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A farmer’s guide to alternative finance for equipment and machinery

POSTED: 9th May 2014
IN: Guides
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In January, 900 exhibitors from all over the world travelled to Peterborough to showcase their innovations to over 40,000 visitors at the industry’s leading machinery and equipment show, Lamma.

undefinedBut if those visitors are still ‘umming’ and ‘ahhing’ about whether to take the plunge and make a big investment, now might be the time to reconsider.

What kind of alternative funding is available to farmers?

In recent years it’s become more difficult for businesses to access traditional bank loans. At the height of the economic downturn, the well-known high street lenders tightened their purse strings. As a result, small to medium sized business owners including many in the farming industry, weren’t able to get access to the money they needed to keep trading effectively.

As a result of this, a number of alternative finance solutions emerged in their place, including both invoice and asset finance.  For farmers, whose machinery is fundamental to their day-to-day, asset finance exists to provide flexible funding for investment.

To illustrate, if you need to invest in a new tractor, milking parlour or combine harvester, but can’t afford to pay outright, you can approach a lender for asset finance. There are two types of this form of funding:

  1. Hire purchase: the lender procures the asset on the borrower’s behalf, and then recoups the cost through manageable monthly payments over an agreed period of time
  2. Lease finance:  the lender buys and owns the asset, and the borrower agrees to rent it for use over period of time. Some businesses prefer this model because, although they won’t ever own the equipment, there’s greater scope to update regularly, and they won’t incur the ill effects of depreciation in value.

Annual Investment Allowance: 100% tax relief

Thanks to George Osborne’s 2014 Budget announcement, there’s even more reason for farmers to seriously consider investment opportunities. Business owners can now claim 100% tax relief on machinery and plant expenditure on sums of up to £500,000 (inflated from just £25,000) until the end of the 2015 under the government’s Annual Investment Allowance (AIA).

The AIA applies to all new investment in plant machinery – new or used – and can be claimed on the full cost of machinery with hire or lease purchase agreements even though the capital expenditure may not be paid in full until after this date.

In fact, AIA tax relief is even applicable to the interest charges in hire purchase agreements, meaning that it can be just as lucrative for businesses that need to borrow funding to afford new machinery as for those that pay outright.

How do I ensure I benefit from my entitlement?

In order to maximise your AIA claim, it’s imperative for businesses to balance their timing with purchase amounts. One complication of the initiative is that the amount of tax allowance that businesses are entitled to depends on their year-end.

Speaking to the Farmer’s Guardian, David Bennett, a tax partner at chartered accountant Moore and Smalley, said, “The basic idea is simple: AIAs give businesses a 100 per cent deduction from taxable profits for expenditure on machinery, equipment and plant. But the ever-changing AIA limit means it can be hard to work out exactly how much businesses are entitled to.”

For example, consider that the capital allowance has been increased to £500,000 from April 6th 2014 (or April 1st for limited companies), until December 31st 2015. Businesses whose year-end runs out in April 2016 rather than December 2015, will only be able to claim an AIA of £6,250 for the first three months of 2016 – or the last three months of their 15/16 year.  For that reason, the actual allowance rate for 2015/16 is £381,250. 

It can be confusing, so for best results, farmers are advised to look carefully at the dates of their expenditure on plant and machinery in order to take full advantage of the increased allowance.

Although asset finance and the AIA create a fantastic opportunity for farmers that are financially able and ready to invest in equipment, every business is different. There should always be a compelling business case for investment and before making a decision, farmers should always seek advice from their accountant or financial advisor.

For more information about farming financing options, visit our business finance pages, or feel free to get in touch to speak to one of our expert advisors if you’d like some specific advice for your business.

Image used courtesy of geography.co.uk

 

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  • Asset Finance
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  • Agriculture
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