costs, £550m carried forward
- 31 December 2015: £350m paid out, further provision of £50m made of which £6m is for administration costs, £250m carried forward
Under the commencement rules, P gets deductions in 2015 for £124m, the £100m provided at 30 June 2015 and the administration costs provided at 30 September 2015 and 31 December 2015.
Bank R has tax relief denied for the balance of £132m provided at 30 September 2015 and £44m provided at 31 December 2015 that is £176m. This is the relevant sum for the purpose of determining the amount treated as a taxable receipt under CTA09/S133B (2). P will be charged an uplift of 10% of the relevant sum that is £17.6m (BKM205100).
In Q1 of 2016, Bank R finalises all claims in respect of this issue, without making any further payments. It therefore reverses the £250m provision carried forward at 31 December 2015. This reversal is treated as follows:
- £176m is non-taxable, reflecting the fact that £176m has been denied tax relief in 2015
- £74m is taxable income
In each case, the effective treatment is to adjust the underlying expense.
No adjustment is made in respect of the £17.6m charged under CTA09/S133B (2).