How hire purchase works
With hire purchase (HP) the funder buys the asset and the business hires it, usually after paying a deposit. The business pays fixed monthly instalments over an agreed term. Once the final instalment, and any small option-to-purchase fee, is paid, legal ownership passes to the business.
HP suits assets the business intends to keep for most of their working life: plant, machinery, commercial vehicles and production equipment. For tax purposes the business is normally treated as the owner from the start, so it can claim capital allowances on the asset once it is brought into use.
How a finance lease works
With a finance lease the funder buys and keeps legal ownership of the asset, and the business pays rentals to use it for most of its working life. At the end of the main rental period the business can usually continue at a much lower secondary rental, or the asset is sold to a third party and the business receives an agreed share of the proceeds. The business does not normally take legal title.
Finance leases suit businesses that want the use of an asset without ever owning it, or that prefer to spread VAT over the rentals rather than pay it up front.
The differences side by side
| Hire purchase | Finance lease | |
|---|---|---|
| Ownership | Passes to the business after the final payment | Stays with the funder |
| VAT | Usually paid on the full asset cost at the start and reclaimable by VAT-registered businesses | Charged on each rental, so the cost is spread over the term |
| Tax relief | The business normally claims capital allowances on the asset and deducts the interest | Rentals are generally deductible as a business expense, although special rules apply to some longer leases |
| Balance sheet | The asset and the liability appear on the balance sheet | Usually recognised on the balance sheet as well; leasing is rarely an off-balance-sheet route |
| End of term | The business owns the asset outright | Secondary rental period, or sale with a share of the proceeds |
| Typical deposit | Often a deposit or the VAT up front | Usually one or more rentals in advance |
Which is likely to suit
- Choose HP when the business wants to own the asset, expects to use it beyond the finance term, and can benefit from capital allowances.
- Choose a finance lease when ownership does not matter, when spreading VAT helps cash flow, or when the asset will be replaced at the end of the term.
- If the business wants to hand the asset back with no residual value risk, an operating lease or contract hire may fit better. These are more common for cars and vans than for heavy plant.
- If the business already owns equipment outright, refinancing can release cash against it. See the asset finance page for how asset refinancing works.
What lenders look at
For both HP and finance lease, funders assess the asset (type, age, condition and resale market) and the business (trading history, accounts and existing commitments). Assets with a strong second-hand market, such as construction plant and commercial vehicles, are generally easier to fund on good terms than specialised or soft assets.
Terms are usually matched to the asset's useful life, typically 3 to 7 years. Bedrock arranges HP and finance lease for UK limited companies only.
Tax and accounting: check with your accountant
The tax and accounting treatment depends on the agreement, the asset and the accounting standard your company reports under. The table above sets out the general position, not advice for your business. Your accountant should confirm the treatment before you sign.