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August 1, 2009updated 12 Apr 2017 4:34pm

Why an operator can reduce lessor tax burdens

Historically, the UKs HM Revenue & Customs has deemed plant hire companies which offer equipment without operators to be leasing companies But with 40 percent FYA announced in this years Budget, where does the plant hire sector stand in terms of eligibility?

By Fred Crawley

Historically, the UK’s HM Revenue &
Customs has deemed plant hire companies which offer equipment
without operators to be leasing companies. As a result, such firms
cannot claim enhanced first year allowances. (FYA). But with 40
percent FYA announced in this year’s Budget, where does the plant
hire sector stand in terms of eligibility?

The answer, unsurprisingly, is somewhat
opaque. Currently, plant hire companies are major customers of UK
leasing firms, and purchase roughly 75 percent of the construction
plant and equipment used in the British construction industry. When
this equipment is purchased on finance, it is almost always on hire
purchase terms.

Under last year’s rules, a large plant hire
company spending £1 million (€1.16 million) in its tax year would
have been able to write off £240,000 against taxable income. That
is, £50,000 annual investment allowance (AIA) at 100 percent,
followed by the remaining £950,000 at 20 percent annual writing
down allowance. This same company in this tax year, providing over
50 percent of its hires have an operator, would now be able to
write-off £430,000 (the same £50,000 AIA at 100 percent, plus
£950,000 at 40 percent).

However, those providing mainly non-operator
hire (the vast majority of medium to large plant hire companies)
will still only be able to claim under the old rules, and will be
restricted to writing-off only £240,000.

When asked to clarify the situation, HMRC
commented:

• All expenditure on plant to be
exclusively hired out with an operative will qualify for the
temporary FYA.

• Any expenditure on plant that is
to be exclusively hired out without operatives will not qualify for
the temporary FYA.

• However where there is expenditure
on plant where there is expected to be mixed hire (with and without
operatives), provided the predominant hire is with operatives, then
all the expenditure on that plant will qualify for the temporary
FYA.

How this is going to be policed may be a far
more difficult question for the government to answer. The
expectation, however, is that local tax offices will expect
applicants to prove the majority of the plant has been provided
with an operator.

Fred Crawley

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