– USE ONLY IF IT
Anyone planning to take advantage of the one-year special
capital allowance rate should do so only if it makes sound
business sense, as tax specialist Carlton Collister
explained to Suzie Horne
THE one year special rate of 50% capital allowances on the purchase of new plant and machinery has given outright and hire purchase the financial edge over leasing.
However, much of the investment that was in the pipeline had already been done when this special rate was announced in the July 1997 Budget, says Carlton Collister, tax specialist with Grant Thornton.
Cash is now shorter, and anyone thinking of taking advantage of the one year special rate must do so only if it makes business sense and not simply to save tax, he advises.
Many accountants and consultants are warning producers against saddling their businesses with capital commitments in terms of both repayments and depreciation at a time when profits are falling.
Return on expenditure
"Farmers should consider carefully whether the return on their capital expenditure can be justified with lower produce prices, as the next year or so will be very tough," warns Mr Collister, who is based at Grant Thorntons Witney office.
The one year offer runs for investment made within the 12 months up to July 1, 1998. If the machinery or equipment is purchased on HP, then it must be on the farm by that date otherwise it will not qualify.
Cars are excluded from the 50% rate, and if more than £250,000 is spent on a long life asset such as a new dairy unit, then the rate is cut to 12% (normally 6%).
Purchase and hire purchase are treated in a similar way for tax purposes. With purchase, 50% of the price may be set against the income of the business to reduce the tax liability.
Hire purchase customers can set the same proportion of the total purchase price off in year one, even though the finance plan may run for several years. The balance sheet would show the outstanding commitment.
Leasing is treated differently in that no capital allowances are available with this method of finance. Instead, the depreciation on the leased asset is allowed.
"The capital depreciation is based on the value of the asset, not on what is paid in leasing charges," says Mr Collister. For practically all assets that allowance will be at a lower rate than is currently available for purchase and hire purchase. The days of being able to get a lot of leasing charges up front are gone.
"But if it were not for the one year 50% rate of capital allowance, then one would generally depreciate machinery faster than the rate of capital allowance.
"After July 1 next year it will probably be leasing which proves to be best for tax purposes, but there is one disadvantage with leasing," points out Mr Collister.
"At the end of the leasing period a lease rebate is generally paid, and this is all taxable in the year in which it is paid. From a cash flow point of view this slightly penalises leasing."
Contract hire charges are allowable as a straight deduction in the accounts, but if they are a cost directly attributable to producing and growing the livestock or crops then they need to be taken into account in arriving at the actual cost of stock at the businesss year end. This may mean that tax relief on part of the cost is deferred until the following year.
Mr Collister points out that tax incentives are just one commercial factor to consider when deciding whether and how to purchase machinery. *
The one-year 50% capital allowance offer applies to investments made within the 12 months up to July 1 1998.
Dont get too excited – cars are excluded from the 50% allowance rate.