Tractor contract hire/leasing

Ali_Maxxum

Member
Location
Chepstow, Wales
Looking at changing a 10yr old tractor with 8000hrs which is used for agricultural contracting. But rather than chopping and buying new on finance. I thought it would be better to sell to dealer and go for a 3-5yr contract hire. Simple reason being the tractor is no longer fit for purpose and is going to start costing money, and it's a lot of money tied up in a depreciating asset.

However I'm not sure of the ins and outs of doing this. With contract hire do you start by paying a small lump then continue with the monthly rentals? Or go straight in to the monthly rentals? Are the payments similar to what you would be paying if it was hire purchase?

Thanks in advance.
 

Clive

Staff Member
BASE UK Member
Location
Lichfield
payments will be smaller than buying on HP as your not paying any capital

however unlike HP you will never own it so at end of contract you send it back and have no trade in for next time

I used to run almost all my machinery this way and it was both cheap and tax efficient, today however I buy instead as that has become cheaper and more tax efficient
 

Ali_Maxxum

Member
Location
Chepstow, Wales
So there is no lump to pay to start? I understand not owning it, but by the time it would be paid for it would be at the right age/number of hours for it to be changed again, so it just seemed to make more sense to go for the contract hire route. Also usually once it's owned, something would usually go wrong, and the bill to put it right could have been better spent on a new machine which would be covered under warranty.

If that makes sense?
 

Brisel

Member
Arable Farmer
Location
North Yorkshire
Hie/lease is more expensive as someone else is providing the capital & paying the interest + admin + repairs if applicable.

Since my employers don't like depreciating assets on the balance sheet I will be contract hiring my next tractor & probably the combine too. Each to their own. The hire option should cover you for major breakdowns & something you can hand back if you change business policy.

Buy vs hire also depends on capital allowances if you are just looking at taxation implications.
 

Clive

Staff Member
BASE UK Member
Location
Lichfield
A good friend of mine owns a car dealership group and they just produced a good series of videos that hopefully explain the different types of finance. Clearly they are car orientated but the principles are the same for machinery finance


PCP & LEASE PURCHASE EXPLAINED: http://www.perrys.co.uk/car-news/vid...-purchase-pcp/


HIRE PURCHASE EXPLAINED: http://www.perrys.co.uk/car-news/vid...e-car-finance/


PERSONAL CONTRACT HIRE EXPLAINED: http://www.perrys.co.uk/car-news/vid...e-car-finance/


PERSONAL LOAN EXPLAINED: http://www.perrys.co.uk/car-news/vid...personal-loan/

 

Lincsman

Member
Arable Farmer
Location
Lincolnshire
So there is no lump to pay to start? I understand not owning it, but by the time it would be paid for it would be at the right age/number of hours for it to be changed again, so it just seemed to make more sense to go for the contract hire route. Also usually once it's owned, something would usually go wrong, and the bill to put it right could have been better spent on a new machine which would be covered under warranty.

If that makes sense?
It all sounds good, but the dealer will be making a profit and will have allowed a few repairs, depreciation and money borrowed into the costing, its only you giving him money so you can only win if the repairs and or depreciation cost way more than anyone expected.
 

Brisel

Member
Arable Farmer
Location
North Yorkshire
It all sounds good, but the dealer will be making a profit and will have allowed a few repairs, depreciation and money borrowed into the costing, its only you giving him money so you can only win if the repairs and or depreciation cost way more than anyone expected.
That's managing risk for a known cost. Makes budgeting easier, especially when pricing up contracting jobs.
 

Lincsman

Member
Arable Farmer
Location
Lincolnshire
That's managing risk for a known cost. Makes budgeting easier, especially when pricing up contracting jobs.
But isnt paying the highest cost possible going to make you uncompetitive compared to the guy who owns and looks after his tractor to avoid big repairs?
 

Brisel

Member
Arable Farmer
Location
North Yorkshire
Maybe - would that be better than running at a loss when an unexpected big repair bill come in later on having lost £x/hour? Food for thought.

Why do Tesco outsource their haulage to Stobart? If they can't run a fleet of trucks around their thousands of stores cheaply then who can? Tesco & Marks & Sparks lease their trucks too. Why do you suppose they do this? It might not be cheaper but it will be more efficient with no nasty suprises or lost deadlines.
 

alan6430

Member
Location
cornwall
How many hours per year do you need to do to make hiring a tractor worthwhile..... Fancy doing it on my loader tractor but always thought 1000hours per year isn't enough. Or am I wrong?
 

Brisel

Member
Arable Farmer
Location
North Yorkshire
I hire a JD 8360R for the summer & I have a limit of 600 hours over 14 weeks but in it's current form the tractor would only do 800 hours/year if I had it for 12 months so hiring is cheaper. Just.

An uneducated guess would put 1000 hours not far from the breakeven point between owning & hiring. Of course there's plenty of number crunching to do to find the breakeven point out exactly for your loader tractor.
 
Contract Hire (Operating Lease) is an off the balance sheet figure so it makes your gearing ratio better. I still think its a good way of hiring equipment but each to their own.
 
Hie/lease is more expensive as someone else is providing the capital & paying the interest + admin + repairs if applicable.
Not normally for a vehicle. If you look at a contract hire price vs purchase price on a car generally the hire works out cheaper over the period of time in terms of money you actually pay annually.

The contesting point is the period of time because generally leasing a vehicle you do over 3 years and hand it back as the warranty runs out where as purchasing a vehicle people tend to do it over 5 years.

So pricing them up against each other accurately is difficult and really the only way you can do it is by putting a 3 year purchase against a 3 year contract hire. But because a vehicle looses more early on then the depreciation on the purchase at the end of year 3 generally makes the contract hire the cheaper option.

Also remember with purchase its normally 1 year on the capital allowances where as contract hire can benefit you every year of the lease. If its a commercial vehicle then 100% of the cost is allowable against tax. Even if its part business and part private use you are still likely to be able to offset 50% of the lease cost against the annual profits thus reducing the tax payable.

Bit of a minefield and you need to speak to your accountant really rather than listen to a internet forum.
 

Brisel

Member
Arable Farmer
Location
North Yorkshire
What made buying my combine viable vs hiring it was the residual asset value. For a fleet of Vauxhall Astras clocking up 100k miles the residual values will be much lower. Just another consideration.

It's all down to what deal you can do & your individual circumstances as to which is cheaper. As you rightly say, this is the internet... :D
 
What made buying my combine viable vs hiring it was the residual asset value. For a fleet of Vauxhall Astras clocking up 100k miles the residual values will be much lower. Just another consideration.

It's all down to what deal you can do & your individual circumstances as to which is cheaper. As you rightly say, this is the internet... :D
You see then there's a difference between straight hiring and contract type hiring. 2 years ago a straight hire of a combine was cheaper than contract hiring it and purchasing it. You need a good accountant to find the best solution for your own business really.
 

Ali_Maxxum

Member
Location
Chepstow, Wales
Thanks everyone, it's certainly made it a little clearer. We currently have another tractor on HP with another 2yrs to go and a hedge trimmer with 3yrs to go. Another tractor would mean we'd be financed up to our eye balls but if it means we can work better and acquire some cash from the sale of the current tractor then surely that would be a good thing?

I think comparing part ex/hp with contract hire would be the way to look at it. It would take over the role as main tractor so it would be doing plenty of work. Just a case of getting some prices it seems.
 
We have just done this exercise with a new 4wd. We got PCP figures for a 4 month old demonstrator that was on the forecourt for £42,500 (obviously no vat involved). In round figures they wanted £3500 up front which includes the road tax at £180. Then it was 48 monthly payments of £550 with a balloon payment at the end of £17,000. You can pay that and own the car, hand it back and walk away or use any equity in the car as the deposit for the next one. We would get capital allowance in year one of the full £42,500 but obviously cannot claim any vat back.
The lease deal of exactly the same vehicle but obviously brand new though (£50,500 value) was £2900 + Vat deposit, then 35 payments of £485 + Vat.
Having shown the accountant both figures and looking at our business accounts we can claim 50% of the vat back and put 50% of the lease costs against tax meaning that the lease vehicle will cost us about £22,000 over the 3 year lease whilst the PCP one will cost us about £23,000 over the same period of 36 months. But the PCP vehicle then has another year to run out of warranty whilst the leased vehicle is handed back at 3 years old when the warranty runs out. Then on top of leased £22,000 we can put half that cost against tax so really if your a tax payer then we might as well have a nice car out of it instead of handing it to the government.
 
rightly or wrongly over the past few years I have been under the impression to buy, as the price of new/used machinery has risen so fast it would be futile to be out of the market in such times. Onced out you could never ever get back into it again if needed and there would become a point whereby you may need to end up going down the contractor route. Owning something, it will always be worth something come upgrade time and a machine if looked after can last 15yrs and for the last 12 or so owning outright is normally cheaper than leasing etc a shiny machine
 

Leaping_Dear

Member
Location
Berks, UK
It is really is a horses for courses situation.

We lease all of our vehicles because as many mentioned above it is a fixed cost. You know exactly what it will cost for the period you own it, lease it for the warranty period then you wont have any extras besides servicing which you can allocate for.

Out sourcing and sub contracting are now common place in all business facets. You'd be surprised how little large businesses actually do 'in house' these days because pay someone else to do it, know your cost and let them run the risk. As Bernie Ecclestone once put it 'if its floats, fu*ks or flies....rent it'.

I have observed that when the subject of contract hires come up on here many posters seem very skeptical about the concept, firstly it'd been around in farming for years. Contracting your land out is effectively the same thing and when it comes to machinery it is an idea which suits farming well. As machinery costs go up and with machinery reliability an ever discussed issue it makes it more attractive.

However I don't think it always the way forward for smaller family farms, but for contractors and farms with larger new fleets then it has to be considered. Ultimately let the accountants decides, if he's worth what he charges he'll work which suits your company best.
 

Could a ‘Meat Tax’ be on the cards in the UK?

  • 216
  • 0
Written by Richard Halleron from Agriland

The latest machination coming from the so-called ‘opinion formers’, who seem to have the ear of government advisors in London, is the introduction of a ‘Meat Tax’ at consumer level.

This approach, it is argued, would have the combined impact of reducing meat consumption levels (I can really see the health benefits coming through now), while also helping to reduce the overall carbon footprint of production agriculture.

What absolute drivel! In my opinion, none of this makes sense at any level. This is a scurrilous and unfounded attack on livestock farming in this part of the world.

Yet, it has to be taken seriously. I make this point because economists at Rothamsted Research have already crunched the numbers where the introduction of a ‘UK...
Top