MARKET REPORT COMPACT PLANT continued
the asset and rents it to the customer), which gives lower
monthly payments, easy
Time spent planning plant purchases can bring tax benefits.
upgrade options, greater flexibility and tax
advantages to the customer in some situations. While, these arrangements are common in the commercial truck and car fleet markets, demand is also growing in the construction industry.”
JCB Finance, the manufacturer’s in-house finance arm, offers a broad range of purchasing options, for which demand is increasing quickly, according to Marketing Manager Nigel Greenaway. “Prior to the economic downturn, approximately 45% of new JCB machinery was bought using finance, but that has now risen to nearly 65%. The recession has made more businesses realise that ‘cash is king’, and the advantages that can be achieved by avoiding having capital tied up in plant and equipment. We have seen a particular surge in demand over the last few months.”
Annual Investment Allowance increase
A particular opportunity that Nigel Greenaway highlights is the benefits that might be gained from taking advantage of changes in the Annual Investment Allowance (AIA) announced last December. As we reported in our Jan/Feb issue, the AIA was increased from £25,000 to £250,000 from 1 January 2013. It is designed to encourage new investment in new or used plant and machinery against taxable profits in the year in which the qualifying expenditure is made. The same rules apply to all businesses, large or small, incorporated or not, for expenditure incurred from 1 January 2013 and before 1 January 2015.
“Unfortunately it seems that some financial advisors have been slow in coming to terms with the new rules, and some tax-saving opportunities have already been lost. The first £250,000 of expenditure is 100% allowable against tax, with any excess attracting the 18% annual writing down allowance in the first year. In a typical scenario a partnership paying income tax at 40% could save £100,000 in tax in the first year. If the asset was purchased over three years on a hire purchase agreement, this would potentially be equivalent to HM Revenue & Customs paying for the partnership’s deposit and its first year’s HP payments. For a company paying corporation tax at the small profit rate of 20% then the above example can be halved, but, even so, tax relief of £50,000 is still available.”
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He suggests it is important for different financial year end companies to plan carefully to maximise the tax benefits. ”For businesses with financial year ends falling on 31 March or 5 April 2014, if they do not order machines soon, they may miss the opportunity to secure the first tranche of £250,000 in tax relief. Given lead times between ordering and delivery, it is vital that machines are delivered and available for use within the business by those dates, or the tax relief will be lost forever.
“Whilst HP remains the most popular form of funding, some companies have realised they have a core group of machines they plan to operate for a set period, which are unlikely to be changed or disposed of before that period has expired. Once the threshold of the £250,000 AIA has been broached, these same companies are asking whether there is a quicker way to write off these assets against taxable profits. The answer is yes because, with an operating lease, 100% of the monthly instalments can be offset against taxable profits. Run the machine for three years and 100% could be written off. Depending on the make and model of machine and its respective residual value, an operating lease could offer 90% better tax write-off in as little as three years, compared with paying cash or using HP.
“However, there is another reason to consider an operating lease, namely to reduce the level of debt carried on the balance sheet. This has been exacerbated by the continuing caution being exercised by the major banks. With an operating lease or contract hire agreement, the plant will not appear as an asset on the balance sheet. This can dramatically improve such key accounting ratios as return on capital employed, because the same turnover and profit is effectively measured against a smaller asset base.
JCB Finance says that 65% of its new machines are now bought using finance.
“JCB Finance is not a tax or financial advisor, so always seek advice from your accountant or finance director, because every business’ circumstances are different. Businesses should not make investment decisions purely on a tax basis - there should be a compelling business case for the investment.”
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