The Role of Accounting in Taxation
Drawing From the Relevant Case-Law
The topic of this paper is the role of Accounting in Taxation. It is necessary to understand that there are basic accounting principles to be followed, both on national level (existing practice in the United Kingdom), and international (namely international accounting standards).
With this in mind, such general accounting principles and existing practice form the basis of national tax assessment and thus, legislation. It should be noted that the two aspects being discussed, namely accounting and taxation may differ in their nature: while accounting is designed for the purposes of gathering information to be later used for controlling and governing the assets, taxation is aimed at raising revenue and/or governing social and economic policy of a state.
Nonetheless, both commercial accountancy and tax assessment relate to each other. Also, the general principles of accounting and taxation, recognised and proved by the practice in the UK, are undergoing the process of development. Sir Thomas Bingham stated in Gallagher v Jones, to be later discussed: “As has often been pointed out, such principles are not static: they may be modified, refined and elaborated over time as circumstances change and accounting insights happen” .
Thus, the evidential role of the accounting principles in the legislation process, as it appears from the practice of the courts of the Crown, is becoming increasingly persuasive, while the statutory statement of the position reflects the views that the UK has reached the position in which the accounting standards are to be followed, subject only to statute.
For this matter we are to discuss a remarkable case and its impact on the taxation system in the UK. Gallagher v Jones:For the issue under discussion it is necessary to review the relevant case Gallagher v. Jones. In this remarkable case, a taxpayer, Geoffrey Stanley Gallagher carried on a trade hiring out narrow boats. The taxpayer agreed to lease narrow boats for the primary period of 24 months. As a matter of fact, the rental payments consisted of the substantial initial rental payment, which was followed up by 17 monthly rental payments, the secondary rental period of 21 years at an annual rental of £5. On 23 May 1990 under section 381 “Further relief for individuals for losses in early years of trade” of the Income and Corporation Taxes Act, the taxpayer submitted a claim on a trading loss for 1989-1990 years of £13,899 to be carried back and set against his income for the period of 1986-1987, which was rejected by an inspector of taxes. He then soon appealed against the decision made by that inspector.
The issue of the case is whether the whole amount of the leasing charges of £16,568 for one narrow boat consisting of an initial payment and four out of 16 monthly payments of £1,840 for a primary period of 21 months followed by a secondary period of 21 years at an annual rent of £5, as shown in the taxpayer's accounts for the period 29 December 1989 …