Side by side
| Criterion | Hire purchase | Finance lease |
|---|
| Ownership at end of term | Transfers to you after final payment | Remains with the funder, though you retain use |
| VAT treatment | VAT paid upfront on the full price | VAT charged on each rental |
| Capital allowances | Claimed by your business | Rentals generally offset against profit instead |
| Balance sheet | Asset and liability recorded | Asset and liability also recorded under current rules |
| End of term options | Own it outright | Sell on the funder's behalf, extend, or return it |
| Best suited to | Assets you want to keep long term | Assets that depreciate quickly or need periodic renewal |
Ownership and what it changes
Hire purchase is closest to a loan secured on the asset itself. You make an initial payment plus instalments, and once the final payment is made the asset becomes yours. This suits equipment you intend to run for its full useful life, such as core production machinery or vehicles you plan to keep.
A finance lease is closer to a long-term rental with the option to share in the eventual sale proceeds. It suits assets that lose value quickly or that you expect to upgrade before it is fully depreciated, since you are not committed to owning it at the end.
Cash flow and tax differences
VAT is usually payable in full at the outset on hire purchase, which can be a meaningful cash outlay on larger assets even though it is normally recoverable. On a finance lease, VAT is spread across the rentals, which is gentler on cash flow in the early months.
Capital allowances generally go to whoever owns the asset for tax purposes, so hire purchase usually lets your business claim them directly, while lease rentals are typically deducted as an expense instead. The right treatment depends on your specific tax position, so this is worth checking with your accountant before deciding.
Choosing between them
If long-term ownership and claiming allowances matter most, hire purchase is usually the better structure. If you would rather avoid the upfront VAT hit and want flexibility to hand assets back, a finance lease is often more suitable.
The short answer
Use hire purchase when you intend to keep the asset and want ownership at the end; use a finance lease when flexibility, lower upfront VAT cost or periodic renewal matter more.
Questions
Can I pay off a hire purchase agreement early?
Most agreements allow early settlement, sometimes with a rebate of interest, though terms vary by funder so it is worth checking before signing.
Does a finance lease appear on the balance sheet?
Under current accounting standards, most finance leases are recognised on the balance sheet as a right of use asset and a corresponding liability.
Which is better for a business wanting to preserve cash?
A finance lease usually preserves cash better in the short term because VAT is spread over the term rather than paid in one lump sum.
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