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September 9th 2024

Contracting vs buying new equipment: A farmer’s dilemma during harvest season

As the golden hues of harvest season sweep across the Scottish countryside, many of our agricultural clients come to us for advice.

August to September is a crucial time for farmers, and one of the most pressing – and often the most stressful – decisions is whether to contract equipment or invest in new machinery.

With each option presenting its own set of advantages and challenges, it's not an easy decision.

This year I’ve noticed that many clients are feeling the added pressure of the ongoing shortage of labour too.

The unique circumstances of your farm

I’ve lost count of how many times a client has walked into my office, wrestling with the decision of whether to contract or buy new equipment.

On paper, it might seem like a straightforward choice, but the reality is anything but.

The truth is that the right answer often depends on your very specific circumstances – your farm’s size, the crops or livestock you're working with, and even the condition of your current equipment.

For some, the appeal of contracting is undeniable and an easy decision.

It offers flexibility, allowing you to scale up or down based on the season's demands without the hefty investment that comes with buying new machinery.

Plus, there's the bonus of not having to worry about maintenance costs or depreciation – two factors that can quickly erode your bottom line.

However, contracting can also come with its own headaches.

Availability can be an issue, especially during the peak of harvest season, when everyone else is thinking the same thing.

And then there’s the question of reliability – will the contractor deliver on time, or will you be left waiting?

The allure of new equipment and its tax implications

On the other hand, the thought of buying shiny new equipment is always tempting.

There's something to be said for having control over your own machinery – knowing that it's there when you need it, and that it's been maintained to your standards.

For many farmers, owning their equipment is a point of pride, a tangible investment in the future of their farm.

But let’s not kid ourselves – new machinery doesn’t come cheap.

It requires a significant upfront cost, and that’s before you even consider ongoing maintenance and the inevitable depreciation.

This is where the financial side of things gets interesting.

Farmers can potentially offset some of the costs of new machinery through tax reliefs, which can make buying a more attractive option.

The Annual Investment Allowance (AIA), for example, allows businesses to claim 100 per cent of the cost of qualifying plant and machinery, up to £1 million, against their profits in the year of purchase.

This could mean significant tax savings, particularly for those who have had a profitable year.

Moreover, you can claim Capital Allowances on the cost of equipment that doesn’t qualify for the AIA, spreading the tax relief over several years.

These allowances reduce your taxable profits, effectively lowering your tax bill.

However, it’s worth noting that while these tax reliefs can ease the financial burden, they don’t eliminate it.

You’ll still need to consider whether your cash flow can support the initial outlay, especially with the uncertainty brought about by the labour shortage.

Contracting as a flexible, tax-efficient alternative

Contracting, on the other hand, doesn’t offer the same tax reliefs as buying.

However, it does provide some financial flexibility that can be beneficial during uncertain times like these.

When you opt for contracting, your expenses are treated as operational costs, fully deductible against your income in the year they are incurred.

This can help reduce your taxable profits and, by extension, your tax liability for the year.

So, for many farmers, contracting represents a lower-risk option.

There’s no large upfront cost, and you don’t have to worry about ongoing maintenance or depreciation.

Instead, you can focus on the task at hand – getting through the harvest season – without the financial strain that often accompanies new equipment purchases.

This can be particularly advantageous if you’re facing tight margins or are unsure about your long-term equipment needs.

The labour shortage and its impact

This brings us to the elephant in the room – the current labour shortage.

This issue has been rearing its head across all sectors, but it’s particularly pronounced in agriculture.

The shortage of skilled workers means that even if you have the latest and greatest equipment, you might not have enough people to operate it during this critical time.

This labour crunch also impacts the contracting side of things.

Contractors are feeling the pinch just as much as farmers, which can lead to delays and higher costs.

It’s a classic supply and demand scenario – too many farms needing too few workers.

For many of our clients, this has tipped the scales in favour of buying, as it offers more control in a time when so much feels out of our hands.

But for others, the flexibility of contracting still wins out, despite the added uncertainty.

What’s the right choice for you?

So, where does this leave us?

Unfortunately, there’s no one-size-fits-all answer.

The decision to contract or buy new equipment during harvest season is deeply personal and depends on a multitude of factors unique to your farm.

My advice?

Take the time to weigh up the pros and cons based on your specific situation and discuss the issue with your accountant.

Talk to your accountant about the potential tax reliefs available if you decide to purchase new machinery, but also about the flexibility and reduced risk that contracting offers.

Remember, you’re not alone in this.

We’re here to help you navigate these challenging decisions.

Please give us a call if you’d like to talk about the contracting vs buying options available to you.
Call +44 (0) 1856 872983 or email me directly via karen.scholes@scholesca.co.uk
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