Hire Purchase (HP)
An asset finance arrangement where a business hires an asset and eventually owns it outright after making all agreed payments.
Hire purchase (HP) is one of the most common forms of asset finance. The lender purchases the asset and 'hires' it to the business over an agreed term with fixed monthly payments. Ownership transfers to the business at the end of the term, typically for a nominal £1 purchase fee.
For tax purposes, HMRC treats the business as the owner of a hire purchase asset from the date it is put into use. This means the Annual Investment Allowance (AIA) can be claimed in full in year one (up to the £1 million limit), rather than spreading the deduction over multiple years via writing-down allowances.
VAT on a hire purchase agreement is charged on the full asset value at the point of sale, not spread over the payments as it is with a lease. This requires the business to fund the VAT (typically 20% of asset value) upfront, though it is recoverable as input VAT for VAT-registered businesses.
Example
A construction company purchases a £150,000 excavator via hire purchase over 48 months. It claims the full £150,000 via AIA in year one and owns the excavator at the end of the term.
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