How Many Hours a Week?
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Solving the Problems of the Carrier
Further, Inquiry Into How a, Flat Rate to be Quoted in a Hiring ,Contract Must be Adjusted to Ensure a Profit Under Varying Conditions
ALARGE number of interesting points has arisen from a letter of inquiry I received from a man who is entering the haulage business for the first time as an operator although he has had some years wcirking as a driver. He wrote to me stating that he had plenty of experience of the practical side, "from the driver's scat" as he so aptly put it, but was rather short of knowledge of the administrative side, especially about the way in which he should set about preparing an estimate.
His first potential customer had expressed a desire that the quotation should be on the basis of a flat rate per hour. Investigation of the problem showed that there were good reasons for regarding that method of quoting as unsatisfactory and although I recommended him to endeavour to meet his customer's requirements, I nevertheless suggested safeguards against loss of earnings because of the limitations of the flat rate. In conclusion, I pointed out to him that the time and mileage figures given in "The Commercial Motor Tables cf Operating Costs" were adapted to just such problems as were in his mind, and recommended him to make a study of those figures.
I had then to warn him that there were snags in the way of using those figures without giving proper consideration to the circumstances in which the vehicle was to be operated, especially in respect of the number of hours of profitable employment per week or per day. The point is that the figures for time which are quoted in the Tables are calculated on the basis of 44 hours per week. If the vehicle works no more than 44 hours per week well and good: 'if it works more that is better, for overtime on the part of either the vehicle or its driver is good. But if it works less than 44 hours per week, and if that is regular, the revenue, if based on the data provided in the Tables will be insufficient; the profit will be much less than it should be and may even be non-existent.
Most Direct Method
The simplest and the most direct way of calculating what the rate should be so that there should be no loss is to assess the hourly rate on the average number of hours the vehicle is going to work, For example, take the case of the 6-tonncr to which reference was made in my previous article. The standing charges totalled £9 10s. per week; £3 per week was taken to be the amount of the establishment charges. A sum of £6 per week was the profit the operator wished to make. The above items. total £18 10s.
The mileage was taken to be about 300 or 400 per week, and on those bases the time charge per 44-hour week was shown to be 8s. 5d. per hour and the mileage charge to be 90. per mile. Now assume that it is found that the average hours per week were 37 and not 44. All that needs to be done is to divide that weekly total, £18 10s., by 37. The answer is 10s., and that is the figure for the charge per hour. The mileage charge remains unaffected.
Whenever I receive an inquiry similar to this I have to work on the basis of the figures in the Tables unless it is possible to get some further information from the inquirer. This particular reader wrote to say that he has been asked to tender for the haulage of a 6-ton load.over a 90-mile lead.
The first thing I want to know is whether that is the only job he has to do in the week and, if so, must I calculate the charges on that basis and at the same time provide, in the quotation, for a substantial margin of profit. Alternately, if he has other work, what does he expect his total of miles and hours per week to be. If, as is probable, my inquiry meets with no response I send him replies assuming both conditions separately.
Making Up the Charge If the contract referred to in the inquiry is the-only work the vehicle has to do in the week, then. the .haulier must earn the whole of the amount just described as comprising his standing charges and gross profit for the. week. That is to say, he must be paid on account of. that one job, £9 10s. for standing charges plus £3 for establishment costs and £6, the agreed profit, £18 10s. in all. To that must be added the revenue due on account of the mileage charge of 90. per mile and that, for 180 miles, is £7 2s. 6d. The total charge for that job of haulage is thus £25 12s. 6d. That represents 2s. 10d. per mile run, 55,8d. per mile lead or £4 5s. 6d. per ton.
If the inquirer can obtain the job at that price, good luck to him. As; however, that is extremely unlikely, he must have recourse to the alternative way of estimating the price, i.e.. by the time and mileage method.
I take it that 10 hours will be the minimum period necessary for the journey. In that there is allowance of two hours for loading and unloading and eight hours for travelling. If I take it that the loading and unloading can be carried cut either on the I day before or in the day immediately after the journey so that there is no need for the driver and the vehicle to be away from home, the charge will be comprised of 10 hours at 8s. 5d. per hour, which is £4 4s. 2d., plus 180 miles at 90. per mile (£7.2s. 6d.), the total being £11 6s. 8d.; Is. 3d. per mile, 2s. 6d. per lead mile or £1 17s. 9d. per ton.
With this reply I must include a warning that if I am wrong in my estimate of the time for loading or unloading, or for travelling, the inquirer must make corrections according to his own experience. Further, if much-of the journey is through congested areas or in a .hilly district, it will not be possible to cover the distance in eight hours and corrections must be made on that account also.
Suppose, for example, that the total time was 18 hours, say, two full days, then the charges will have to be assessed as follows. For time. 18 hours at 8s. 5d. per hour, £7 I Is. 6d., plus 180 miles at 90., £7 2s. 6d., plus £1 for subsistence, etc., total, £15 14s. That is £2 12s. per ton, Is. 9d. per mile run and 3s. 6d. per mile lead.
Those rates are calculated on the assumption that the
vehicle and driver work at least 44 hours per week. If the total hours per week are fewer than that, the haulier will be compelled to reassess the rate taking not 8s. 5d. per hour, which is based on the 44-hour week, but Ws. per hour on the assumption that the vehicle is operated for only 37 hours. In that case the charges will be: for 18 hours at 10s. per hour, which is 19, plus 180 miles at 91d. per mile which is, as above, £7 2s. 6d. The total charge is thus £16 2s. 6d. Add £1 to cover subsistence, etc., and we get 11 / 2s. 6d. The rate per mile run is 2$. approximately, 4s. per mile lead and £2 17s, per ton.
am at the moment almost snowed under with inquiries about income tax. This is the time of the year when hauliers are completing the forms sent out by the income-tax authorities and it seems that I, too, must take a hand in the job. The subject is, at all times, of more than passing interest for readers of these articles, however distasteful the actual payment may be. Perhaps the fact that most of those who write to me on the subject do so in the hope that I may be able to suggest means whereby their payments may legitimately be reduced has something to do with the frequency with which I receive inquiries of this nature.
One thing had better he dealt with at once before I go any farther with this topic. It is that the initial allowance of 20 or 40 per cent, on the purchase price of 'a new vehicle,• as laid down in the Income Tax Act, 1945, does not now apply. It was a useful concession while it was allowed but it applies no Longer.
Many readers seem to imagine that because the instalments of a hire-purchase contract are paid from time to time out of the profits of business they are entitled to rebate of income tax on these payments as though they were ordinary expenses. Those who still hold to that idea are quite wrong. There is no rebate on account of any capital expenditure and it does not matter whether the amount disbursed is paid in one lump sum or by instalments. It still remains as capital expenditure.
There is, however, some small hope of a rebate in connection with these payments—extremely small compared with what some of the more optimistic correspondents have been anticipating. Whenever a vehicle is purchased by instalments, the initial price payable as a cash transaction is increased by an amount calculated so as to cover interest. Therefore, every instalment really comprises an aliquot part of the original price, plus .a similar proportion of the total amount of interest to he paid. Rebate of income tax may be claimed on that interest but only on that.
Assessors' Viewpoint
It may help readers to understand the income-tax assessors' point of view if I remind them of another aspect of these instalments. They are sometimes regarded by hauliers as operating costs. Many a time have I had estimates of costs from readers in which instalments on hirepurchase contracts have so appeared.
I have had to explain to them that if their revenues are such as to allow them to pay hire-purchase instalments as well as to meet all the other incidental expenses of their businesses, including those relating to the operating costs of their vehicles, then the amounts itemized as hire-purchase instalments are in fact statements of profit earned.
The method of dealing with depreciation always enters into any discussion of income tax, partly. I suppose, because that item is linked with it. It is no exaggeration to state that 33 per cent, of the hauliers in this country disagree with their local income-tax assessors in the matter of the allowance for depreciation. At any rate, that is so if my postbag may be taken as a criterion. There can be no denyin, either, that on the face of it there seem to be good grounds for the point of view of the haulier. Depreciation allowances by the inland Revenue officers fall far short of the actual decrease in the value of motor vehicles. The allowance is at the rate of only 25 per cent. per annum and, even at that, it is not calculated on the first costs of the machine hut on its value year by year as it is depreciated.
The meaning of this may be somewhat obscure to those readers who are not familiar with calculations of this kind. They understand the meaning of the 25 per cent., but do not so readily appreciate how the calculation is made, year by year. An example may help the reader to appreciate the facts.
1 will take the case of a vehicle costing £1,000 and bought this month. if it were depreciated regularly at 25 per cent. per annum of the original cost, the value in successive years would be, in 1954, £750; in 1955, £500; in 1956, £250, and by April. 1957, its value would be nil. Each year according to that, the owner would be able to claim £250 per annum rebate of his income tax.
Actually that state of affairs applies only to the first year, during which the depreciation would still be £250 bringing the value down to £750 by April, 1954. During the next year, however, it will depreciate 25 per cent. of only £750, which is £188, and the haulier will be allowed a rebate on only that amount.
Its value in April, 1955, will thus be £562 and the depreciation during the next year £140 and so on. Thus, with the depreciation calculated in that way, the vehicle will never be written right off.
Income-tax Rebates
As a further example showing the working of this system I cannot do better than quote an actual inquiry and give the figures relating to the fleet operated by a haulier. His fleet comprised three vehicles each costing the same, namely £1,000. Two were bought in 1952 and the third in 1953. The figures set down in the accompanying table represent. year by year, the amounts to be allocated for depreciation and the value of the vehicles as depreciated by the method used by the Inland Revenue officers. The figures for depreciation indicate the amounts for which rebate of income tax can be claimed each year.
The Inland Revenue personnel usually refer to these amounts not as depreciation but as wear and tear or obsolescence. On the face of it, as I have already shown, the methods seem to be unfair, because, as everybody knows, the rate at which motor vehicles depreciate in normal times is certainly in excess of 25 per cent. per annum of the depreciated value. In reality, however, the ultimate results are not so unfair to the income-tax payer as may appear, because when the vehicle is sold the actual depreciation as exemplified in the price received for it is then taken as a basis for the calculation of the appropriate rebate.
Referring to the initial example of a vehicle costing £1,000. At the end of the third year its value is £422. If, during the following year the owner sold it and received. say, roo, then in his accounts for that year he would be able to set down, as wear and tear. the difference between £422, its value at the beginning of the year, and £300, the amount he received on sale. In the long run, therefore, the user is allowed rebate on the actual depreciation which his vehicle has suffered.
l• will close with another problem which at first sight appears to have nothing to do with income tax. A haulier equipped a petrol-engined vehicle with an oil engine at a cost of £400. He wanted to know how he should refer to that expenditure in his accounts; whether he should set it down as the purchase of a new engine or debit it as repairs to the old vehicle.
After some consideration I advised him to debit it as repairs. I did so because it seemed to me that whilst, so far as he was concerned, the expenditure of £400 was probably justified, inasmuch as the value of the vehicle to him was increased by that amount, he would never be able to get that money back on selling the vehicle. Therefore, outside his own requirements, if I may put it that way, the value of the vehicle had not been increased'.
If the expenditure of £400 appeared in his accounts as repairs, he would be allowed a rebate of income tax on the full amount, that is to say, 1190, calculating on the basis of 9s. 6d. in the pound. If he were to set it down in his accounts as purchase of a new engine, it would be capital expenditure and, therefore, not subject to any rebate bf tax until the end of the year. Then he would be credited with 25 per cent, of it, namely £100, on which his tax relief would be only 147 10s. S.T.R.