Purists maintain that accounting and taxation should be neutral in terms of economic impact. Decision-making should be based on what’s good for the business – for its customers, staff and shareholders – without distortion by complex tax and accounting rules. But we have strayed: there is scarcely a decision untainted by daunting tax or accounting considerations – often both.
Take moving office. You would expect this decision to be based on space, suitability, location, rent, rates and service charges. That’s too simple. What about the tax and accounting treatment of a rent-free period? Has the landlord opted to charge VAT? Is the landlord’s contribution to fitting-out costs a “reverse premium” for corporation tax purposes, with consequential impact on capital allowances? And over what period are these effects to be spread – length of lease (IFRS)? Or until the next review date (UK GAAP)?
The interplay of factors in this matrix of barely intelligible rules, and the associated array of legal, accounting and valuation expertise, can lead to a severe case of “paralysis by analysis”, leaving an exhausted management wondering why they ever contemplated moving office in the first place!
Distortion by the tax system is most obvious when you contemplate £192 billion of annual welfare spending – a figure that effectively renders the elimination of UK’s structural deficit impossible within the span of one parliament. How crazy does a government have to be to tolerate a system in which anyone moving from benefits into work loses those benefits and suffers penal marginal rates of tax on their earnings?
Reform of this insane regime is imperative
Reform of this insane regime is imperative. The Chancellor’s new “Office for Tax Simplification” (OTS) will be a good start in shredding thousands of pages of impenetrable gibberish that have brought the UK tax code into worldwide ridicule. Superfluous complexity generates no tax. It spawns an army of interpreters in the Revenue and the professions. It is the taxpaying public that suffers.
Once the Chancellor has launched his OTS he should get busy on taxation’s twin saboteur by setting up an “Office for Accounting Simplification” before the IFRS steamroller flattens us all.
There was a time when phoney accounting breached the law; now it is cited as a defence! Consider the marking-to-market of BT’s liability when its pension fund deficit doubled. This neatly yielded a £1 billion gain, but its own spokesmen commented that the IAS 19 figure “has no relevance to the funding of the scheme”. Consider the finding against Lehman Brothers for its accounting-compliant removal of $50 billion of debt from its balance sheet every quarter; and the “compliant” twists that enabled the Greek government to hide most of the country’s fiscal deficit by creative bond-pricing following swap transactions.
Consider the systemic inflation of banks’ reserves by understating the need for asset write-downs, consequentially overstating profits and paying dividends that destroy creditor protection. The deceit that swells banks’ balance sheets arises because IAS 39 makes no allowance for losses from inherent (as opposed to incurred) risks. Why else did Northern Rock, Bradford & Bingley and HBOS reflect such profitable business models in their IFRS accounts before their real losses wiped out their share capital?
UK banks are fuming against the proposal to force them to anticipate losses over the life of a loan and recognise them at the outset. They are uniformly complaining that the rule would be “impractical, costly and misguided”.
They would say that. The irony is that they are waiving covenant breaches and extending facilities to avoid forced sales as they stampede towards another day of reckoning in the worst commercial property slump since records began.
And their auditors? The big ones are ramping up consultancy services as never before, and offering them to audit clients as if Enron had never happened. Remember Andersens? They were the independent external auditors of Enron and WorldCom. “Consulting” seemed to get in the way, if I remember aright. But regulators have no memory.