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Hire Purchase v. Leasing Calculator
How leasing is set up
The lessor buys the equipment from your supplier and then leases it to you. When you sign the lease agreement, the supplier invoices the lessor, who, having paid them for the equipment, starts to charge you the monthly or quarterly payments over 12, 24, 36, etc. months.
How hire purchase is set up
Hire Purchase is a traditional method of financing a capital purchase. It combines elements of both a loan and a lease. The monthly payment is determined by the amount of deposit paid, the period of the contract and the initial price of the capital purchase. You reach an agreement with the dealer to pay a deposit and then pay off the balance in monthly instalments over an agreed period of time. At the end of this period, the asset is yours.
The main differences between leasing and HP
1. VAT
With hire purchase (often referred to as lease purchase) you pay all of the VAT with your first instalment. Leasing spreads the cost of the VAT which is applied to each monthly or quarterly instalment. In both cases you recover the VAT but with hire purchase the initial VAT can be a sizeable amount of cash for you to find for a few months.
2. TAX
Both finance methods provide you with savings to offset against your year-end taxable profits. With HP, you can claim 25% of the equipment cash price in the first year, then 25% of the balance in the second year and this continues on a reducing balance basis each year. With leasing, all the lease payments you make in the financial year can be offset against your taxable profits for that year. Leasing can therefore be more tax efficient in the short term, if you buy something early in your financial year. On the other hand, if you make a sizeable purchase near your year-end, then hire purchase might be more tax efficient for you.
3. OWNERSHIP
At the end of the hire purchase agreement, title to the goods passes to you for a small transfer fee, usually £50 - £100. At the end of a lease you generally have two options:
- To continue leasing, on an annual basis for an annual fee.
- You can gain title to the equipment via a third party.
You do not have to be a limited company to qualify for leasing.
This page is reviewed regularly but the information may not reflect changes in legislation made since the last review.
This is only a guide and should not be relied on in place of professional accounting or tax advice.
Any calculated figures are illustrative and are based on the data you provided.
