Hire Purchase 

Finance lease overview.jpg
Lorries Parked In Line

Overview

A Hire Purchase agreement is a popular alternative to Finance Lease for many businesses throughout the UK. 

Unlike a Finance Lease agreement, with Hire Purchase all the VAT is paid upfront and recovered in the normal way.

 

The asset is shown on the balance sheet. 

In addition to being able to claim back up to 100% of the VAT at the beginning of the agreement, the monthly payments will be shown as a reduction of liability and capital allowances can be claimed in the usual way. 

Key Benefits 

Fixed payments for the entire period. Asset appears on balance sheet  

The VAT paid upfront is recoverable in the normal way if the hirer is VAT registered 

Capital allowances and depreciation is claimed in the appropriate way

No excess mileage charges. Ownership at the end of the period 

What is HIRE PURCHASE?

Hire purchase is where a business “the hirer” agrees to purchase an asset over an agreed period by way of regular monthly payments. Throughout the term, normally 3 - 5 years, the hirer doesn’t own the asset until the agreement has completed and the option to purchase fee is paid. However, the hirer has full use of it and is also responsible for the full repairs and maintenance. 

 

Typical hire purchase deals would consist of an initial upfront payment or deposit, this can be anything from VAT only, to any percentage of the asking price. A higher deposit would reduce the monthly payments, whereas a lower or VAT only deposit would mean higher monthly payments. 

 

The agreement is for a fixed term, and the monthly payments are fixed. This helps the hirer to accurately forecast their cashflow. 

 

Selling the asset during the fixed term is allowed with the permission of the lender. The hirer would request a settlement figure and clear the outstanding balance from their own cash resources or perhaps by selling or part exchanging the asset. 

 

At the end of the term, a small option to purchase fee is paid and title of the asset passes from the finance company or lender to the hirer. 

Hire Purchase vs Lease? 

The choice between Hire Purchase or Finance Lease for most limited companies, partnerships and sole traders is normally dependent on financials and accounting. 

 

Hire Purchase normally requires the full VAT amount to be paid upfront, with the agreed deposit. That said, there are now options to defer the VAT to the 2nd, 3rd or 4th monthly rental. 

 

For more information on how we can assist arranging a hire purchase agreement with a VAT deferral, please contact us. 

Will I own the asset? 

Hire Purchase

Yes, once the option to purchase fee is paid, title of the asset transfers to the borrower 

Finance Lease

No. However you can continue to lease the asset for an annual "peppercorn" rental. You will also have up to 99% interest in the asset. 

What initial payment is required?

All the VAT + a percentage of the purchase price. 

Normally a 10% + VAT on the 10% is required. But this can vary, depending on the deal. 

What term can the agreement be taken over? 

Anything between 2 and 7 years, depending on the terms set our by the lenders. 

Up to 5 years for the primary rental period. The secondary rental period can extend to the life of the asset. 

Will my payments change? 

No, the payment is fixed for the duration of the agreement. 

No, the payment is fixed for the duration of the agreement. 

What happens at the end of the agreed term? 

After the option to purchase fee has been paid, title of the asset transfers to the borrower who then owns the asset. 

The asset can be sold in which case the lessor will raise the sales invoice and on receipt of cleared funds will refund up to 99% less VAT and any settlement. Or, the asset can run into the secondary rental period for an annual "peppercorn" rental 

The hire purchase definition is “a system by which one pays for a thing in regular instalments while having the use of it”