Initial Allowances
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IN 1946, hauliers were given a concession by the Government in what was called an "initial allowance." Like so many of the benefits we receive from time to time from the Government, there was a snag in it, never seriously considered by the rank and file of commercial-vehicle owners until recently, when rumours about a so-called balancing charge began to circulate.
These conditions were the outcome of the operation of the Income Tax Act, 1945. It provided that there should be a special allowance made to purchasers of plant and machinery which was additional to the ordinary wear and tear allowances with which, in varying percentages, payers of income tax were familiar. So far as hauliers' vehicles were concerned, the wear and tear allowance in respect of commercial motors was 20 per cent.
The allowance used to be assessed on the falling value of the vehicle in this way. Assuming that the vehicle cost £1,000 in the first place, in the first year of its use the haulier could set out in his statement of expenses, £200 as representing the wear and tear allowance in respect of that vehicle. In the subsequent year the value of the vehicle was assumed to be £800, the original purchase price less the £200 the operator had already received in relief of taxation.
The allowance for that year was accordingly 20 per mit. of £800, which is £160. For the next year the allowance was calculated on the basis of £640 (£800 less £160), and so on. Sometime during the war years, that 20 per cent. was increased to 25 per cent., largely, I believe, on account of official representations.
Then there came this new Act, which provided an additional allowance, actually 20 per cent, of the amount expended on any additional plant. Commercial vehicles, whether new or used, which were purchased during the year, were items to which the new Act applied. According to ' that Act, a vehicle purchased after April 6, 1946, was regarded as an addition to the haulier's plant and a percentage of the amount so spent could be entered as an allowance to be deducted from the operator's income as a legitimate item of expenditure.
Thus, referring again to the case of the haulier who expended 11,000 on a vehicle, he could claim £200 as a legitimate item of expenditure on which income tax would be nil. When making his return of revenue and expenses, he could claim, as legitimate expenditure, first this initial allowance of £200 (20 per cent. of £1,000) plus a further 25 per cent. (£250) as wear and tear allowance.
Year Value
E
1,000
450
1 550
138 2
412 •
103
- 3 309
78 _
4 231
58
— 173 5
The total allowances in respect of the vehicle would therefore be £450, and the income tax relief, assuming tax at the rate of 9s. in the pound, would be £202 10s. The purpose of this measure was to encourage the purchase of new equipment and thus accelerate the return to normal commercial conditions.
The desired reaction was evidently not realized, because the initial instalment was shortly increased to 40 per cent., so that, again referring to the purchase of a vehicle for £1,000, the first year's allowance became 65 per cent., or £650, representing an allowance of income tax on £650, saving the operator in the first year as much as.£292 10s.
For the next year the value of the vehicle, insofar as income tax calculations were concerned, would be £550 only and the allowance for wear and tear would be £138, making the value £412. (See Table I.)
I have several times pointed out to operators that this so-called benefit is almost a snare and a delusion, that the ultimate total savings are the same whether there was an initial allowance or not. All that the operator gained was a big but temporary saving in expenditure when he first bought the vehicle, and that was at the expense of later years, as the falling value of the vehicle diminished rapidly and the rebate on tax was the less. However, that initial allowance was taken at its face value by most and the concession had to an extent achieved its object as it did encourage operators to buy new vehicles—when they could get them.
Now to discuss another aspect of the Act, that which relates to the balancing charge. Before the passing of this Act, an allowance was given when a vehicle was to be sold and replaced —note that the piece.of machinery or the vehicle must be for replacement. This was called an obsolescence allowance. That was computed by deducting from the cost of the replaced machinery or plant (a) any wear and tear allowance given on it and (b) any proceeds of sale: but could not exceed the initial cost of the new machinery or plant. That recognized and usual allowance was replaced by the balancing allowance, which operated in this way.
Imagine a vehicle which has been in use for some time and is scrapped, sold or destroyed while that Act was in force. There would be what is called a balancing allowance, equal to the amount of capital expenditure on the vehicle which has not been allowed for income tax purposes less any proceeds of sale, or compensation received.
If in similar circumstances the sale proceeds, Thus, a haulier spends £1,000 on a new vehicle. He keeps it for several years in the course of which he receives allowances totalling £600. He then sells it for £300. Now he is assumed to have received £900 in all, comprising £600 allowances and £300 on sale. He is in such circumstances due to receive a balancing allowance of £100, the difference between the amount paid in tax, plus the amount for which. the vehicle is sold and the original cost of the vehicle. I do not mean that the operator is to be paid £100 in cash; that would be too much to expect. He is entitled to be allowed that sum as part of his wear and tear allowance.
On the other hand, if the vehicle is sold for more than the amount paid in tax plus the amount received on sale, there is a balancing charge against the taxpayer; that extra amount is treated as having been earned, and is correspondingly subject to tax.
For example, taking again this expenditure of £1,000 on a new vehicle. After the amount received on account of wear and tear expenditure, phis initial allowance, amounting in all to £600, he sells the vehicle for £500, he has thus received in all a total of £1,100. The balancing charge is thus £100 and that amount was added to the operator's income as assessed for purposes of taxation as though it were part of his actual earnings.
After a few years, the initial allowance was withdrawn. It has now been brought into operation again, and at present stands at 20 per cent, of the amount spent. The total allowance which can be claimed during the first year after purchase of a new vehicle is 45 per cent, of the purchase price of the vehicle. That is £450 in the case of a machine which cost £1,000 when new. The same allowance is made in the case of a used vehicle.
In Table I, I have set out the wear and tear and initial allowances, giving the figures for five years, at the end of which period I assume that the operator
disposes of his vehicle for 1400. The position as regards income tax allow ances will then be that he has spent £1,000 and has received allowances
amounting to £827, also £400 on sale Year
of the machine, £1,227 in all, That may be treated directly in respect of the balancing charge of £227, or as fart of the initial allowance on a new machine, purchased to replace the one
which has been sold. 2 Suppose, for example, that the pay ments and allowances are the same as, 3 those of Table I. The balancing charge is there shown to be £227, as above. 4
Instead of putting that amount as being a balancing charge, it is treated as follows. Assume that the operator purchases a vehicle to replace the old one and pays, again, £1,000 for it.
Instead of asking for an adjustment of his income tax in the way just described, that is, providing that the £227 balancing charge shall be included in his return of expenses and revenue, he can ask, and be granted, that the £227 shall be regarded as part of the recompense in the form of the initial allowance on buying the new machine. For instance, if he does buy a new machine for use in place of the one just sold, he can arrange for the initial allowance to be £200 and carry forward the extra £27 as dutiable in the following year together with his other earnings.
Or again, suppose that he sells the old machine, not for
Year
1
2
3
5
£400, but for £650. The amount which will then rank for balancing charge will be £477. The position will then be as follows. The normal balancing charge will be the difference between the allowances made in respect of the old machine, £827, plus the amount received on the sale of the old machine, namely, £650. The total is £1,477. Altogether the operator has spent £1,000 and received £1,477 and the difference, £477, is the balancing charge which he has to face.
He may elect to have it dealt with in one of two ways. He may have it treated as though it were part of his earnings, and pay income tax in the ordinary way. The purchase of the new vehicle to be used in place of the old one must in that
case be treated as a separate transaction. In that way he will be entitled to claim an initial allowance and wear and tear allowances in respect of the new machine, Alternatively, he can arrange to have the balancing charge against him treated as part of the new purchase, If the new vehicle costs £2,500, the initial allowance will be £500 and, in this way, that debit of £477 can be absorbed into the new transaction so that the operator, instead of paying tax on that £477, is made an allowance of £.500 less £477 as the initial allowance.
Annual wear and tear and balancing allowances are given as deductions
from the assessments on the profits or•
income for the year for which the allowances are due, and a balancing charge is made as an addition to the normal assessment on the business or employment income for the material year. If the assessment for the year in which an initial, annual wear and tear, or balancing allowance becomes due is less than the amount of any unallowed balance, the latter will be carried forward and deducted from the assessment or; the income of the same person from the same source for the following year, and so on for succeeding years without time limit.
It is worth while to note that provision for allowances to be paid in subsequent years takes precedence over provisions for losses in trade. For example, a loss incurred in trade may normally be carried forward to be set off against profits from the same trade, for a limited number of years. If, because of deductions for initial, annual and balancing allowances, the assessments in
1,000 250 those years are inadequate to cover the 250 losses available for set-off, any balance 750 250 of loss " displaced " by these
zso allowances may be carried forward indefinitely.
500 250 TABLE III Depredation on a Mileage Basis 25,000 miles per annum at 2.4d. par mile Value Depreciation
250 It is well known that in reckoning 250 250 operating costs which are to be the basis 250 of assessment of charges, depreciation
is reckoned on a mileage basis. According to "The Commercial Motor
Total .. £1,000 Tables of Operating Costs," the
depreciation allowance for a 6-tonner running 500 miles per week is 2.38d. per mile (say 2.4d.). That is approximately £250 per annum. Table III is designed to give the reader opportunity to compare his figures for depreciation with those allowed by the Inland Revenue. In four years, according to the Tables, the vehicle is fully depreciated: its book value is nil. If depreciation is measured as in Table I the vehicle is still worth 1237.
My last article which dealt specifically with the assessment of depreciation was published in The Commercial Motor dated February 6. I showed there how to take the factor of obsolescence into account when reckoning with vehicles
covering relatively low mileages. S.T.R.