Substance, Form and Equity in Taxation and Accounting
Both taxation and accounting are concerned with economic transactions; both have had to face the argument that within their respective domains transactions should be analysed according to their 'economic substance' rather than their legal form. Within the UK tax system the law has eschewed that doctrine until very recently, but in the world of accounting it seems to have been embraced as a principle, concept or consideration underlying accounting practice. Whether this represents a contradiction between the practices of taxation and accounting, between lawyers and accountants, or whether the issue is different in the two contexts, notwithstanding the use of the same terminology, is considered here. In their professional domain accountants have encompassed both taxation and accounting to such an extent that it would not be surprising if there was an idea shift from one to other. However, like many such shifts it may not be wholly appropriate, or the idea itself may need further explication. In particular there is the danger that substance over form is seen as a peculiarly legal doctrine, whereas it will be argued that it is a general issue potentially applicable wherever there is a rule governed activity. That being so, substance is not something to be determined exclusively by reference to legal, or for that matter economic, characteristics; it is something which derives from the perspective of the activity under consideration. As an idea, substance over form can be discussed in a quite neutral sense; but its application will always depend on the context. Substance is to be understood in the context of prior definitions or norms; it is not determinative of those definitions or norms. In that sense it is a second order issue. Substance over form is therefore not regarded here as a fundamental accounting paradigm which can determine accounting outputs. This paper suggests, using taxation as an example, that the doctrine of substance over form has more than one meaning; at one level it is a legal doctrine of construction, (or in more general terms it is a question of categorisation)); at another it is an equitable concept employed by those charged with administering generalised rules in a hostile environment. Taxation is a rule-governed activity; tax law represents the rules by which tax policy is administered. By contrast, accounting has not always been a rule-governed activity. It has been practised and only relatively recently has that practice been regulated, latterly through accounting standards. These standards, or rules, seek to administer the activity which is accounting, but they are grounded in an extant practice. In essence they seek to codify that practice by formalising the consensus on best practice as rules; and they seek to do so in an increasingly internally consistent way. To that end attempts have been made (notably in the US) to formulate a conceptual framework a conceptual base to underpin the specific rules of individual standards. In so doing, consistency with fundamental concepts may in fact require a change in the detail of practice or existing standards. It will be argued that the doctrine of substance over form in accounting has two facets broadly similar to those at issue in taxation. One is the question of categorisation, the other is the equitable application of accounting rules. The problem