How should I buy my next tractor?

Seems like a straight forward question, if you have the cash then use that and if not a hire purchase agreement with as little interest payable as possible.

But what else can you do?

FINANCE LEASE

This is where ‘the customer’ hires the asset and pays a leasing company a monthly rental with VAT being paid on each rental. At the end of the primary leasing period, you can either continue to use the asset by paying a secondary rental or sell the asset to an independent third party for a true and fair market value.

The benefits of this are:

• The asset can be used immediately whilst the rentals can be spread over the useful life of the asset, allowing you better cashflow and reducing the initial outlay.
• You can deduct the full cost of lease rentals from taxable income as they are treated as a trading expense.

One thing to remember is that if there is any element of “rebate on rentals” at the end of the primary leasing period (which is often similar to the market value of the machine) then that is treated as taxable income.

CONTRACT HIRE

This is where ‘the customer’ pays for the use of an asset, over a period which is less than its useful life. Rentals are typically linked to pre-agreed return conditions and maximum hour usage. They often also include maintenance and repair packages.

The benefits of this are:

• Better financial control due to the maintenance and repair element being included.
• Rentals are lower than a finance lease due to the customer only paying for its use as opposed to its ownership.
• Rentals are treated as an expense and can be allowable against tax over the period of the agreement.

NOT BUY IT!

You also do need to consider whether ultimately you need a new tractor - are you purchasing a new tractor to increase efficiency and profit; to replace a deteriorating and costly old machine; because you have been wooed by the manufacturer’s clever marketing, or to obtain some tax relief?

With several different options available, which is best?

There is no single right answer when it comes to making the decision and it is important to compute the cost after tax for each option, over the whole life of the machine.

Every business can suit the different options at different times and it will largely depend on the finance deals being made available by the machinery dealer or manufacturer and the individual business’s tax position.

Should you need any help with this then do contact us. We are more than happy to look at the numbers and give an opinion on the relative cost of each option.