Hire purchase vs leasing: which is better for your business?

Answer in brief

Choose hire purchase if you want to own the asset and use it for most of its life. Choose a lease if you'd rather not own it, want lower upfront costs, or plan to upgrade regularly. With hire purchase, VAT is usually paid upfront. With leasing, VAT is added to each rental.

Hire purchase

You pay a deposit, then fixed monthly payments. After the last payment and a small option to purchase fee, you own the asset. You're usually treated as the owner for tax from the start, which may let you claim capital allowances.

Finance lease

The lender owns the asset and rents it to you for most of its working life. At the end you can usually keep renting for a small fee, or sell the asset on the lender's behalf and receive most of the proceeds. You never take legal ownership.

Operating lease and contract hire

You rent the asset for part of its life and hand it back. The lender takes the risk on what it's worth at the end. Contract hire, common for vehicles, can include maintenance.

VAT and tax

On hire purchase, VAT on the asset is normally due upfront, and a VAT-registered business can usually reclaim it. On a lease, VAT is charged on each rental. Cars have special rules: VAT on buying a car usually can't be reclaimed unless it's used only for business, and on leased cars with any private use you can usually reclaim half the VAT on rentals. Speak to your accountant about your situation.

Questions and answers

Is hire purchase cheaper than leasing?

Not always. Hire purchase can cost less overall if you keep the asset for a long time. Leasing can be cheaper if you'd otherwise sell or replace it early. Compare total cost over the period you'll actually use it.

Can I end a hire purchase agreement early?

Usually, by paying a settlement figure. Ask for early settlement terms before you sign.

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