Tractor Purchase vs Hire

[Albert]

I am currently thinking about renewing my main tractor.

What are the pros and cons to buying (HP) or hiring?

I know there are the obvious such as no repair bills if I hire but I also won’t own the tractor at the end of the hire period whereas if I was to hp and pay for it over say two years I would be left with an asset.

I need to talk to my accountant, but can anyone help me understand where depreciation on a purchased machine stands me? This is what I’m really struggling to understand. If I hire I can set this against profit to reduce my tax bill whereas if I buy the depreciation will end up increasing my profit and tax bill. Have I got this right?

Any help greatly appreciated!

 

[Iben]

Why does depreciation increase your tax bill?

 

[Bramble]

Don’t forget capital allowance

 

[Albert]

@Iben as I understand it the depreciation on the tractor will get added to my taxable profits in my year end accounts. Have I got this right?

 

[Pringles]

How did you pay for the tractor you currently have?

If that method worked for you then I would do the same again.

 

[Ali_Maxxum]

It's pretty pointless comparing without some more details, what do you have now? What's it worth? Will you part ex? How many hours year? Type of work you are doing with it? Then obviously one for only you to consider, what other financial commitments do you have on, any other kit that will need upgrading in the same period? A building? Took us 2-3 years of pricing up and working around other things that went on before we ended up with our latest new tractor.

 

[Albert]

@Bramble I can see that when I initially buy the tractor I will be able to put the cost to change ( if I trade my old one in) against profits by using capital allowances and reduce my tax. But after year one when depreciation kicks in the depreciation on the new tractor will be added into my profits and increase my tax bill for a few years. Is there any way around this?

 

[britishblue]

All I know is our last main tractor was a 2006 MF6465 which we bought new for £36'600 and sold in 2018 with 6000hrs for £21'000 with luckily no repair bills just servicing. A friend along the road had big repair bills in the past and his last 3 tractors of similar size to mine were on a 3 year hire up to 500hrs a year. All he had to do was put fuel in. His last deal which finished in 2018 was £10'000 a YEAR! £30'000 for 3 years and he only did 300hrs a year!

 

[ajd132]

Depends on hours I think.

 

[ridger]

@Bramble I can see that when I initially buy the tractor I will be able to put the cost to change ( if I trade my old one in) against profits by using capital allowances and reduce my tax. But after year one when depreciation kicks in the depreciation on the new tractor will be added into my profits and increase my tax bill for a few years. Is there any way around this?

Thought depreciation reduced profits

 

[David.]

Your depreciation is added back into your tax computation and you pay income tax on it.
AIA is deducted from your profit figure and you do not pay tax on it, but soon as you depreciate an asset in the accounts they get the income tax on the amount of depreciation.
It's all a con really to keep you spending in the economy, and thinking you are saving a lot of tax.

 

[Albert]

@David. That is how I am looking at it. I’m just thinking if I was to hire I can put all the hire fee against profits and I won’t have any depreciation to fight against in the coming years. The main downside is I won’t have an asset like if I had bought the tractor instead

 

[Bignor Farmer]

As said above, depreciation, a proportion of the value of the tractor, will decrease Your annual profits and therefore tax. However, if you over depreciate your tractor and eventually sell it for more than the depreciated value (on your asset register) then you have made a profit on the disposal of the tractor which is taxable. This can be painful with 2nd hand values rising.

You also need to consider capital allowances including what you did with your last tractor if you swap to hiring. This can also be expensive!

Having done both over the years I generally prefer to buy tractors. The exception would be 300+hp tractors on 900+hours per year because they seem to depreciate hard. I’m sure plenty of others will disagree with me!

 

[Albert]

@Bignor Farmer how can I use the depreciation to reduce profits and tax?

My understanding is as David said above that the depreciation value is added to profits therefore increasing tax?

 

[Bignor Farmer]

Depreciation will always reduce your profits, that’s why its calculated. I‘m not an accountant but if you then add it back to your tax calculation you will then benefit from annual investment allowances so however you look at it buying assets is beneficial at reducing tax. In no way does depreciation add to your tax burden.
Whether or not it’s better than hiring depends a lot on individual circumstances and annual allowances at the time.

 

[Albert]

I would get capital allowances on the initial purchase in year one but after that the depreciation will be added onto my profit and I will get charged income tax on it.

How can I use depreciation to reduce profits? If I could see a way to do this then buying would be the better route by far

 

[Agrivator]

I would get capital allowances on the initial purchase in year one but after that the depreciation will be added onto my profit and I will get charged income tax on it.

How can I use depreciation to reduce profits? If I could see a way to do this then buying would be the better route by far

You really have got the wrong idea about how depreciation affects your profit and tax liability.

Speak to your accountant. There is a standard writing -down allowance for machinery and equipment, and this figure will
always reduce your profit and thus reduce your tax bill.

But in the longer term, if a new tractor is written off to zero, and if you then sell it for say £20,000, you will pay tax on that £20,000. But if you replace it with another tractor which costs £60,000, you will be able to claim tax relief on all or a proportion of the £40,000 net cost. I might be very wrong, but at least you have something concrete to ask your Accountant.

 

[Spanish]

The Spanish tax system and the UK tax system are exactly the same. After reading this thread I am clear that what is very different is the mentality of a British and a Spanish.

 

[box]

Thinking long term, just buy the bloody thing, you've obviously got money burning a hole in your pocket. The way tractor prices are going, you'll sell it for the same price you bought it for. I hope that finance is 0%?

I've never seen any sense in leasing/hiring a machine.

Don't think too hard about the tax liability and depreciation, the taxman always wins in the end whether you spend the money or not.

Can you tell I'm not an accountant?

 

[Enry]

I am currently thinking about renewing my main tractor.

What are the pros and cons to buying (HP) or hiring?

I know there are the obvious such as no repair bills if I hire but I also won’t own the tractor at the end of the hire period whereas if I was to hp and pay for it over say two years I would be left with an asset.

I need to talk to my accountant, but can anyone help me understand where depreciation on a purchased machine stands me? This is what I’m really struggling to understand. If I hire I can set this against profit to reduce my tax bill whereas if I buy the depreciation will end up increasing my profit and tax bill. Have I got this right?

Any help greatly appreciated!

If you buy and its withing your capital allowance you can claim all the tax relief in yr 1 of use, if you hire you will claim the hire payments against tax each year. Basically HP vs Hire comes down to whether you expect the depreciation to be more or less than the payments…eg 100k tractor paid over 3 yrs is worth X…. If you have hired you obvs dont own it so if it’s worth more than X hirer wins, if its worth less than X they lose. Be careful re claims for damage etc when returned