{"id":1233,"date":"2022-07-21T15:28:14","date_gmt":"2022-07-21T14:28:14","guid":{"rendered":"https:\/\/accountants247glasgowsouth.co.uk\/?p=1233"},"modified":"2022-07-21T15:28:16","modified_gmt":"2022-07-21T14:28:16","slug":"hire-purchase","status":"publish","type":"post","link":"https:\/\/accountants247glasgowsouth.co.uk\/?p=1233","title":{"rendered":"Hire purchase or lease rental: which is best for your business?"},"content":{"rendered":"\n<p>When setting up or growing your business, you\u2019ll need access to new equipment, tools and vehicles. This usually means accessing finance to either buy or lease these new assets.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"683\" src=\"https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/07\/hirepurchase-1024x683.jpg\" alt=\"hire or lease\" class=\"wp-image-1234\" srcset=\"https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/07\/hirepurchase-1024x683.jpg 1024w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/07\/hirepurchase-300x200.jpg 300w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/07\/hirepurchase-768x512.jpg 768w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/07\/hirepurchase-750x500.jpg 750w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/07\/hirepurchase-1140x760.jpg 1140w, https:\/\/accountants247glasgowsouth.co.uk\/wp-content\/uploads\/2022\/07\/hirepurchase.jpg 1200w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>It\u2019s easy to get confused between hire purchase (HP) and lease rental (LR). The names lenders use aren\u2019t always helpful, and the tax and VAT treatments are very different.&nbsp;<\/p>\n\n\n\n<p>To help you get a handle on these two very specific finance facilities, we\u2019ve outlined the main differences between HP and LR, and how they\u2019re both taxed.&nbsp;<\/p>\n\n\n\n<p><strong>What\u2019s the difference between HP and LR?<\/strong><\/p>\n\n\n\n<p>Both of these approaches give you (the business) the ability to make use of the asset. The machinery or equipment will be there in your workshop, warehouse or office for your employees to use as part of your operational processes.&nbsp;<\/p>\n\n\n\n<p>But there\u2019s a big difference when it comes to the legal ownership of the asset:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Hire purchase (HP)<\/strong>&nbsp;\u2013 with HP, you make regular payments to the HP provider and have immediate use of the asset. Once you\u2019ve completed the repayments, your business will be the owner of the asset. In short, you buy the asset over a period of time.<\/li><li><strong>Lease rental<\/strong>&nbsp;\u2013 with LP, you still make regular payments to the LR provider and can use the asset as soon as the lease agreement is completed. The difference is that you\u2019re only renting the asset, not buying it. At the end of the lease agreement, you won\u2019t be the owner of the asset (although you may be offered the chance to purchase the asset).<\/li><\/ul>\n\n\n\n<p><strong>How does buying or renting affect the tax you pay<\/strong><\/p>\n\n\n\n<p>But how does this affect the tax you save on the use of this particular bit of machinery, tech equipment or vehicle?<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Let\u2019s imagine that you want to buy a van for the business.&nbsp;<\/li><li>Buying a van \u2013 if you purchase this asset, then you claim back the VAT at the time of purchase. You can also claim the cost of the van through capital allowances, often in full in the year of purchase.<\/li><li>Renting a van \u2013 if you rent the asset, then you claim VAT each month against the rental invoices, and the rental payments are claimed as an expense throughout the rental period of the agreement.<\/li><\/ul>\n\n\n\n<p><strong>How can using HP or LR confuse the tax issue?<\/strong><\/p>\n\n\n\n<p>As we\u2019ve seen, buying or renting can have very different tax implications. Where the confusion can arise is when the asset is financed through a particular finance facility. The finance agreement may be HP or LR, and it isn\u2019t always clear which type is being used.<\/p>\n\n\n\n<p>These are the main tax differences:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Using HP to finance the asset<\/strong>&nbsp;\u2013 with HP, you can still claim the full VAT on the purchase price at the time of acquisition. The deposit paid must be at least equal to the VAT. The full cost of the van appears in your balance sheet as a fixed asset, and there\u2019s a liability shown for the future capital repayments (the purchase price including VAT, less any deposit paid). As each payment is made, the interest amount goes to expenses, and the capital element reduces the liability created.<\/li><li><strong>Using LR to finance the asset<\/strong>&nbsp;\u2013 With LR, VAT on the monthly payments is claimed as it arises, and the net payment is treated as an expense.<\/li><\/ul>\n\n\n\n<p><strong>Does the business own the asset?<\/strong><\/p>\n\n\n\n<p>To qualify as an HP agreement, the agreement has to confer ownership. So, the question to look at when examining the finance is \u2018Does the business own the asset?\u2019.<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>If there\u2019s an option to purchase at the end of the lease period for a significant balloon payment, then it\u2019s not a HP agreement and it will be treated as a LR transaction. If there\u2019s an option to purchase for a nominal sum, say \u00a31, such that it\u2019s extremely likely that the option will be exercised, then it will be HP.<\/li><li>If payments during the minimum lease period of at least 7 years (excluding interest) covers at least 80% of the cost of the asset, the agreement for these purposes is treated as an HP agreement.<\/li><\/ul>\n\n\n\n<p><strong>Choosing the finance path that\u2019s best for your cashflow<\/strong><\/p>\n\n\n\n<p>Knowing whether you\u2019re entering into an HP or LR agreement is important for two reasons.&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The choice of finance will affect your tax liabilities in the future.&nbsp;<\/li><li>The way you pay these taxes will have an impact on your cashflow position.<\/li><\/ul>\n\n\n\n<p>The timing of VAT claims and tax relief can have a significant effect on cashflow, so it\u2019s important to make sure that you know whether you\u2019re going down the HP or LR route \u2013 and that the correct treatment is followed by you and your tax advisers.<\/p>\n\n\n\n<p><strong>Helping you make the best finance decisions<\/strong><\/p>\n\n\n\n<p>If you\u2019re thinking of acquiring an asset through finance, please do come and talk to us first. If you can provide us with the documentation, we\u2019ll determine the correct VAT, corporation tax and accounting treatments to follow \u2013 saving you any worries further down the line.<\/p>\n\n\n\n<p>Whether you\u2019re purchasing a vehicle, equipment and other assets, <a href=\"https:\/\/accountants247glasgowsouth.co.uk\/contact-us\/\">talk to our south Glasgow<\/a> office about the impact of different options.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>When setting up or growing your business, you\u2019ll need access to new equipment, tools and vehicles. This usually means accessing finance to either buy or lease these new assets. It\u2019s easy to get confused between hire purchase (HP) and lease rental (LR). The names lenders use aren\u2019t always helpful, and the tax and VAT treatments [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":1234,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","jnews-multi-image_gallery":[],"jnews_single_post":{"subtitle":"","format":"standard","video":"","gallery":"","source_name":"","source_url":"","via_name":"","via_url":"","override":[{"template":"1","single_blog_custom":"","parallax":"1","fullscreen":"1","layout":"right-sidebar","sidebar":"default-sidebar","second_sidebar":"default-sidebar","sticky_sidebar":"1","share_position":"top","share_float_style":"share-monocrhome","show_share_counter":"1","show_view_counter":"1","show_featured":"1","show_post_meta":"1","show_post_author":"1","show_post_author_image":"1","show_post_date":"1","post_date_format":"default","post_date_format_custom":"Y\/m\/d","show_post_category":"1","post_reading_time_wpm":"300","zoom_button_out_step":"2","zoom_button_in_step":"3","show_post_tag":"1","show_prev_next_post":"1","show_popup_post":"1","number_popup_post":"1"}],"image_override":[{"single_post_thumbnail_size":"crop-500","single_post_gallery_size":"crop-500"}],"trending_post_position":"meta","trending_post_label":"Trending","sponsored_post_label":"Sponsored by","sponsored_post_name":"","sponsored_post_url":"","sponsored_post_logo":"","sponsored_post_desc":""},"jnews_primary_category":{"id":"58"},"footnotes":""},"categories":[58],"tags":[],"class_list":["post-1233","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.2 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Hire purchase or lease rental: which is best for your business?<\/title>\n<meta name=\"description\" content=\"Thinking of buying or renting a new business asset? 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