A N inquiry from a coach owner, one principally conmined with
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excursions and tours, gave me much food for thought in several directions. The original letter had some peculiar features. It read: "We should be pleased if you would advise us on the following tax problems:-Capital expenditure, 1948 (new coaches), £40,000; depreciation at 45 percent, £18,000; annual net profit, £8,000. Is the [balance of] £10,000 depreciation recoverable from the next year's profits, or from the tax paid in previous years ?"
It may be as well to explain here the meaning of the item "depreciation at 45 per cent." The inquirer obviously refers to benefits conferred by the income Tax Act, 1945, whereby he is allowed in the first year of the purchase of new vehicles, the set-off in his income tax return for that year, of an initial allowance of 20 per cent, of the capital expenditure, as well as 25 per cent. of that amount as wearand-tear allowances.
The letter reached me in February of this year. My first reaction was: " Does this inquirer expect me to believe that he has already taken delivery of 10 or a dozen new coaches this year ?" I did not believe it. Second, I thought, he is not likely to receive these new vehicles in the whole of 1948, let alone in the first two months.
I almost decided that it was a catch question, and the writer a would-be humorist. However, I decided to give him the benefit of the doubt, and dealt with his letter as though it presented a serious problem—as later it proved to be. 1 replied to the following effect:— " Before attempting to deal with the problem I must have some further information._ Apparently you have already this year taken delivery of between 10 and 12 first-class new coaches. Presumably, as it is hardly likely that a newcomer to the business would purchase to that extent—a newcomer would be unlikely, these days, to obtain a licence to launch OM in that way— you must have disposed of old vehicles for which these are replacements. Will you please tell me, in respect of those other vehicles: (a) The date of purchase of each; (b) the amount paid for each; (c) the amount received during their existence as wear-and-tear allowances; (d) the price at which each was sold; (e) the date of sale of each."
Perhaps I should make clear my own line of thought. I had concluded that this inquirer ?eared that the reduction of income-lax, resulting from the initial and wear-and-tear allowances, would exceed the actual profit, and thus he would, in consequence, lose some of it. I guessed that he would sell his old vehicles at a premium, so that he would have to return, by way of balancing charge, some of the profit thus made. That return would diminish the rebate of tax due to him, thus relieving him of some of his worry.
Year of Expenditure 1948 1949 1950 1951
Pre-view of the Field In advance of that information, the situation is this: there is an expectation of profit for the year amounting to only £8,000. As a result of the application of the Act, with reference to this purchase of £40,000 of vehicles, there will be an allowance of £18,000 of revenue on which tax need not be paid. My correspondent's trouble, as I then saw it, was that he feared he would lose the benefit of £10,000 of that amount, because there would be no profit from which it could be deducted.
If this £18,000 allowance were a net addition to all other allowances, and if there were nothing in the rest of his accounts to be deducted from it, the £10,000 could be carried forward to another year. • However, his next letter put quite a different face on the matter. "In reply to your questions," he said, "there are five old coaches which will be disposed of and replaced by B2 some of the new vehicles on order. They are as follow:— (1) Cost £650. Date of purchase, 1941. Allowance to date for wear and tear, £582.
" (2) Cost £1,122. Date of purchase, 1942. Allowance to date for wear and tear, £917.
(3) Cost £1,057. Date of purchase, 1942. Allowance to date for wear and tear, £862.
(4) Cost £1,064. Date of purchase, 1942. Allowance to date for wear and tear, £868.
"(5) Cost £1,090. Date of purchase, 1937. Allowance to date for wear and tear, £1,051.
"It is expected that the old coaches will realize an average of £1,600 each on resale. It is estimated that the profit on trading for the year 1948 will be 18,000 (approximately equal to that for 1946 and 1947), and as our financial year ends on December 31, it appears we shall not get the first wear-andtear allowances on our new coaches in the normal course until 1950 or 1951.
"The point on which we should like to have your opinion is whether there are means whereby we can get any relief for earlier years, as it seems unjust to us to have to wait ' for so long. Deliveries of new vehicles are, as you know, very uncertain and deliveries for 1948 might be only (say) £20,000. If this be so, would this make any difference to any method you might suggest for obtaining relief for the years 1949 to 1950?"
Quick Tax Benefit Required It now appears that this inquirer is not so much worried about the allowance and its relation to his actual net profits, but wishes to gain the benefit of that allowance as quickly as possible, presumably a'S a set-off against the heavy capital • expenditure incurred in buying these new coaches.
Before, therefore, dealing with the effect on the figures for rebate of income-tax of these disclosures as regards old vehicles, it seems more important to answer the question as to the possibility of experiencing the benefit of the rebate ahead of time. There seems to be little prospect of that.
• In the little explanatory pamphlet on the Income Tax Act, 1945, issued by the Board of Inland Revenue, the following example is quoted:— " A trader who makes up his accounts annually to December 31, buys a machine on July I, 1948, in his accounting year to December 31, 1948, for £1,000. The initial allowance of 20 per cent. (i.e., £200) will be deducted from his Schedule D assessment for the income-tax year 1949-1950 since his profits for his accounting year to December 31, 1948, form the basis of his 1949-1950 assessment."
Of course, the actual benefit, that is to say, the reduction in tax, will not be felt until 1§50, when the operator is paying the tax on that assessment. If my inquirer buys some of his vehicles in 1949, the benefit of that allowance will not be felt by him until 1951.
There seems to be no way out of that difficulty, so far as the actual wording of the Act is concerned, but here, again, I have advised him, as I have in other similar cases, to go to the local inspector of taxes and discuss the matter. I have found that course to be advisable and, as a rule, the income-tax authorities are helpful. As every one of the five vehicles is expected to sell for more than the original cost, the operator will have to refund, by way of balancing charge, the income-tax on the total of wear-and-tear allowances, received since they were put into service. That is £4,280. Instead, therefore, of the full £19,000 ranking as a business charge which will be allowed as a set-off against revenue, there will be £18,000 less £4,280, or £13,720.
Rebate in 1951
On the faze of it, therefore, and supposing I am right about the impossibility of advancing the date of receipt of this benefit, it seems as though the operator will have to wait until 1951 before he gets his rebate. He will have. £8,000 profit in 1950. carrying forward the balance of the £13,720, namely £5,720, to set off against his presumed profit of £8,000 in 1951, leaving £2,280 on which he must ay tax.
In fact, the position will be more favourable, because by then there will be a further amount of wear-and-tear allow ance to be taken into consideration. In the 1949-1950 assessment there has been allowed £18,000 off the original capital outlay of £40,000, leaving a balance of £22,000. On that sum the wear-and-tear allowances, for consideration in the 1950-1951 assessment, will be at the rate of 25 per cent., i.e., £5,500. There will thus be a credit allowance of £3,220 still available to be carried forward to the next year, during which, presumably, it will be extinguished. None of this is really helping our friend with his main problem, which, presumably, is that of finding a capital sum of £40,000 in 1948 and having to wait until 1950 before he receives the benefit of the £18,000 initial and wear-and-tear allowances. The picture is not, in fact, quite so black as that. There is still the revenue from the sale of the Ave old vehicles to be considered. At the price quoted, that will amount to £8,000, £4,280 of which, admittedly, ranks for tax, but not until 1950, so that there is some salvation there. The £8,000 is available as a contribution towards the £40,000.
Presumably, too, my correspondent has a fairly large sum available. If I assume that amount to be, say, £20,000, there is £28,000 towards the £40,000, leaving £12,000 to be obtained from outside sources.
But it is most unlikely that the whole of the £40000 will be needed in the first year. Moreover, the point has not been overlooked by the inquirer, who himself, in his smiled letter, expects that he may be able to obtain delivery of only half his new fleet, or £20,000 worth. In that ease he will., on the above figures, have £8,000 in hand towards expenditure during the second year.
Out of his £8,000 net profit in that second year he may be able to contribute £2,000 or £3,000, so that his borrowings will be correspondingly diminished. Incidentally, if it does happen that only £20,000 is expended in 1948, the 45 per cent. allowance, creditable in 1950, will he only £9,000. The £4,280 balancing charge will, however, be deducted, leaving £4,720 as the net allowance.
What will happen is shown in Table I, carrying the figures down as far as the fourth year. The first return will be the poorest. Whilst the total allowance on £20,000 will be £9,000, that is subject to a deduction on account of the balancing charge of £4,280, so that actually the total allowance will be only £4,720.
In the next year the operator presumably spends another £20,000, of which he has an initial allowance of £4,000 plus wear-and-tear allowance of £5,000. There is further the wear-and-tear allowance of £2,750 on the transaction of the preceding year, so that the total wear-and-tear allowance for that year is £7,750, and the allowance covering initial and wear and tear amounts to £11,750. That is not subject to any balancing charge and the operator, therefore, gets full credit..
For Operators Large and Small
This information is just as useful to the small operator ordering one vehicle as it is to this inquirer who is preparing to spend £40,000. The small operator buying a luxurious coach costing about £4,000 has simply to divide the foregoing figures by 10 and he will be able to appreciate what his own position is likely to be. If he buys the vehicle in, say, May, his initial allowance will he £800 and his wearand-tear allowance £1,000, a total of £1,800. He will not, however, receive any benefit until 1950. On the whole, this delayed-action effect has, I think, its good points, particularly in the case of the small operator buying one vehicle, because he is not so likely to overestimate his profits and under-estimate his charges.
While on this point it is of interest to note that the Northern Ireland Road Transport Board is spreading over five years the relief afforded by the initial capital expenditure allowance of 20 per cent. on vehicles. The attitude taken is that these allowances are in anticipation of future wear-and-tear allowances, and on that basis the Board considers it advisable to aim at equalization and avoid excessive discrepancies in future years. S.T.R.