Machinery Purchasing vs Hiring

Inflation and advances in technology has meant new farm machinery purchases are more expensive than ever. In the financial year ended 5 April 2023, strong performance in some agricultural sectors resulted in farmers having more cash to spend on machinery. This, combined with increased trade in values, meant demand for new machinery remained strong.

Times have changed in 2024, with reports of 13% fewer tractor registrations in the first 6 months of 2024 compared to a year earlier. This has led to farmers repairing older machinery and running them for longer, instead of opting for capital outlay on new machinery.

When the time does come for considering new machinery, there are many different options on how machinery can be sourced and financed. This could be through:

• Hire Purchase (HP) agreements
• Extending the business’ overdraft and purchasing the
• asset out right
• Hiring or leasing; or
• Using contractors.

This decision will be influenced by a combination of management views, availability of funds and let’s not forget, the tax implications.

A benefit of purchasing machinery – either outright or through finance, is that it is at your disposal. This can be vital when navigating the unpredictable UK climate. However, it is difficult to factor the weather into any cost benefit analysis when looking at the various options to obtain new machinery.

Other costs to be considered when purchasing machinery are ongoing repairs, labour, insurance, and depreciation.

When purchasing machinery, it should pay for itself over its replacement period - a good benchmark here would be to aim for a 5 year pay back policy. If the machinery depreciated £100K in 5 years this would cost £17 per hour based on 6,000 working hours in depreciation alone.

The business will need to afford monthly capital repayments or factor the full cost into the cashflow of the business. Interest charges should also be considered when looking at the total costs, as 0% finance agreements are becoming harder to find.

Full tax relief is available in year one on the purchase price if the annual investment allowance (currently £1M) is not exceeded. However, it is worth remembering when the machinery is sold, tax is payable on the proceeds received. Tax relief is also obtained on the interest paid over the term of any borrowing.

Just to caveat, if acquiring machinery on finance, it needs to have been brought into use before full allowances can be claimed. Something that catches some farmers out, particularly when acquiring combine harvesters post-harvest.

If machinery is unlikely to pay for itself within the replacement policy timeframe, hiring could be considered. This can be a good option for larger equipment used less frequently in the business or for sourcing an additional machine at key times of year, e.g. harvest.

Here, you do not have to consider depreciation or repair costs. However, skilled labour needs to be available so you can run the machinery effectively in house. This option also allows use of larger and/or more advanced machinery which may not be affordable within the normal course of business, to help improve efficiencies and reduce time spent on a job.

For tax purposes, hire costs are offset in full against any trading profits.

Use of contractors is another option to explore. This removes the need for in house labour and can reduce staff numbers which the business may use less efficiently throughout the quieter months. Breakdowns are also less of a concern as the machinery should be of higher standard and backups will hopefully be available.

Contractors do come at a cost, which is why it is essential to work out the machines which are cost efficient to the business to purchase and ones which are less so.

Shared ownership can be considered if your business cannot justify purchasing machinery independently. This could help mitigate the risks that come with a contractor not arriving on time and having an adverse effect on crop quality.

This has the same tax relief benefits as purchasing the machinery alone, if invoicing is done in the correct manner – see James Bryant’s article for more details.

As you can see, there are many factors to consider when weighing up the pros and cons to each of the above options, some more obvious than others. All of which will need to be considered on a case-by-case basis.

Talking to us before making the decision, will therefore ensure that these options can be explored in order for you to make the right decision for your business.