Upgrading farm machinery: hire purchase or operating lease?

I rent seven acres of gently sloping land as pony paddocks. The agreement is that I maintain the land and in return pay no rent. Although I have grown up with horses, I have only had to think about my own paddock maintenance in the last 18 months – before this the horses lived in luxury at livery yards!

With the warm weather followed by heavy rainfall in recent weeks the grass grew uncontrollably so instead of allowing the horses to gorge on the long grass I decided I would top it. The owners of the land allowed me to borrow their old (and much loved) Ford 3930 tractor and mower. I’m quite happy driving my car and the horsebox but must admit I was completely overwhelmed by the number of levers and the hand throttle(!). After a rather uncomfortable few hours topping – and stopping every 30 minutes to give the old girl a break – I had managed to top one out of the three paddocks. This seemed like quite enough considering it was 25°C plus!

I live next to a very useful man who works for a machinery dealership (T H White). I was telling him about my poor skills with a tractor and he said he would bring home a piece of demo equipment to try. The next thing I know, a Spider remote controlled mower turned up. For those of you who haven’t seen one of these fantastic machines, do look them up online. This was my type of mowing – paddocks and the nearest bridleway mowed beautifully in an evening. The choice for me was obvious – upgrade.
Admittedly in both scenarios I wasn’t parting with any cash; if I were there would have been considerations in relation to how the machinery purchase was financed.

Purchasing machinery

Very few farming businesses are in the position to purchase big pieces of kit outright, cashflow is simply too tight. Thankfully there are various types of finance available. I will consider the accounting and tax implications of the two most popular types I come across in the table below.

It is important to note that the end of a hire purchase agreement, you own the asset – with an operating lease it is returned after the final lease payment.

When considering how to finance the purchase of machinery it is important to review your cashflow forecast for the term of the agreement. This may well help you decide which type of finance to obtain – or to extend the life of your existing machinery.

Accounting	Operating lease	Hire purchase
Asset (and liability) on the balance sheet	No	Yes
Payments deductible in profit and loss account	Yes	No
Tax	Operating lease	Hire purchase
Capital allowances	No	Yes
VAT claimed on regular payments	Yes	No
VAT claimed on the full price at the start of the agreement	No	Yes

Please speak to your local contact at PKF Francis Clark for further advice.