Farmers are making the most of buoyant second-hand trade in machinery, with strong demand throughout Europe – but they need to be careful of VAT and legal pitfalls, a rural tax expert has warned.

According to farm accountant Old Mill, selling surplus machinery is a good way to free up cash, but it usually comes with an increased tax bill and is not without its risks – particularly when dealing with overseas buyers.

“If you sell any equipment you will usually have to pay Income Tax or Corporation Tax on the sale price,” Andrew Vickery, head of rural services at Old Mill said.

Many people think that they are dealing with Capital Gains Tax (CGT) instead, and can, therefore, make use of their CGT allowance – but that simply isn’t the case.

“There is a strong trade in second-hand machinery within the UK, as farmers join forces to buy new equipment while others look for cheaper options.

“While there will always be tax considerations when freeing up capital, it’s important to make the right commercial decisions for your business.”

Image source: Tim Scrivener

Sales of second-hand machinery through Cheffins auctioneers increased by 13% in the second quarter of 2018, to £10.07 million; its highest level since 2014.

However, the volume traded only increased by 3%, reflecting the higher prices driven by favourable exchange rates for overseas buyers, stronger commodity prices and a lack of stock.

Around 80% of stock sold at the firm’s Cambridge machinery sales went overseas, with buyers from countries including Ireland, Spain, Bulgaria, Poland and Belgium.

Selling overseas

“If you’re selling overseas to a business you do not generally need to charge VAT,” Vickery said.

“For EU sales, you must show the purchaser’s VAT number on your sales invoice and they pay VAT in their own country using the acquisition VAT process.

“You then need to log the sale on your VAT return, fill out an EC Sales List and send it into HMRC. It is also vital that you retain a copy of the relevant freight documents for both EU or non-EU sales.”

“Since laws differ in every country, it’s important to understand the basic legal framework of the country to which you intend to export,” added Amy Kerr, senior associate at solicitor Clarke Willmott. “Initial research and planning ahead are essential.”

Considerations include investigating who you are dealing with, and checking they have the legal capacity to sign any contract.

“In some jurisdictions, there is a duty to inform potential buyers of any facts which would affect their decision to sign up to the contract,” Kerr explained.

The contract itself should include an accurate description of the machinery – otherwise, it may be deemed to be of satisfactory quality. It should also be noted if the price includes any sales taxes, customs duties, freight and insurance – and if these can be varied later to reflect fluctuating duties or exchange rates.

A key concern is when and how payment is to be made – and in what currency.

“Payment up front is always best, with delivery once payment has cleared,” Kerr said. “Paypal is an option as this controls when payment is made.”

If interest is to be charged for late payment, this should be specified.

“If you’re receiving a cash payment of €10,000 or more, you may need to register with HMRC and carry out money laundering checks,” she added. “You should also specify which courts are to have jurisdiction in the case of a claim.”