Quota – buy or lease conundrum…

9 October 1998

Quota – buy or lease conundrum…

MILK producers seeking quota must calculate the true cost to the business before deciding whether to purchase or lease.

Simply multiplying the lease price by the number of years to 2006 (when quota is expected to end) to find the equivalent purchase price is misleading, warns Tom Chapman, farm business consultant with accountant Grant Thornton.

To calculate the true cost of leasing quota, interest and tax allowances must be made. Assuming leased quota costs 8p/litre, interest on borrowed money (at 9.25%) comes to 0.74p/litre. This pushes the leasing price up to 8.74p/litre.

However, leased quota attracts tax relief, which, for a basic rate taxpayer reduces the cost by 23% (2.01p/litre), so leasing actually costs the business 6.73p/litre a year.

Allowances for discounting and interest through to 2006 show leasing at that price until then will actually cost 40.03p/litre, says Mr Chapman. So at current prices, a farmer would be better buying.

A higher rate taxpayer benefits from a 40% allowance on leased quota and should therefore pay no more than 33.22p/litre for purchased quota. Generally, leasing is more favourable for higher rate taxpayers, although this assumes the quota has no value or compensation in 2006, says Mr Chapman.

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