Hire Purchase vs Finance Lease: Which Is Better for Business Equipment?

What is Hire Purchase?

Hire Purchase is a fixed cost, fixed period loan, linked to the purchase of an asset such as a vehicle, equipment or machinery

When Hire Purchase may be suitable

Hire Purchase (HP) is suitable for clients who want to own the asset once they have made all the necessary payments.
HP is often seen as the simplist form of finance, offering greater agreement flexibility and opportunity of ownership at the end of the repayment term.

What else does the client need to know

The finance provider owns the asset until the point when the client has made all the necessary payments. The client is not therefore entitled to sell the asset before this time.

For vehicles in particular, there are no mileage restrictions, servicing requirements or other charges because it is expected that the client will own the vehicle at the end of the agreement.

All hire purchase interest charges can be offset against the client's taxable profits.

VAT on the initial cost of the asset is normally paid by the client as part of the deposit at the start of a hire purchase agreement.

For tax purposes, hire purchase is treated in the same way as if the client is paying cash for the asset. For example, they may be able to benefit from capital allowances or annual investment allowances on the purchase.
see:

• GOV.UK – Annual Investment Allowance
  Useful for tax-related context around plant and machinery and hire purchase.

What is a Finance Lease?

A Finance Lease is a form of flexible leasing to fund the "use" but not the ownership of an asset.
The client can never directly "take title" to the asset.

Finance Lease repayments are subject to VAT at the standard rate.

When Finance Leasing may be suitable

For tax purposes, finance leases are treated as business costs. All Net repayments can therefore be offset against the business's taxable profits.
Finance Lease agreements can allow clients to fully offset the cost of an asset over the term of the hire agreement.

Where a client deliberately does not want to take ownership of an asset

What else does the client need to know

The finance provider, known as the "lessor", owns the asset throughout the lifetime of the finance lease agreement.

The client can terminate the finance lease agreement early but early termination charges are often applied. These charges will be set out in the hire agreement.

Hire Purchase vs Finance Lease: Key Differences

Ownership

Hire Purchase - title to the asset can pass to the hirer once all the repayments have been made, including any option to purchase fee.

Finance Lease - title to the asset will always remain with the lessor (finance provider) during the lifetime of the hire agreement

Monthly payments

Hire Purchase & Finance Lease net payments are unlikely to vary greatly as most finance providers provide the same cost of funds to both products.
Finance Lease repayments will always be subject to VAT at the current rate.

End-of-term options

Hire Purchase - generally include a nominal "option to purchase" fee with the last instalment which will automatically pass title to the hirer. At this point the hire will become the legal owner of the asset.

Finance Lease - end of term options include:-
(1) Secondary rentals - continue hiring the asset by paying annual secondary rentals.
(2) Instruct the lessor to sell the asset. The hirer (lesee) will then usually receive a rebate of sale proceeds, ranging from 90% to 99%, of the net sale value.

Tax and accounting considerations

For tax purposes, hire purchase agreements are treated in the same way as if the client is paying cash for the asset. For example, they may be able to benefit from capital allowances or annual investment allowances on the purchase.

For tax purposes, finance leases are treated as business costs. All Net repayments can therefore be offset against the business's taxable profits.
Finance Lease agreements can allow clients to fully offset the cost of an asset over the term of the hire agreement.

Which Option May Suit Your Business?

If you want to own the asset

Hire purchase would likely be the most appropriate funding option if the clients wishes to own the asset at the end of the loan agreement.

If you want flexibility

Hire purchase generally offers more flexibility throughout the lifetime of the loan agreement.

If cash flow is the main concern

Finance Lease may have cash flow benefits as it removes the need to cover the large VAT element of an asset purchase - which generally needs to paid upfront on a hire purchase agreement

Examples by sector

Clients with large fleets of vehicles may find finance lease facilities more appropriate to avoid remarketing & disposal costs at the end of the hire term.

Assets that depreciate slowly, for example engineering machinery and yellow plant, are most likely more suited to hire purchase agreements, passing the equity benefits to the hirer at the end of the agreement.

Conversely, assets that depreciate quickly, for example computer equipment & shop fittings, may be more suited to finance lease agreements.

Additional Questions to Ask Before Choosing

How long will you use the asset?

Most financial providers will have limits on the maximum repayment term on specific assets dependent on the likely lifespan of the asset.
For example, a commercial trailer is likely to have a much longer lifespan than a piece of computer equipment.

Is ownership important?

If ownership is important, then Hire Purchase would be the most appropriate funding option.
An option to purchase fee is normally automatically applied to the final repayment to automatically transfer ownership to the hirer.

Is the asset new, used or specialist?

Hire Purchase or Finance Lease agreements can be used for new, used or specialist assets.

Have you spoken to your accountant?

It is always good to speak with your accountant who may be able to guide you as to the most tax efficient funding option at the time of asset acquisition.

Speak to Lincoln Finance About Asset Finance

Get in touch with Lincoln Finance Ltd to find the most efficient way to fund the growth of your business, whether that be a new vehicle, machine or even technology enhancements.

About the author

The author and owner of Lincoln Finance Ltd is Jason Lincoln, who has been involved with asset finance since the early 1990's. A graduate of the University of Sunderland with BSc Hons in Combined Science in 1992. The path through the finance industry shortly followed, with Jason setting up his own business in 2005.