Contractors World - UK & Ireland Edition
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Part 2 of financing options for new plant and equipment (see part 1)

An alternative way to write-off Plant and Machinery against tax

In the last issue, Roger Lindley asked Nigel Greenaway, General Manager at JCB Finance to clarify a number of matters relating to finance in the UK construction sector.

Nigel placed some emphasis on the introduction of the £100,000 Annual Investment Allowance in March 2010 because it was likely to encourage small to medium sized businesses to invest in plant and machinery. The appeal of writing off 100% of that expenditure against tax in one year is a powerful incentive.

Unfortunately the June emergency budget announced, from April 2012 onwards, the reduction in the AIA to £25,000. Either way, users of modern construction plant may regard £100,000 as a drop in the ocean and would prefer an alternative method of writing off machinery expenditure against tax – especially as it takes about 10 years to write off 90% under the current 20% writing down allowance (WDA) rules. This prompted the question – is there an alternative method of financing plant that is more tax efficient?

Nigel’s response was “yes” and he went on to explain that “In the waste/recycling, mining and quarrying sectors Operating Leasing and Contract Hire are very popular alternatives to traditional plant funding. Depending on the nature of your business, ultimate ownership of your plant and its position as an asset on your balance sheet may not be very important – especially if the plant is part of a production process. In these circumstances it is often more important to know how much each piece of plant contributes to the overall cost of the process.

In the Construction Industry, hire purchase remains the most popular form of funding. However, a number of companies have realised that a core group of machines operated for a set period are unlikely to be changed or disposed of before that period has expired.

Road/rail machinery with a seven year license to operate on the rail is a good example. This is where leasing comes in to its own because 100% of the monthly rentals can be offset against taxable profits. Run the machine for three years and 100% could be written off. Consider that from April 2012 the annual writing down allowance will decrease to 18% and it will take 12 years to write off 90.76% of the original capital cost against tax.

Take an example of a £100,000 piece of plant, financed over 3 years and consider the tax write-off when using Cash or Hire Purchase when compared to an Operating Lease under the new 18% WDA rules.

The Operating Lease offers 89.38% better tax write off in as little as three years. Multiply these figures for a fleet of machines and the figures become eye watering!

Operating Lease features and benefits

Off balance sheet funding with fixed low cost lease rentals reflecting a predicted future residual value which remains unpaid by the customer (lessee). This residual risk is taken by the leasing company who recover the machine at the end of the period and sell it in order to realise this unpaid amount. This transfer of risk allows the lessee to treat the asset as off balance sheet - which can facilitate significant improvements on some key accounting ratios like return on capital employed (pleasing the shareholders or potential investors).

Benefits include:

• Low capital outlay.

• Spreads the impact of VAT which is collected on each rental as it falls due.

• Low fixed repayments.

• Tax efficient

• Preserves working capital reserves.

• Removes residual value risk.

• Off balance sheet funding.

• Easily combined with repair and maintenance contracts to offer total peace of mind

Ultimately your accountant will need to run the calculations to see what is best for your business coupled to a sound reason for investing in additional plant and machinery in the first place. [END]

JCB Finance

Contractors World acknowledges the assistance given by Nigel Greenaway, Marketing Manager, JCB Finance Ltd, with over 26 years experience in the finance industry. JCB Finance Ltd was formed in 1970 as the in-house finance arm of JC Bamford Excavators.

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