With hire purchase, you can fix the cost of acquiring an asset but spread the cost of the purchase over time.
Hire purchase is an on-balance sheet method of funding the purchase of assets for business use.
There is an initial deposit, typically 10% (though it can be more or less) and the remaining cost is spread across fixed monthly instalments. For some assets it is possible to include a balloon payment at the end of the hire purchase agreement which can be a real cash flow bonus.
Hire purchase offers a number of advantages:
Fixed monthly costs spread over the course of the finance agreement
Low or no deposit is often available
On-balance sheet funding allows you to maximise your asset base
Business purchases may benefit from Annual Investment Allowance tax savings and VAT can be reclaimed on the purchase price of the asset.
Fixed and variable interest rates are usually available
Frees up vital capital in the business
The security taken by the lender is the asset not a charge over the business as a whole
What happens at the end of the agreement?
An HP agreement usually includes an option to purchase fee at the end of the initial rental period. Payment of this nominal fee transfers title of the asset to you and brings the legal agreement to an end.
Who owns the asset?
The Leasing company is the owner until the last payment is made, then ownership passes to your business.
VAT is payable upfront in full. VAT charged will usually be payable with the first instalment.
Who Claims capital allowances?
Your Business can claim capital allowances.
Who claims depreciation?
Your Business can claim depreciation.
Future instalments are recorded as a liability on your balance sheet.
The interest component is categorised as expenditure, therefore only the finance charge is shown as an expense in the profit and loss account.
For tax purposes, you are treated as if you have purchased the asset at the beginning of the HP agreement. This has the advantage of providing tax relief via the capital allowances system. For further information about capital allowances click here.
You can claim the full value of an item that qualifies for annual investment allowance (AIA) from your profits before tax. The current Annual investment Allowance is £200,000. For further information about the AIA click here.
Maintenance and Insurance?
Your business is responsible for maintenance and insurance.