BUY, HIRE PURCHASE OR LEASE?
OR LEASE?
HIRE PURCHASE
BUY
OR LEASE?
HIRE PURCHASE
BUY
The decision to buy, hire purchase, or lease an asset will generally depend on the financing available to your business.
There are different treatments for tax and accounting purposes, depending on the type of finance contract entered into, and these will need to be considered together with the VAT treatment.
Buy
This section covers outright purchase for cash or by bank loan, etc.
Accounting treatment
The asset is capitalised in the balance sheet and an annual charge for depreciation is deducted as an expense in the profit and loss account, which in turn reduces the value of the asset in the balance sheet.
The annual depreciation charge is calculated in accordance with accounting standards, based on the useful economic life of the asset and the residual value.
Tax treatment
Depreciation is not allowed for tax purposes, but capital allowances are available. The Annual Investment Allowance (AIA) now provides 100% relief on qualifying plant and equipment (not cars) up to £1,000,000 a year, made permanent from 1 April 2023. Any expenditure over this enters either the main pool (18% writing down allowance) or the special rate pool (6% writing down allowance) — these replaced the old 10%/20% pool rates some years ago.
Companies (not sole traders or partnerships) can also claim Full Expensing — a 100% first-year allowance on qualifying new main rate plant and machinery, with no upper limit, available alongside the AIA since April 2023.
Any business that invests in certain energy-saving or environmentally beneficial equipment may still claim a 100% First Year Allowance, though the qualifying list has narrowed over the years and is worth checking for specific equipment.
Cars are treated separately from other assets and don't qualify for AIA or Full Expensing. Only new, unused zero-emission cars qualify for a 100% First Year Allowance. Cars with CO2 emissions of 50g/km or less go into the main pool at 18% WDA, and cars with emissions above 50g/km go into the special rate pool at 6% WDA — the emissions threshold was tightened considerably from the old 110g/km and 160g/km bands referenced here.
New, unused zero-emission vans continue to qualify for a 100% capital allowance, now on an ongoing permanent basis rather than tied to the original 2010 introduction date.
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VAT
Unless the asset is a car, the VAT shown on the supplier's invoice will generally be recoverable by the purchaser, if he or she is registered. Buying at the beginning of a VAT period will entail a wait of three months or more to recover the tax. VAT on cars is recoverable only in very rare circumstances.
Hire purchase
An HP agreement usually includes an option to purchase at the end of an initial period. Payment of this nominal fee transfers title of the asset and brings the legal agreement to an end.
Accounting treatment
The asset is treated as if it had been purchased. It is, therefore, capitalised in the balance sheet and depreciation is provided on an annual basis.
The obligation to pay future instalments is recorded as a liability in the balance sheet. The payments are apportioned between a finance charge and a reduction of the outstanding liability. The total finance charge should be allocated to accounting periods during the HP term and is shown as an expense in the profit and loss account.
Tax treatment
Capital allowances are available on the same basis as an outright purchase — see the Buy section above for current AIA, Full Expensing and car emissions figures. The finance charge in the accounts is normally allowed against tax.
VAT
VAT charged by the finance company will be payable with the initial instalment. There will be a delay of up to four months in recovering this from HM Revenue & Customs. In the case of a car, most businesses will be unable to recover any of the VAT.
Finance leases
A finance lease typically has a primary period for a fixed period at full cost, followed by a secondary period, usually of an indefinite length, at a very low cost.
Accounting treatment
The asset is treated as if it had been purchased. It is therefore capitalised in the balance sheet and depreciation is provided on an annual basis. The obligation to pay future rentals is recorded as a liability in the balance sheet.
The rents payable are apportioned between a finance charge and a reduction of the outstanding liability. The total finance charge should be allocated to accounting periods during the primary lease term and is shown as an expense in the profit and loss account.
Tax treatment
Where accounts have been prepared in accordance with accounting standards, the accounting treatment will be acceptable for tax purposes and no adjustments to profit need be made. Where accounts have not been prepared in accordance with accounting standards, for tax purposes the rentals are deductible in computing profits under the accrual concept. The rentals are, therefore, allocated over the period of the lease.
Where the asset is a car with CO2 emissions exceeding 50g/km (reduced from the previous 160g/km threshold), there is a flat rate disallowance of 15% on the amount of rental payments allowed for tax purposes.
Capital allowances are not available.
VAT
VAT charged by the finance company will be payable with the initial instalment and each subsequent rental. There will be a delay of up to four months in recovering this from HM Revenue & Customs. In the case of a car, most businesses will be able to recover 50% of the VAT.
Operating leases
An operating lease is where an asset is rented for a period, not necessarily fixed, and returned to the owner at the end of the period. Contract hire is a typical form of operating lease.
Accounting treatment
The asset is not capitalised; the rental payments are charged on an acceptable basis over the lease term to the profit and loss account.
Tax treatment
The accounting treatment is an acceptable treatment for tax purposes, where the accounting standard has been applied. No adjustments to profits, therefore, need be made.
Where the asset is a car with CO2 emissions exceeding 50g/km, there is a flat rate disallowance of 15% on the amount of rental payments allowed for tax purposes.
Capital allowances are not available.
VAT
Each rental or instalment will have VAT added so that the VAT cost is spread throughout the period of the agreement.
Where the asset is a car, only 50% of the VAT on the leasing charges can be reclaimed. If identified separately, the VAT on any maintenance element of the contract can be reclaimed in full.
The disposal proceeds of leased cars will be VAT inclusive.
Summary: Buy, Hire Purchase or Lease — Treatment Comparison
| Method | Accounting Treatment | Tax Treatment | VAT Treatment |
|---|---|---|---|
| Buy (cash or bank loan) | Asset capitalised in the balance sheet; annual depreciation charged in the profit and loss account. | Depreciation not allowed for tax. AIA gives 100% relief up to £1,000,000/year (plant & equipment only, not cars). Excess goes to main pool (18%) or special rate pool (6%). Companies can also claim Full Expensing (100%, uncapped, new main rate plant & machinery). Cars: 100% FYA for new zero-emission cars only; 18% WDA if ≤50g/km CO2, 6% WDA if >50g/km. Zero-emission vans: 100% allowance, ongoing. | VAT on invoice generally recoverable if VAT-registered (except cars — recoverable only in rare circumstances). Buying early in a VAT period can mean a 3+ month wait to recover. |
| Hire Purchase | Treated as a purchase: capitalised, depreciated annually. Future instalments recorded as a liability; payments split between finance charge and liability reduction. | Capital allowances available on the same basis as an outright purchase (see Buy column). Finance charge normally allowable against tax. | VAT charged by the finance company payable with the initial instalment; up to a 4-month delay to recover. For cars, most businesses cannot recover any VAT. |
| Finance Lease | Treated as a purchase: capitalised, depreciated annually. Future rentals recorded as a liability; rentals split between finance charge and liability reduction. | Accounting treatment generally accepted for tax. Cars with CO2 >50g/km: flat 15% disallowance on rental payments (threshold reduced from 160g/km). No capital allowances available. | VAT payable with initial instalment and each rental; up to a 4-month delay to recover. For cars, most businesses can recover 50% of the VAT. |
| Operating Lease | Asset not capitalised; rental payments charged to the profit and loss account over the lease term. | Accounting treatment generally accepted for tax. Cars with CO2 >50g/km: flat 15% disallowance on rental payments. No capital allowances available. | VAT spread across rentals/instalments. For cars, only 50% of leasing VAT reclaimable (maintenance element, if separately identified, fully reclaimable). Disposal proceeds of leased cars are VAT-inclusive. |
Figures correct as of July 2026. Capital allowances and car emissions thresholds change frequently – please check with us before making significant asset finance decisions.
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Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd. Registered in England No. 05770414
