The way a machine is financed can determine the pace at which tax relief will apply and of course the overall cost of the deal. Scarcely a week goes by that I do not receive a call from a farmer client enquiring how best to finance a new piece of equipment from a tax efficiency and credit cost perspective.

Many farm machinery and motor dealers offer finance deals where the choices can be bewildering ranging from personal loans to lease finance to Hire Purchase or Personal Contract Plans (PCPs) in the case of motor vehicles.

Unfortunately, banks will rarely provide personal loans for such purposes and will refer the client to their finance representative who typically will be a very personable individual, an excellent salesperson and frequently a current or former sports star.

I’m not suggesting for one second that these people are not honest and professional but I am cautioning people not to be blinded by their celebrity status and to focus on how much the finance is costing and whether there are any termination payments or secondary lease payments in the case of lease finance.

The cost of finance can vary widely. Some machinery dealers offer zero per cent finance on certain brands which can represent a substantial saving. However, the message is to always get your accountant to cast his/her eye over the terms on offer to ensure that what you are getting represents good value.

Outright purchase

What I mean by outright purchase is where a farmer buys a machine with his/her own money where there is no finance agreement involved. There is no difference in purchasing the machine in this way to purchasing it on Hire Purchase from a tax treatment perspective. The cost of the machine is equally spread over eight years and offset against your income thereby saving you tax at your marginal rate while also saving PRSI & USC. Where the machine is eventually traded in for an amount that represents a profit on its value for tax purposes, this profit can be rolled over on to the replacement item. The tax treatment applies to second-hand machines in exactly the same way as it does to new machines.

Hire Purchase

This is by far the most commonly available type of credit towards the purchase of machinery, new or second-hand. The main features of this type of finance are as follows:

♦ The asset being financed will satisfy the security requirements;

♦ The interest rate is always fixed and will not change during the life of the loan;

♦ The interest is applied on a simple interest basis, i.e., you pay interest on the entire sum borrowed for each year of the agreement. In this regard it is important that the rate of interest being quoted is the true or APR rate;

♦ Because all the interest is applied at the outset an early termination of the agreement may prove costly;

♦ While the machine may be registered in your name, you will not actually own it until the term of the finance has expired and all payments have been made;

♦ The cost of the machine is written off over eight years for tax purposes;

♦ Similar to outright purchase, where the machine is traded in for an amount that represents a profit over its value for tax purposes, this profit can be rolled over on to the replacement item.

Finance Leases

Finance Leases differ from Hire Purchase in a number of ways:
♦ Lease agreements will not end at the end of the primary repayment term. You will be given an option to continue with a secondary lease or you can buy out the item. Either option will generally involve additional cost;

♦ Lease payments are fully allowable against income tax whereby the entire cost is written off over the primary term of the lease. However, terminating the lease will trigger a clawback of relief equivalent to the deemed market value of the item at that time. This can have serious tax implications. Entering into a secondary lease period will defer this problem but generally at an annual cost;

♦ Where a leased machine is traded in, the profit arising on its sale cannot be rolled over on to the replacement machine and will be taxable in full in the year of disposal.

Finance and Tax Relief Checklist

♦Consult your accountant to establish what the true rate of interest on the finance agreement is.

♦Query if there is an arrangement or termination fee and how much it is.

♦In the case of lease finance, consult your accountant and be sure you understand the taxation implications to avoid any unpleasant surprises at the end of the lease term.

♦Avoid early terminations as these will cost you.

♦Be aware of the consequences of missed payments for your credit rating.