Hire purchase has long been a popular option for businesses looking to invest in vehicles, equipment, or machinery without a hefty upfront cost. But what many business owners overlook is the range of tax advantages that come with this type of finance.
If you’re weighing up your options for business asset funding, understanding the tax benefits of hire purchase could make the decision a lot clearer.
What Is Hire Purchase?
Hire purchase allows you to acquire an asset by spreading the cost over monthly payments. At the end of the agreement, after paying an option to purchase fee, you own the asset outright.
It’s commonly used for:
Vehicles (cars, vans, HGVs)
Plant and machinery
Agricultural or commercial equipment
Key Tax Benefits of Hire Purchase
1. Claim Capital Allowances
Unlike with leasing, when you enter a hire purchase agreement you’re treated as the asset’s owner for tax purposes – even before the agreement is fully paid off. That means you can claim capital allowances from day one.
In many cases, this means you could:
Claim 100% of the asset’s value against your taxable profits in the first year (under the Annual Investment Allowance, currently up to £1 million).
Reduce your corporation tax liability significantly.
2. Offset Interest as a Business Expense
While the capital part of each repayment goes towards owning the asset, the interest portion is tax-deductible. This allows you to offset it as a revenue expense, reducing your overall tax bill further.
3. Reclaim VAT (for VAT-registered businesses)
If VAT is charged on the total purchase price, you can often reclaim the full amount upfront – even though you’re paying in instalments. This can dramatically improve your short-term cash flow.
Note: Always check how the VAT is applied, as some agreements may differ.
A Smart Move at Year-End
Hire purchase becomes particularly attractive as you approach your business year-end. By securing an asset before your accounting period closes, you may be able to claim capital allowances within that financial year – even if you’ve only made the first payment.
Real-World Example
Let’s say your business buys a £40,000 piece of equipment on hire purchase.
If eligible, you could deduct £40,000 from your taxable profits using the Annual Investment Allowance.
Assuming a 19% corporation tax rate, that’s a potential £7,600 tax saving.
Plus, you still benefit from spreading the cost monthly, improving cash flow.
Conclusion: Finance Smart, Save More
Hire purchase isn’t just a convenient way to spread the cost – it’s also a smart way to reduce your tax liability while acquiring valuable business assets.
At Kick Asset Finance, we help businesses unlock the full benefits of hire purchase. We’ll guide you through the options, structure the repayments, and ensure you’re set up to make the most of the available tax reliefs.
