Farm Ireland
Independent.ie

Wednesday 7 December 2016

Pros and cons: leasing or hire purchase?

Published 14/09/2010 | 05:00

It has been the first decent year for farming in quite some time. Many farmers will be thinking of replacing machinery and asking themselves whether to go the leasing or hire-purchase route.

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Both have advantages and disadvantages, depending on what the predicted income stream will be. For the purposes of this example, we'll look at a new tractor costing €78,000. We'll assume the farmer is registered for VAT. Let's say that he/she will be trading in an existing tractor that was paid for through a lease. It's worth is €22,000.

Leasing

A. VAT: If you lease a new tractor, you will recover the VAT over the periods for which the lease payments are made. This is OK if you're not stuck for cash, but make sure you don't plan for any VAT windfall.

You must also account for the VAT on the trade-in, but the €4,620 (€22,000 X 21pc) due here will be cancelled out by a VAT invoice for the trade-in provided by the lease company. In other words, this part of the transaction will be VAT neutral.

B. Income tax: The trade-in value of the old tractor (€22,000) will be allowed as an initial lease payment. In effect, it is spread out over the period of the lease. This is good for your wallet, since all the lease payments (including the initial lease payment) are tax deductible. In this case, the farmer has just reduced his taxable profit by €22,000 over the (say) four-year period of the lease.

But you get nothing for nothing from the Revenue. It gets its pound of flesh out of the value of that trade-in up front by classing it as income. This throws up a hefty tax bill, which many forget to factor in when doing the sums on a new lease. Depending on what the farmer's income is, the €22,000 could be liable for levies and taxes at 55pc.

Here's the tax due on trade-in at the higher rate in the year ended December 31, 2010:

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  • Cost of tractor: €78,000;
  • Less trade-in: €22,000 = €56,000;
  • Plus interest on lease at 10.25pc: €6,400
  • Total cost of new tractor on lease: €84,400
  • Monthly payments (over 48 months from September 2010): €1,758
  • Allowable lease payments (four months up to end of 2010): -€7,033
  • Trade-in sale: €22,000
  • Taxable 'income': €14,967
  • Income tax @ 41pc: €6,136
  • PRSI (3pc), income (6pc) and health levies (5pc): €2,095
  • Total taxes due on trade-in: €8,231

All the subsequent lease payments are also tax deductible over the period of the lease, so you will get a tax deduction that equates to your lease payments each year.

Hire Purchase (HP)

If you acquire the tractor on HP, the first big advantage is that you will be entitled to recover the full amount of VAT on the tractor on purchase. Don't forget, however, that you must offset this against the VAT on the trade-in.

The figures are as follows:

  • VAT on purchase (78,000 x 21pc): €16,380
  • Less VAT on trade-in (22,000 x 21pc): €4,610
  • Net amount: €11,760

If you use HP, the interest charges are written off over the period of the HP agreement. The cost of the tractor is written off in equal instalments over eight years. The big advantage of this is that if and when you decide to buy another tractor, you won't be hit with a big tax bill for your trade-in, regardless of its worth. Instead, you're entitled to reduce the cost of the new tractor by an amount equal to the trade-in value. Effectively, this allows you to spread the hit over eight years. You will still need to deal with tax due on the €22,000 trade-in. This will still be regarded as income as the trade-in was a leased machine. But by switching to HP, you're not going to have the same problem the next time.

  • Michael Hough is a tax consultant with Owen Sweetman & Co, Balbriggan, Co Dublin

Irish Independent