Thorough Treatment of the Subject of Income-tax Returns, with Reference to Depreciation and Hire-purchase Instalments
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Problems of the
HAULIER and CARRIER •T HE fact that I receive a number of inquiries about the preparation of income-tax returns demonstrates that the subject is of wide interest to hauliers, however distasteful the actual payment may be. Perhaps the fact that most of those who write to me on the subject do so in the hope that I may be able to suggest means for reducing their payments has something to do with the frequency with which I receive inquiries of this nature. Many readers seem to imagine that because the instalments of a hire-purchase contract are paid from time to time out of the profits of business, they are entitled to rebate of income tax on those payments, as though they were ordinary expenses, but they are wrong. There is no rebate of income tax on account of any capital expenditure and it does not matter whether the amount is disbursed in one sum or in several instalments. It still remains as capital expenditure.
There is, however, some slight hope of a small rebate in connection with these payments—extremely small as compared with what some of the more optimistic correspondents have been anticipating. Whenever a vehicle is purchased by instalments, the initial price payable in a cash transaction is increased by an amount calculated so as to cover interest. Therefore, 'every instalment really comprises an aliquot part of the original price, plus a similar proportion of the total amount of interest to be paid. Rebate of income tax can be obtained on that interest, but only on that.
It may help readers to understand the income-tax assessor's point of view if I remind them of another aspect of these instalments. They are sometimes really regarded by Table hauliers as operating costs. Many a time have I had estimates of costs from readers in which instalments on hire-purchase contracts have so appeared.
I have had to explain to them that if their revenues be such as to enable them to pay hire-purchase instalments, as well as to meet all the other incidental expenses of n44
their businesses, including those relating to the operating cost of the vehicle, then the amounts itemized as hire-purchase instalments are, in actual fact, statements of profit earned. Now, as regards depreciation, if my
postbag be anything of a criterion, about 33 per cent. of the hauliers in the coun try disagree with their local income-tax assessors in the matter of an allowance for depreciation. There can be no denying, either, that they have every reason for dissatisfaction. Depreciation allowance by the Inland Revenue officers falls far short of the actual decrease in value of motor vehicles to-day. It is at the rate of only 20 per cent. per annum and, even then, it is not on the first cost of the machine, but is calculated on its value year by year as it is depreciated, at that rate. The meaning of this may be somewhat obscure to those readers who are not familiar with calculations of this kind. They will understand the meaning of the 20 per cent., but not so readily appreciate how the calculation is made year by year. An example will suffice to make the matter clear.
I will take the case of a vehicle costing £1,000 and bought, say, on April 5th, 1926. If it were depreciated regularly at 20 per cent, per annum of the initial cost, its value in successive years would be: April 5th, 1927, £800; 1928, £600; 1929, £400; 1930, £200; 1931, nil, so that each year the owner would be able to claim for a rebate of income tax on £200.
Actually, that state of affairs applies only to the first year, during which the depreciation would still be £200, bringing the value down to .£800 on April 5th, 1927. During the next year, however, it would depreciate 20 per cent. of £800, which is £160, and the haulier would be allowed a rebate on only that amount.
Its value on April 5th, 1928, would thus he £640 and the depreciation during the next year would be £128, and so on. Thus, with the depreciation calculated in that way, the vehicle would never be written right off.
As a further example showing the working of this system, I cannot do better than to quote an actual in quiry and give the figures relating to the three vehicles of a haulier reader who, a few clays ago, wrote to me on this subject.
His fleet comprised a banner bought on June 3rd, 1927, for £225; a two-tonner purchased on March 15th, 1929, for £310, and a 2i-ton machine bought on April 10th, 1931, for £465. He wanted to know how he should assess depreciation for income-tax purposes.
I suggested to him that it would be sufficiently accurate if he were to assume the dates of those purchases to be April 5th, 1927, 1929 and 1931 respectively. In these circumstances the figures set out in the accompanying table represent year by year the amounts to be allocated for depreciation and the value of the vehicles as depreciated after that fashion. The figures for depreciation indicate the amounts for which rebate of income tax an be claimed each year. These statistics appear in the table.
The income-tax authorities usually refer to those amounts-not as depreciation, but as wear and tear or obsolescence. On the face of it, as I have already pointed out, they seem unfair, because, as everyone knows, the rate at which motor vehicles depreciate to-day is cer
tainly in excess of 20 per cent. per annum of the depre elated value. In actual fact, however, the ultimate results are not so unfair to the income-tax payer as appears, because, when the vehicle is sold, the actual depreciation as exemplified in the price received is then taken as a basis for the calculation of the appropriate rebate. Referring back to the initial example of the £1,000 vehicle, at the end of the third year this would be worth £512. If during the following year the owner sold it and received, say, £300 for it, then, in his accounts for that year, he would be able to set down as wear and tear the difference between £512, its value at the beginning of the year, and £300, the amount which he obtained on sale. In the long run, therefore, the user is allowed rebate on the actual depreciation which his vehicle has suffered.
I will close with another problem which, at first sight, appeared to have nothing to do with income tax. A haulier equipped a petrol-engined vehicle with a compression-ignition unit at a cost of £300. He wanted to know how he should refer to that expenditure in his accounts; whether he should set it down as on the purchase of new engine or debit it as repairs to the old vehicle.
After some consideration I advised him to include it as repairs. I did so because it seemed to me that whilst, so far as he was concerned, the expenditure of £300 was probably justified, inasmuch as the value of the vehicle to him was increased by that amount, he would neveribe able to get his money back on selling the vehicle. 4Therefore, outside his own requirements, if I may put it that way, the value of the vehicle had not been increased.
If the expenditure of £300 appeared in his accounts as repairs, he would be allowed a rebate of income tax on the full amount, that is to say, £75, calculating on a basis of 5s. in the £. If he set it down in his accounts as purchase of a new engine, it would be capital expenditure and, therefore, not subject to any rebate of tax except at the end of a year. Then he would be credited with 20 per cent. of it, namely, £60 on which his tax relief would be £15, as against the £75 rebate
allowed under the other scheme. S.T.R.