Tractor Purchase vs Hire

[oil barron]

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

The depreciation is taken out of your profit and loss statement, but added back in to your tax computation because you made use of the annual capital allowance. So the depreciation is not net being added on, it is just being added back in after being removed in the first place.

I think you also have the option not to use the capital allowance and just follow a depreciation schedule if you want, which probably makes more sense for a farmer that only buys big pieces of equipment every 5 years or so.

 

[daveydiesel1]

The depreciation is taken out of your profit and loss statement, but added back in to your tax computation because you made use of the annual capital allowance. So the depreciation is not net being added on, it is just being added back in after being removed in the first place.

I think you also have the option not to use the capital allowance and just follow a depreciation schedule if you want, which probably makes more sense for a farmer that only buys big pieces of equipment every 5 years or so.

Yes u can take all the tax reduction on year 1 or spread it out over either 5 or 7 years afaik

 

[bobajob]

If you think you can afford it then buy it, after all you need a tractor to do the jobs on a farm, not much way around it unless your going to get contractors in.
If the job all goes belly up in a few years at least you have some assets to sell at the farm sale.!
Try and keep hold of some things- some machinery a herd of cows, flock of sheep etc
Asset rich but cash poor.!

 

[Chae1]

@agricontract

 

[ajd132]

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!

Agree, when bought our 8rx last year it needed to be doing about 900hrs to make hiring better. We do about 800 so bought it.
It’s actually gone up in value significantly now as we agreed a price a long time before delivery and a couple of price hikes have happend since.
I don’t really see the point in leasing tractors in general, I can’t make it work.

 

[essexpete]

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.

Go on then, explain. Thanks.

 

[SilliamWhale]

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.

how?

 

[SilliamWhale]

I'd say buying is always going to be cheaper than hiring rule of thumb

 

[David.]

@farmerdan7618
Could you bring a bit of clarity to the depreciation and AIA discussion please, because I am at the edge of my somewhat limited knowledge.

But to answer OP directly, if I had a chunk of money to put down, there is no way on earth I would put £10k a year into hiring a tractor that I didn't own at end of year three, because I would expect a new bought machine to do a fairly uneventful 10 years with kind treatment.
If you are worried about big repairs before five years old, pick a better brand

 

[e3120]

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.

You can't have the taxman's cake and eat it. If you claim the capital allowance, you can't get the tax benefit of depreciation as well. It's, quite rightly, deducted in the management accounts but 'added back on' in the tax computation, so doesn't help the bill.

As @david says above it's a great wheeze by successive chancellors to encourage spending without it costing them anything. The 130% allowance is just the same as limited companies using it will only get the same tax relief as if they delayed until after the corporation tax goes up.

To the OP: Don't worry about all this. In short your tractor costs (repayments/hire/repairs/fuel/wages) will end up all tax-deductible in one year or another. Just make your decision on what will cause you to pay out least.

 

[flywheel]

Get a price from dealer & ask what finance packages are available & then speak to your accountant or possibly sooner... Remember tractor could have a long waiting list....

 

[Thomas5060]

Yes u can take all the tax reduction on year 1 or spread it out over either 5 or 7 years afaik

You can use 100% in year one or else 18% each year until it becomes a 0 value. That’s what my accountant told me on Friday.

 

[farmerdan7618]

@farmerdan7618
Could you bring a bit of clarity to the depreciation and AIA discussion please, because I am at the edge of my somewhat limited knowledge.

But to answer OP directly, if I had a chunk of money to put down, there is no way on earth I would put £10k a year into hiring a tractor that I didn't own at end of year three, because I would expect a new bought machine to do a fairly uneventful 10 years with kind treatment.
If you are worried about big repairs before five years old, pick a better brand

Thanks for the tag, I'll give it a go!

Depreciation has no effect on tax, however something is bought or leased. It is there to make accounts show a 'true and fair view' of the business as equipment falls in value.

HMRC do not allow depreciation against tax, they use the Capital Allowances regime instead. This allows for full allowances in the first year (subject to limits that will not be a concern to most farming businesses buying a single tractor), or can be taken as 18% allowances each year. This is a choice you make with the help of your accountant to be the best for your business.

The danger with this is when allowances are claimed in full, but finance is over a number of years, if you finance kit purely to reduce tax you will chase your tail and run out of money.

A hire cost is a simple expense, and is allowed against tax in the year it is paid.

Whichever way the deal is done, you will get tax relief on the amount of money the tractor costs over your period of use. Reduce this, you will pay more tax, but also have more money. HP Vs lease only affects timing of costs and tax.

 

[David.]

But, but, but; you do pay income tax on the total depreciation figure that you add back into the tax computation do you not?
To further clarify, if I bought a tractor and claimed the full Annual investment Allowance relief on it in year one, would it now stand at value zero on my books? Meaning that any sale value that it may realise in future will be taxable profit.
Sorry for all the questions, but I suspect I am not alone in being a bit confused by this.

 

[Finn farmer]

You can use 100% in year one or else 18% each year until it becomes a 0 value. That’s what my accountant told me on Friday.

Might be different here, we can deduct 20%/year and the 20% is deducted from the deducted value of last year so it'll never really hit "absolute" 0 value. 100k-20%=80k-20%=64k-20%=51,2k etc.

 

[40 series]

Thought depreciation reduced profits

as far as i know in your profit loss it reduces your profit but when it comes to your tax calculation it gets added back to your profit

 

[farmerdan7618]

But, but, but; you do pay income tax on the total depreciation figure that you add back into the tax computation do you not?
To further clarify, if I bought a tractor and claimed the full Annual investment Allowance relief on it in year one, would it now stand at value zero on my books? Meaning that any sale value that it may realise in future will be taxable profit.
Sorry for all the questions, but I suspect I am not alone in being a bit confused by this.

Depreciation is an estimate, it reduces accounting profit, but is then added back for taxable profit - so gets you back to the same tax as if it wasn't there.

Correct on the tax value being zero once Annual Investment Allowance is claimed, and correct on the future value being taxable.

Certainly one of the more confusing areas of accountancy and tax if you aren't doing it every day.

 

[Albert]

@farmerdan7618 Thanks for your explanation. I think I am finally starting to get my head around it!

So even though depreciation is added back it doesn’t affect your tax liability because it has been previously entered as a business expense so in effect cancels itself out?

If I was to purchase a combine for instance that has a high price tag presumably the sensible way to deal with its capital allowance would be to spread it out at 18% over five? years instead of claiming all the capital allowance it generates in the year of purchase?

 

[robs1]

@farmerdan7618 Thanks for your explanation. I think I am finally starting to get my head around it!

So even though depreciation is added back it doesn’t affect your tax liability because it has been previously entered as a business expense so in effect cancels itself out?

If I was to purchase a combine for instance that has a high price tag presumably the sensible way to deal with its capital allowance would be to spread it out at 18% over five? years instead of claiming all the capital allowance it generates in the year of purchase?

That depends on how much profit you have the year you buy it and whether the cost is over the AIA limit, as Dan said if you are paying for a piece of kit over a number of years you are going to pay tax on the profits you need to make to pay off the cost.

 

[warksfarmer]

@farmerdan7618
Could you bring a bit of clarity to the depreciation and AIA discussion please, because I am at the edge of my somewhat limited knowledge.

But to answer OP directly, if I had a chunk of money to put down, there is no way on earth I would put £10k a year into hiring a tractor that I didn't own at end of year three, because I would expect a new bought machine to do a fairly uneventful 10 years with kind treatment.
If you are worried about big repairs before five years old, pick a better brand

It’s not that though. Said tractor would probably be £150,000 purchase over 5 years so your paying £36,000 ‘per year’ back including interest vs hiring at £10,000 per year. Cashflow is king.