Lease vs hire purchase: which is right for your business?
When your business needs new equipment, vehicles, or machinery, you’re faced with a choice: lease vs hire purchase?
Both options help you spread the cost without paying everything upfront, but they work in different ways with distinct impacts on your business finances. Getting this decision right can improve cash flow management and help optimise your tax position.
What is hire purchase?
Hire purchase is essentially buying an asset through instalments. You typically pay a deposit upfront (usually 10-20% of the asset’s value), followed by fixed monthly payments over an agreed period. The finance company legally owns the asset until you make the final payment, then ownership transfers to your business.
Think of it like a mortgage for business equipment – you’re paying off the asset in instalments until it’s fully yours.
What is a lease?
Leasing works more like a long-term rental. A finance company purchases the asset and rents it to your business for an agreed period, usually one to five years. You make regular payments to use the asset, but ownership always remains with the leasing company.
At the end of a lease, you typically return the asset, extend the lease, or sometimes purchase it by paying its residual value. The two main types are finance leases (where you’re responsible for maintenance) and operating leases (where the leasing company often handles maintenance).
Business perspective: the practical differences
Ownership and flexibility
Hire purchase suits businesses wanting to own assets long-term. If you’re buying a commercial vehicle you’ll use for many years, ownership makes sense – you can modify it, sell it later, or keep using it after paying off the finance.
Leasing offers flexibility if you need regular upgrades. A graphic design agency might lease computers on a three-year cycle, always having the latest technology without worrying about selling outdated equipment.
Upfront costs and cash flow
Hire purchase typically requires a larger deposit (10-20% of asset value), plus you’ll pay all VAT immediately if you’re VAT-registered (though you can reclaim this). Monthly payments tend to be higher because you’re paying off the full asset cost.
Leasing usually involves lower or no deposit and smaller monthly payments, making it easier on cash flow initially. VAT is spread across lease payments rather than paid upfront
Maintenance and responsibility
With hire purchase, you’re responsible for all maintenance, repairs, and insurance once the asset becomes yours. Many lease agreements include maintenance packages, where the leasing company handles repairs and servicing.
Financial accounting perspective
Tax considerations of hire purchase vs. lease
Tax treatment differs significantly and can substantially impact your decision.
Hire purchase allows you to claim capital allowances on the asset, providing substantial first-year tax relief. The Annual Investment Allowance lets you deduct up to £1 million of qualifying plant and machinery from profits before tax. You can also deduct the interest element of payments.
With leasing, you claim rental payments as tax-deductible business expenses. You cannot claim capital allowances because you never own the asset, but you get immediate relief on payments.
Making the right choice for your business
Consider hire purchase if you:
- Plan to use the asset long-term
- Want to build equity in business assets
- Can manage higher upfront costs
- Want to benefit from capital allowances
Leasing might suit you better if you:
- Need to preserve cash flow with lower initial costs
- Want to upgrade equipment regularly
- Prefer predictable monthly expenses including maintenance
- Need flexibility at the end of the agreement
Getting expert advice on lease vs hire purchase
The decision between lease and hire purchase affects your business’s financial position, tax liability, and operational flexibility. The right choice depends on your cash flow, tax position, how long you’ll use the asset, and your broader business strategy.
At Adams Accountancy, we help businesses across Kent make informed decisions about financing options. We can review your situation, calculate the true costs including tax implications, and recommend the best approach.
Contact us today on 01322 250001 for a free consultation about your business’s asset financing needs. No question is too simple when it comes to making smart financial decisions for your business.
About the author
Michelle Adams is a qualified accountant and founder of Adams Accountancy, a friendly accountancy practice based in Dartford, Kent. With over 15 years of experience helping small and medium businesses across the UK, Michelle specialises in making complex financial decisions simple to understand.
For expert advice on business finances, tax planning, or asset financing decisions, contact Adams Accountancy for a free consultation.
Frequently asked questions
What’s the main difference between a lease and hire purchase?
The fundamental difference is ownership. With hire purchase, you’re buying the asset through instalments and will own it once you’ve made all payments. With leasing, you’re essentially renting the asset for a fixed period and you’ll never own it unless you choose to purchase it at the end (if that option exists). This affects everything from your balance sheet to your tax relief.
Can I claim VAT back on lease and hire purchase payments?
For hire purchase, you typically pay all the VAT upfront on the asset’s full value, which VAT-registered businesses can reclaim immediately. With leasing, VAT is charged on each monthly payment and can be reclaimed as you go, spreading the VAT benefit over the lease term. This makes leasing potentially better for cash flow but hire purchase gives you the full VAT benefit upfront.
Which is cheaper – leasing or hire purchase?
Leasing usually has lower monthly payments because you’re only paying to use the asset, not to own it outright. However, over the long term, hire purchase can work out cheaper if you keep and use the asset for many years after you’ve paid it off. The best option depends on how long you’ll need the asset and whether ownership matters to your business.
How does hire purchase affect my business balance sheet?
Under hire purchase, both the asset and the outstanding debt appear on your balance sheet from day one. This increases your total assets but also your liabilities, which can affect financial ratios that lenders look at. You’ll depreciate the asset over time whilst gradually reducing the liability as you make payments. This gives a true picture of your business’s financial position.
Can I end a lease or hire purchase agreement early?
Both agreements can potentially be terminated early, but there are usually penalties involved. With hire purchase, you might be able to exercise voluntary termination if you’ve paid at least half the total amount owed. Early lease termination typically requires paying the remaining lease payments or a substantial break fee. Always check the specific terms in your agreement before committing, as early termination can be expensive.