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How hire purchase works
Under a hire purchase agreement your company takes immediate possession and use of the asset. Legal title passes to the company once all instalments and any final option-to-purchase fee are paid. During the agreement the finance company retains title as security, but for accounting and tax purposes the asset is treated as owned by your company from the outset.
This means capital allowances — including the Annual Investment Allowance on qualifying plant — are available to your company immediately, which can be a significant cash-flow advantage in year one.
How a finance lease differs
A finance lease transfers substantially all the risks and rewards of ownership to the lessee, but title never passes. The asset appears on the lessee's balance sheet under FRS 102 and is depreciated accordingly. However, capital allowances are claimed by the lessor, not the lessee — the lessee instead deducts the lease payments (split into capital and interest elements) for tax purposes.
At the end of a finance lease, the lessee typically has the option to continue leasing at a peppercorn rent, sell the asset on the lessor's behalf and retain most of the proceeds, or simply return the asset.
Which is better for your company?
Hire purchase is generally preferable when your company has sufficient taxable profit to absorb a large first-year capital allowance, wants unconditional ownership at term end, and does not anticipate returning or exchanging the asset.
Finance leases suit companies that prefer to keep options open at end of term, are in a tax position where spreading relief over the lease term is more efficient, or whose sector requires regular asset refresh cycles.
Lender perspective and deposits
Hire purchase typically requires a deposit of 10–20% of the asset value, with the balance financed. Finance leases frequently require a smaller initial rental or none at all, preserving working capital at the point of asset acquisition. Both products are assessed on the company's ability to service the periodic payments from trading cashflow.
Frequently asked questions
Can a limited company claim VAT on hire purchase?
Yes — VAT on the full asset value is typically charged and reclaimable upfront on a hire purchase agreement, unlike a lease where VAT is charged on each rental payment as it falls due. This can be a meaningful cash-flow difference for VAT-registered companies.
What happens if we want to end a hire purchase agreement early?
Early settlement is usually possible but triggers an early termination charge. The lender will calculate the outstanding balance plus any settlement fee specified in the agreement. Review the contract terms before signing if early exit flexibility is important.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.