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Options for purchasing machinery

box_image_3When it comes to replacing or investing in farm machinery, it can be a real dilemma whether to borrow the money, pay in cash, lease or enter into a hire purchase agreement.

In many ways, the option that works out best for you will depend on your personal and business circumstances, but we thought it would be useful to look at the pros and cons of each in this article. The intention of this article isn’t to push you down one route or another; it’s simply to remind you of the positives and negatives of each solution.

While most of you will be aware that machinery repairs are 100% allowable against tax, what you might be less aware of is that there are tax benefits to be gained from your Annual Investment Allowance (AIA) on the purchase of machinery. As a result, if you’re muddling through and finding the funds to keep ageing machinery going, now might be a good time for a re-think on making a machinery purchase, as part of your farm business planning strategy.

Here’s an outline of the three different scenarios:

Paying in cash

If you have cash in the bank, with interest rates as low as they are, there is a good argument for paying for new machinery in cash. However, if you’re looking to extend your borrowing, whether it be on an overdraft or loan basis, paying outright for machinery can become an expensive and unattractive option.

Whether or not you opt for this solution will depend on the terms you’ve been offered by the lender.

What’s important here is to look at the total cost of the borrowing and not just the interest rate. If there are set-up fees and insurances involved, for example, the deal might not be quite as attractive as it looks on first glance.

When you choose to pay in cash for your machinery, you’ll be entitled to full tax relief, but only if the cost of the vehicle is within the available AIA at the date of purchase.

Going down the HP route

Hire purchase is arguably the most commonly used financial solution for purchasing farm machinery. The attractive thing about hire purchase is that you are deemed to be the owner of the machinery from day one and full tax relief is available both on the cost of the machine when you buy it (assuming that the cost falls within the available AIA, of course) and on interest costs as they are paid.

At this moment in time there are some seriously attractive HP deals to be had, so unless you’re cash-rich, this option is probably worth exploring.

Leasing

Leasing is a way of getting access to the machinery you require, but normally isn’t the most attractive option for long term financing of key machinery.

A great way of getting you over a short-term blip where you need access to extra or specialist machinery, the disadvantage of going this route is that you’re never treated as the owner of the machine and so you miss out on the tax relief available on the capital investment.

Although (again assuming they fall within your AIA availability), leasing payments will attract tax relief, it seems a shame to miss out on the relief available on the lion’s share of the cost. All of that said, in certain cases, leasing still prove to be an attractive solution.

Which option you should plump for depends entirely on your own circumstances and with farm machinery costs as they are today, it’s not a decision that should be taken lightly.

Posted in: Business planning, Farmers, Financing, Leasing

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