Hire Purchase Finance Lease

Hire Purchase vs. Finance Lease

Both hire purchase and finance leases are popular methods of acquiring assets without paying the full upfront cost. While they achieve a similar goal, they differ significantly in ownership, tax implications, and overall structure.

Hire Purchase (HP) is essentially a loan secured against the asset. The purchaser (hirer) makes regular installments, including interest, to the finance company (owner). Ownership of the asset remains with the finance company until all payments are made, at which point ownership automatically transfers to the hirer. This structure means the hirer carries the asset on their balance sheet from the start, accruing depreciation. Tax benefits are typically claimed through capital allowances on the depreciated value. HP is often favored when the intention is to own the asset outright at the end of the agreement.

Finance Lease, also known as a capital lease, transfers substantially all the risks and rewards of ownership to the lessee (user). The lessee has the right to use the asset for the majority of its economic life, and the present value of the lease payments substantially equals the fair value of the asset. Although the lessee uses the asset as if they owned it, legal ownership technically remains with the lessor (finance company). Unlike HP, at the end of the lease term, the lessee typically has the option to purchase the asset for a bargain price, renew the lease, or return the asset to the lessor. The asset is recorded on the lessee’s balance sheet, and they depreciate the asset over its useful life. Lease payments are considered partly interest and partly repayment of principal. The interest portion is tax deductible.

Key Differences Summarized:

• Ownership: Hire Purchase leads to automatic ownership transfer upon completion of payments; Finance Lease usually offers an option to purchase at the end.
• Balance Sheet: Both are recorded on the balance sheet.
• Depreciation: Both allow for depreciation expense.
• Tax Implications: HP offers capital allowances; Finance Lease provides tax deductions on the interest portion of the lease payments.
• Risk and Reward: Finance lease transfers substantially all the risks and rewards of ownership to the lessee.

Choosing between HP and Finance Lease:

The optimal choice depends on individual circumstances. HP is suitable when ownership is the primary goal. Finance leases may be more attractive for companies wanting to manage cash flow effectively and potentially benefit from lower initial payments. Consult with a financial advisor to determine the most suitable option based on your specific financial situation, tax strategy, and business objectives.