Hire purchase
Hire purchase (HP) is structured so that the lender owns the asset throughout the term, the business has the right to use it under the agreement, and ownership transfers on payment of the final instalment plus a nominal option-to-purchase fee (often £1 to £150). For accounting purposes, the asset typically sits on the borrower's balance sheet from day one, and depreciation and capital allowances can be claimed in the normal way.
VAT treatment depends on the asset and the agreement. For most HP deals on vehicles, plant and equipment, the full VAT is payable up front by the borrower and recoverable in the next VAT return (subject to the usual rules). The capital element of the monthly payments is VAT-free, and the interest element is also outside the scope of VAT.
HP can include a balloon payment at the end of the term to reduce monthly outflows, or be fully amortising. Either way, the borrower has a clear path to ownership. This contrasts with finance lease and operating lease products, where the lender retains ownership throughout.
Worked example
How the numbers play out
A printing business buys a £120,000 press on a four-year HP deal at 8 per cent flat with a £100 option-to-purchase fee. Monthly instalments are around £2,900. After 48 instalments and the £100 fee, the business owns the press outright and continues to use it.
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