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Hire Purchase

Hire Purchase is an agreement to hire with an option to purchase at the end of the term.  Title to the equipment remains with the finance house until all the instalments and the option to purchase fee have been paid when title then transfers to you.  The whole of the VAT on the whole purchase price is paid at the front end by you and recovered via your VAT return.  You are seen to be the beneficial owner of the machine by the HMRC and the machine appears as an asset on your balance sheet and you can claim the capital allowances.  Interest is deductible against tax.

 

Finance Lease

With a Finance Lease all of the asset value is paid for over the basic lease period and title remains with the finance house therefore you are deemed to bear the risks and rewards of ownership.  There can be no purchase option written into the agreement.  At the end of the basic lease period title usually either reverts to the finance house or equipment supplier or the agreement may have the option to continue on a year by year basis by payment of peppercorn rentals.  Also often Finance Lease agreements will appoint you as agent to sell the machine on behalf of the finance house and retain from 85%-99% of the sales proceeds as a refund of rentals.  VAT is paid on the lease rentals as they fall due and not at the front end on the whole machine cost as with Hire Purchase.  In most cases the asset is capitalised on the balance sheet as an asset to the business with a liability to the finance house for the outstanding balance.  Also in most cases 100% of the rental is deductible against tax.

 

Operating Lease

With an Operating Lease the risks and rewards of ownership remain with the finance house and you pay for the usage of the machine only.  Title to the machine remains with the finance house although you can usually negotiate to purchase the machine at a market price at the end of the lease period.  VAT is payable on the rentals as they fall due and Operating Leases are off balance sheet for you.  The rentals are usually 100% deductible against tax.  One of the best examples of an Operating Lease is contract hire for cars.

Lease Purchase

Often confused with finance lease but Lease Purchase is the same as Hire Purchase and is an agreement to hire with an option to purchase.  Where the confusion originally arose was due to Hire Purchase agreements usually being written with an initial deposit of say 10% + VAT and Finance Leases usually being written with 3 rentals in advance followed by 33 for a 3 year agreement.  The market then began to see Hire Purchase agreements being written with the same payment structure as a Finance Lease such as VAT deposit, 3 rentals in advance followed by 33 and this structure began to be known as Lease Purchase.  In addition the motor trade often refer to Hire Purchase agreements with a balloon payment at the end of the finance period as Lease Purchase.  However Lease Purchase has exactly the same legal basis as Hire Purchase.

 

Please note the above represent our view of the present legal and tax positions although your circumstances may be different and you should check your own position with your Accountant or Tax/Financial Advisor.