Careful timing needed to claim capital allowances for assets on hire purchase

When buying farm machinery on hire purchase, care needs to be taken with the timing.

Once the asset is brought into use for the purposes of the trade, you are treated as having incurred all the capital expenditure even though you will be paying off the finance over several years. Most farmers qualify for 100% tax relief on machinery purchases so not getting the tax relief until a later tax year can make a huge difference to tax bills.

In order to qualify for capital allowances, the equipment must be on the farm and in use by the end of the financial year. If the machinery is ordered and invoiced but isn’t in the yard and in use at your year-end date, the tax relief will be delayed until the following year.

Therefore, it is important that the timing of purchasing equipment for highly seasonal use, such as combines and specialist crop kit, is well thought through. Ongoing pressures in supply chains worldwide mean that for many, it will be necessary to plan and order machinery well in advance in order to secure the right relief in the right period. Delays can have a significant impact on cash flow.

The “in use” requirement can catch you out. Generally, to benefit from a claim for capital allowances it is necessary to be the absolute owner in law. However, s.67 Capital Allowances Act 2001 provides that where you are purchasing an asset under a hire purchase, you will be treated as the absolute owner from the outset where you make use of the asset while paying for it in instalments and where title shall or may be transferred on completion of the agreement. The key point here is the date the asset is brought into use. For assets on hire purchase, just being in the yard at the year-end is not enough.

It is worth noting that the position is different where assets are subject to Lease Purchase Agreements. Here, tax relief is spread over the useful life of the asset.

More generally speaking, farmers need to plan ahead to maximise their available capital allowances and minimise their tax bills.