Pros and cons: leasing or hire purchase?
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.
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.
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: