Should tractor hiring be an option I should consider?

Tractors have become increasingly expensive as a result of increased technology and regulations around safety and engine emissions. They are one of the biggest investments a farmer can make, so the decision has to be considered carefully. A tractor needs to be reliable and dependable and is therefore a worthwhile investment.

When a tractor is due to be upgraded, many Irish farmers believe that buying is the only way. However, in recent years, hiring has become another option for farmers. Here, we crunch the numbers to find out if hiring is a viable option for a farmer who is in the market for a new tractor.

To illustrate the options available, we have chosen the power band 100hp-120hp. This represents the majority of livestock farmers’ tractors, many of which are fitted with front loaders. Our figures will be based around a new 120hp tractor, which is fitted with a front loader.

When it comes to arranging a hire agreement, farmers have two options - short term or long term. A short-term agreement is charged on a weekly rate.

In this example, a 120hp tractor and front loader will cost around €800 (€650 ex-VAT) per week. There is a weekly cap on hours, usually around 45 hours, with an additional charge of €17 (€14 ex-VAT) per hour when the cap is exceeded.

A long-term agreement is usually for 12 months and has a set price. In our example, a 120hp tractor and loader will cost €17,000 (€14,000 ex-VAT) for 1,000 hours. For every hour over this, there is an additional charge of €17 (€14 ex-VAT) per hour.

To get the best value for money in a hire agreement, it would make sense that the tractor is used to its maximum, without surpassing 1,000 hours.

A farmer going for a 12-month hire will need to make a cash payment of close to €5,000 on the first day

Payment terms on an annual hire basis are three months' hire payment up front, plus a refundable deposit of €1,230 (€1,000 ex-VAT).

This means a farmer going for a 12-month hire will need to make a cash payment of close to €5,000 on the first day.

The remaining nine months' hire must be paid within six months’ time. Payments are made by direct debit and the farmer must provide fully comprehensive insurance cover for the tractor. The full hire cost is a farm expense and is therefore tax deductible each year.

Regardless, if a tractor is bought or hired, diesel and insurance costs will be the same. The benefit of a hire agreement is that wear and tear on parts such as tyres are covered by the hiring agent. This alone, depending on application, can be a saving of at least €1/hr, or €1,000 per year on a 1,000hr tractor.

In a hire arrangement, maintenance and repairs such as servicing and breakdowns are not incurred by the farmer, which can provide peace of mind and less risk around unforeseen expenses. However, damage caused to the tractor by the farmer will be at the farmer’s expense.

On today’s market, a 120hp tractor and loader will cost around €105,000 (€85,000 plus VAT) depending on brand and specification.

In most cases, a farmer would trade in a tractor when purchasing new. In our example, we have assumed a trade-in value of €25,000 (€20,000 ex-VAT), which reduces the overall cost of buying new to €80,000 (€65,000 ex-VAT). There are now a number of options to fund this purchase worth €80,000.

Cash funds

If the farmer has cash in the business, a cheque can be written. Fewer tractors are purchased this way due to other demands on a farmer’s cash.

Hire purchase and leasing

Lease finance and hire purchase (HP) are popular options. The main difference between the two is that in a lease, ownership does not transfer to the farmer until the last payment is made. The lease is usually for a period of three to five years.

With HP, the interest charges are written off over the period and the cost of the tractor is written off in equal instalments over eight years. The big advantage of this is that if and when a farmer decides to buy another tractor, they won’t be hit with a big tax bill for a trade-in, regardless of its worth.

But if trading in a leased machine which is then worth for example €25,000, this will be treated as income and there will be tax due. By switching to HP, there won’t be the same problem the next time as you are writing it off over the eight years.

Where farmers need to be careful is if registered for VAT. With leases, the VAT is only recoverable over the period for which the lease payments are made. If buying the tractor by HP, the first big advantage is that the farmer can recover the full amount of VAT on the tractor on purchase.

Bank loan/Milk Flex

Farmers can go to their bank or to their co-op (through the Milk Flex loan scheme) to finance a tractor. The term can be anything from three to eight years usually. Eight years can be suitable, as it matches what the tractor will be written off in the accounts.

Interest rates can be charged from anything from 0% to 6%, depending on individual situations. Farmers need to be aware that 0% interest rates may come at a cost of a higher initial purchase price. Discounts may be given if a farmer opts to finance the tractor to a bank loan. Usually, machinery manufacturers are linked to specific financial providers.

In this example, if a farmer chooses to fund the tractor (€80,000) through a Milk Flex loan over an eight-year term and a rate of 4.18% (inclusive of charges), the repayments amount to approximately €12,000 per year for eight years.

The farmer owns the tractor on the first day purchased. It is treated as an asset and therefore depreciation, which is tax deductible. All machinery owned is written off over eight years at 12.5% per year.

In this case, the depreciation charge per year is €10,000 for eight years. The interest is approximately €3,000 per year, which is also tax deductible. A farmer in a high-tax situation may be interested in this option.

As can be seen, it can be very complex and depends on a farmer’s individual situation whether a tractor should be bought or hired. The benefits of buying means the tractor is fully owned by the farmer and is classed as an asset, while less money over the lifetime of the tractor would be paid overall than if the tractor was hired, it may have a larger cash cost.

Hiring can be a real option for a farmer who may have a high tax bill. Farmers will need to be aware of the number of hours being clocked up, as anything over the agreed contract hours could amount to a high cost. A further benefit is there are no repair or maintenance bills, as outlined above, and the farmer can drive a new tractor every year.

It is recommended to seek independent financial advice before considering these options to ensure you find the most appropriate solution for your farm.