Hire purchase versus leasing machinery -- the legal and tax angles
Many farmers and contractors have been unnerved by the spiralling rate of repossessions of farm machinery.
While many may not have considered the fine print too carefully on leasing or hire purchase agreements in years gone by, the ruthless manner in which machinery is now being repossessed has left some wondering where they stand from a legal viewpoint if they go down this route with new machinery.
"There is no real difference from a legal standpoint on either hire purchase or leasing agreements," said Ronan Brennan of Dublin-based Brennan and Co solicitors. "The farmer or contractor has no ownership rights to the machine until all payments have been made.
"This is totally different from the scenario for ordinary consumers, where the law states that a financial institution is not allowed to seize property without court proceedings if more than one-third of the repayments have been made.
"My opinion is that in a lot of cases facing farmers and contractors, the banks do not have the right to enter the land if all the owners of the land have not signed the agreement."
Under a hire purchase contract, ownership of the machine does not pass to the farmer or contractor until the final instalment is paid. However, the tax treatment is similar to that of an outright purchase. Capital allowances are usually available at a rate of 12.5pc per year on the machine over an eight-year period. If the contractor is entitled to reclaim the VAT, it can all be recovered at the beginning.
Under a finance leasing contract, ownership never transfers to the farmer or contractor. The machine must be returned to the finance company at the conclusion of the lease, unless an option to purchase is exercised. A tax deduction is claimed for each of the lease repayments. The capital cost is therefore reclaimed over the period of the lease.
At the end of the lease, the finance company repossesses the machine and pays the contractor a rebate of lease rentals equivalent to the market value of the asset at that date. If the asset is purchased by the farmer or contractor, capital allowances should then be available on the machine. VAT is claimed over the course of the lease period.