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of the
HAULIER and CARRIER
Hire-purchase Instalments and How to Provide for Them. Explaining Certain Points of Interest to Beginners
pROOF of the widespread misunderstanding of the way to treat hire-purchase instalments in any system of cost keeping is afforded by the number and variety of inquiries that I have received anent that matter. Reference to a few of the points raised in those inquiries may well serve as an introduction to this article.
The most numerous points refer to the manner in which they should be entered on income-tax returns. There are two aspects of that matter. First, readers should realize that the money spent on the purchase of new vehicles and equipment, however they may be acquired, is capital expenditure and, as such, does not appear in a return of income for assessment for taxation purposes. There is an allowance for depreciation, of course, but that begins only after a lapse of time.
That explanation effectively disposes of the suggestion, commonly mooted by inquirers, that they should set down the monthly instalments on hire-purchase account as expenditure relating to their businesses upon which they should be allowed a rebate of income tax. No such rebate is permissible.
A Rebate of Income Talc.
It is, however, reasonable to expect some allowance for the interest that has to be paid on the Initial price in order to obtain the hire-purchase facilities. In order to arrive at the proper amount on which to claim, the full cash price of the vehicle should be deducted from the total paid under the hire-purchase contract. The balance is the sum that the purchaser is paying for the accommodation and may be allowed, wholly or partly, as interest on a loan. As such, some consideration in assessment of tax is due.
To take a simple example, let me assume that the cost price of the vehicle is £300 and the total to be paid under the hire-purchase contract is £327, the payments to be spread over a period of IS months. Then, in the circumstances, the haulier shouLla set down, in his returns, the proportion of the £27 interest which has been paid during the year of assessment concerned. It will be at the rate of £1 10s per month.
The question next in order of importance, judging by B44 the number of inquiries on the point, is, how should instalments figure in the operating costs of the vehicle? The answer to this question, like that of the first, is " not at all." No matter from what angle these payments may be viewed, there is no justification for debiting the vehicle with them as an item of operating costs.
Some hauliers are persistent in this matter and continue to enter hire-purchase payments as operating costs, even after they have admitted the unreasonableness of so doing. One user, I recollect, prefers to regard his instalment payments as depreciation and, when he has finished paying for it in that way, writes the vehicle off An exasperated haulier confronted by these recurring denials, first of his right to claim rebate for income tax on the payments and, secondly, of the justification for including them in costs, will say, "Where, then, do they come in and how shall I regard them?" When the answer Is given, he is, more often than not, more bemused than ever, for the answer is that these payments are "profits.'?
Instalments as Payments Out of Profits.
Strictly speaking, I should state that they are payments made out of profits. To be still more accurate, I should divide • the payments into two, taking the amount paid for the vehicle as an instalment of the cash price, and the other part as the interest charged. Then I should state that the first of these payments comes out of profits and the second is an establishment expense.
Just to make that clear, let me take again the case of a vehicle, the cash price of which is £300 and on which interest of £27 is charged. The initial payment
In connection with a hire-purchase contract extending. over 18 months would be £82 and the monthly instalments would be £13 12s. (neglecting pence). Of the latter sum /12 2s. is on account of the actual cost price of the vehicle and 1.1 10s. the proportion of interest payment. The £12 2s. is taken out of the profits of the • business, whereas the £1 10s. is an establishment charge.
The point can be appreciated perhaps more readily if it be considered in this way. The purchaser of the vehicle must, during the first 18 months, make a gross profit of £13 12s., plus whatever other establishment charges he has to bear, in order to pay for his vehicle. If he makes no more than that amount, he can put no profit to his own account in the bank. If he Makes less, then, if he has no reserve funds, he will find himself in difficulties.
Now, 1300 is about the cost of a moderately priced, but reasonably well-found, 2-ton van, and it is by no means easy, in these days, for a haulage contractor to make a gross profit of upwards of £13 12s. per month with a vehicle of that size. It is, perhaps, even more difficult for a beginner, because he, for many months, may be unable to find suffi.dent work to keep his vehicle fully employed.
There are, however, ways of surmounting the beginner's difficulties. There are methods of making use of certain reserves, properly earmarked on account of operating costs of the vehicle, to help the novice to meet his hire-purchaseinstalment payments.
Whilst he should make every effort to End work at fair rates, it is during the time that profits fall below the essential minimum that he may use these reserves. That use must, of course, be made with the full knowledge of the consequences and a realization that, so soon as the hire purchase is completed, the amounts taken from those reserves must be replaced.
The effect is really to spread the period over which the vehicle is "bought," by a process of borrowing from these special reserve funds. It is now necessary to explain what I mean by these reserve funds, how they arise and for what purpose they are created. The simplest way to do this will be first to take au actual example and then to generalize.
The example I propose to take is that, already mentioned, of a 2-ton van costing, when new and completely equipped, £300. If that machine be bought on a hire-purchase contract, the purchaser paying a quarter of the price and the balance over a period of 18 months, it will be found that the amounts of the initial payment and of the instalments will he what has already been set down, namely, initial payment /82 and monthly instalments £13 12s,
In addition to the i'82, the haulier will have to find cash to pay his insurance premium for the first year and licence for, say, the first quarter. The former may be about £20 (the actual amount differs according to the locality in which the contractor is to carry on his business), whilst the latter will he £6 17s. 6d. It will be a good plan for him to purchase at least a 10-gallon drum of oil, bringing his initial outlay to about £112.
His expenses in the immediate future are now confined to garage rent and the purchase of petrol. For all the other eight items of operating costs, some sort of reserve fund must be built up, and it is in the manipulation of the fund that the provision of hire
purchase instalments can be made. S.T.R.