Get use of all the assets in your business now, whilst spreading cost of ownership
Hire Purchase (also known as Lease Purchase) is still the most common method for Business Asset Finance Companies in the UK to finance their asset purchases. Hire Purchase or HP is simply a "hire" contract that offers the customer an option to purchase the vehicle or equipment at the end of the hire period, typically by payment of an "option to purchase fee".
How does Hire Purchase work?
Hire Purchase, or Lease Purchase, is very straightforward, hence its continued popularity today. It is normally used when a business has to purchase a sizeable asset that they do not wish to acquire out of their day to day cash flow. HP allows them to spread the cost of the purchase price over its useful working life.
What type of assets can be purchased on Hire Purchase?
Businesses can arrange Hire Purchase to acquire cars, commercial vehicles, equipment, plant and machinery.
Why use Hire Purchase?
- Preserves cash in the business
- Fixed costs/repayments
- Tax efficient
- Additional source of working capital/finance for a business
- Security is against the asset being financed (i.e. not over book debts or freehold property)
How long can Hire Purchase be arranged over?
The minimum loan period is twelve months and can be as long as ten years. The typical funding term is five years for standard vehicles, equipment, plant and machinery. Ideally the loan term should reflect the assets useful working life or the time the business intends to keep it for.
Who owns the asset?
Legally the asset remains the property of the finance company until a business has made the final payment on the loan, plus any "option to purchase fee". This means if the business fails to keep up the repayments on the Hire Purchase/Lease Purchase loan, the asset can be repossessed by the lender. Once the "option fee" has been paid plus any outstanding rentals, "title" in the goods passes to the hirer.
How is the asset treated in the accounts of a business?
The asset is treated as if it has been purchased. It is capitalised in the balance sheet and depreciation is apportioned on an annual basis. The Hire Purchase repayments are apportioned between a finance charge and a reduction of the outstanding debt.
The total finance charges should be allocated to the appropriate accounting periods through the term of the Hire Purchase agreement and shown as an expense in a business’s profit and loss account.
What is the tax treatment with Hire Purchase?
Depreciation is not allowed for tax purposes but capital allowances are available. Investment in vehicles, plant & machinery attracts varying allowances dependent upon a business’s size and the nature of the asset being financed.
Can VAT be recovered?
The VAT is normally charged by the finance company along with any initial deposit they require. The finance company will then issue the hirer with a vatable copy of the finance document (after the finance has been drawn down), this is then used to recover any VAT * charged on the assets being financed. There can be a delay of up to four months in recovering the VAT from HM Revenue & Customs.
* VAT cannot normally be recovered on cars.