Buying vs leasing agricultural capital and equipment

By Rob Blair, Partner and ARA specialist

Need to make a major investment in farming equipment? This is a scenario which faces farmers and agricultural business owners regularly and one which represents a significant decision to be made.

To buy or to lease. That is the question.

Both options offer distinct advantages and disadvantages from a financial standpoint, so it really comes down to your unique situation.

However, some pressures may make it obvious which direction you need to turn. Our agricultural accounting experts are here to show you the way.

Buying – The good, the bad and the costly

Buying agricultural equipment outright can be more financially viable in the long run than leasing.

Ownership eliminates ongoing lease payments, meaning the only costs after purchase are maintenance, repair, and operating expenses. This can significantly reduce the overall expense of equipment over its useful life, especially for machinery that remains operational for many years.

Moreover, owning equipment offers more freedom to use and access the equipment around your own needs without being bound by lease agreements or limitations.

This flexibility can be crucial for adapting to unexpected changes in production needs or operational scale.

The obvious primary drawback of buying is the initial capital investment. In simple term, buying equipment can be prohibitively expensive.

If you have a smaller operation or need funds to invest in other areas, then buying may be a difficult option for you.

Furthermore, owning equipment means bearing the full cost of depreciation, maintenance, and repairs. As machinery ages, it can become less efficient and more costly to operate, affecting overall profitability.

Leasing – The unsung hero?

Although it carries the obvious disadvantage of not owning the equipment outright, leasing agricultural equipment can offer several financial benefits.

It allows for the ‘conservation of capital’ – you don’t have to spend as much money up front, which can be a blessing for business owners without large cash reserves.

Leasing also offers flexibility and the ability to stay up-to-date with the latest technology. As leases typically last for a few years, you can upgrade to newer models at the end of the term far more easily than for purchased equipment.

This is crucial for maintaining maximised efficiency and staying competitive.

However, be aware that leasing can carry higher costs in the long term in the form of lease payments.

The tax perspective

Tax is a great decision maker when it comes to investing in business equipment.

Leasing can offer more immediate benefits, as lease payments are generally deductible as business expenses, reducing your overall tax liabilities if you qualify as self-employed.

On the other hand, purchased equipment can qualify for capital allowances for businesses, allowing you to write off a portion of the cost against taxable profits.

This can significantly reduce the tax burden, particularly in the year of purchase.

The Annual Investment Allowance (AIA) allows you to deduct the full cost of qualifying equipment from your taxable profits – up to £1 million.

Additionally, Full Expensing was made a permanent measure in the 2023 Autumn Statement, allowing limited companies to write off the cost of an investment in one go, quickly realising the tax benefits of buying over leasing.

However, in another consideration, the Chancellor announced in the 2024 Spring Budget that he would eventually extend Full Expensing to leased equipment “when economic conditions allow”. While this is still intangible, it represents a potential shift the benefits of leasing vs buying farm equipment.

If you need further guidance on investing in equipment for agricultural businesses, don’t hesitate to contact our team.