How taxes appear in the accounts

A business deals with taxes in three very different roles, and the accounting follows the role, not the word "tax".

1. Collector for the government. With VAT (or GST, or a retail sales tax) the business adds tax to its selling price, collects it from the customer and pays it over. The tax was never the business's money: it is a liability from the moment it is charged, and it never appears in revenue. The same is true of withholding tax deducted from a supplier's payment and of employee income tax deducted from salaries in countries that have one. Revenue is always measured net of taxes collected on behalf of third parties (IFRS 15.47).

2. Taxpayer on its own profit. Income tax (corporate tax) is levied on the business's own taxable profit. It is an expense — "income tax expense" — and any unpaid amount is a liability. IAS 12 Income Taxes governs it, including deferred tax.

3. Tax as part of a cost. When a tax can't be recovered — VAT on purchases by a business that makes exempt supplies, customs duty on imported goods, a non-refundable sales tax — it is simply part of what the item cost. It goes into the cost of the inventory or asset, or into the related expense.

Some levies fall outside these labels. In some jurisdictions a levy that isn't based on taxable profit — for example a religious levy such as Zakat in Saudi Arabia — is accounted for separately from income tax. Taxes on revenue, payroll or property are operating costs, not IAS 12 income taxes, because they aren't based on taxable profit.

The common trap is to put collected VAT into revenue and then treat the payment to the tax authority as an expense. Profit is overstated at the point of sale and understated when the tax is paid, and revenue no longer matches the price the business actually earned.

Why VAT is not revenue — the test. IFRS 15 defines revenue as the consideration the entity expects to be entitled to in exchange for its goods or services. The 15% VAT on an invoice is not consideration for the goods: the business has to hand it over whatever it sells, and it can't keep any of it. Ask "if the tax disappeared tomorrow, would the business's own price change?" — no, so the tax is someone else's money passing through.

How to decide in three questions: 1. Is the tax calculated on the business's own taxable profit? → income tax expense (IAS 12). 2. Is it charged to, or deducted from, someone else and then paid over? → a liability (VAT payable, withholding tax payable). 3. Did the business pay it on a purchase and can't get it back? → part of the cost of what it bought (IAS 2.11, IAS 16.16).

Anything else — a fee based on turnover, a payroll levy, a property tax — is an ordinary operating cost.