By Jason Piper, ACCA Technical Manager, Tax and Business Law
Tax is difficult because the world is complicated. Trite though that sounds, it is unfortunately the simplest way of expressing the inevitable outcome of a huge bundle of conflicting factors. One of the most fundamental issues is that tax is always expressed as an amount of money, but is at the same time used as a mechanism to influence underlying behaviours in line with society’s ‘values’.
Whether you think of monetary labels as the price or the value of something may depend on your level of cynicism, but those amounts are only ever an equivalent for whatever the underlying “thing” is worth. It follows that how we define and process those numerical expressions is fundamental to calculating tax liabilities so the ‘value’ of a business’s activities, as reflected by its tax contribution, is seen through that filter.
Take a factory producing bicycles. The actual taxes paid by the operators of the business will certainly be far more sensitive to the accounting treatments of the factors of production than to the quality of the bicycles, the treatment of the workers or the environmental impact of the whole operation. Whether the ownership of the factory is leasehold or freehold, and whether the workers are employees or independent contractors makes no direct difference to the number of physical bicycles it can produce – and yet those different legal descriptions can radically alter the tax outcomes.
In the long run it’s as likely, if not more so, that the success or failure of the venture will depend more upon the abstract legal considerations than it will the quality of the bicycles or its treatment of the workforce and environment– even though you could make a good argument that it’s actually those aspects of the factory’s operations that society ought to be more interested in.
For the vast majority of individuals things are generally simpler. There’s far less in the way of accounting to be done; all that matters is the tax treatment of the cash amounts of earnings that hit their bank accounts in the year and valuations usually arise only in the context of “benefits in kind”. (It’s probably a given that all employees consider the monetary value their employers put on them to be far too low, but that’s another issue).
The other main tax individuals pay in most countries is sales taxes or VAT – but these are almost entirely dealt with and accounted for by the businesses selling the goods to them, and the complexities that arise bypass the consciousness of consumers altogether. A recent change in VAT treatment of a popular consumer product in the UK hasn’t even resulted in a noticeable change in the retail price, despite the 20% shift in margins for supermarkets.
The issues arise because society tries to use the application of the tax system to enforce its values directly (rather than just raising the revenue to fund other measures). Differentials in tax treatment inevitably end up cruder than the world they’re trying to operate on. There’s a myriad shades of difference between a factory employing local disadvantaged and disabled people to build environmentally friendly water filters for developing economies and a fully automated cigarette rolling plant that deposits its waste products straight into a local river.
It may look simple to use the tax system to distinguish between those two extremes, but then comes the difficulty of drawing the black and white line between tax/no tax on infinite shades of grey. Somewhere after all the tax system has to draw the line, because tax is a binary choice between “this dollar is yours to spend as you will” against “this dollar is taken by the state and you no longer have a say in its use”, and it’s around those tipping points that the uncertainty will crystallise. Set that in the context of accounting standards so complex that even experts can’t agree on them, and tax codes so long that no one dare claim to be expert on all aspects of them, and it can hardly be a surprise that we can’t work out what the tax system does do, let alone what it ought to.
Read ACCA’s certainty in tax paper here