Under a hire purchase contract, ownership of the machine does not pass to the farmer or contractor until the final instalment is paid. However, the tax treatment is similar to that of an outright purchase. Capital allowances are usually available at a rate of 12.5pc per year on the machine over an eight-year period. If the contractor is entitled to reclaim the VAT, it can all be recovered at the beginning.
Under a finance leasing contract, ownership never transfers to the farmer or contractor. The machine must be returned to the finance company at the conclusion of the lease, unless an option to purchase is exercised. A tax deduction is claimed for each of the lease repayments. The capital cost is therefore reclaimed over the period of the lease.