Commercial Finance Education
Hire Purchase
Spread the cost of business equipment and gain outright legal ownership at the end of the term.
What is Hire Purchase?
Hire Purchase is a traditional asset finance structure where the finance provider purchases the asset on your behalf and hires it to your business over an agreed repayment term. You make fixed monthly payments and, upon payment of a nominal option-to-purchase fee at the end of the agreement, full legal title and ownership transfers to your business.
How Ownership Works
During the active financing term, the finance provider holds legal title as security for the debt, while your business holds beneficial ownership and operational control. Once all scheduled instalments and the option fee are settled, legal title formally passes to your business.
Typical Use Cases
Acquiring plant and machinery with long economic lifespans (10+ years)
Financing commercial vehicles intended for permanent fleet integration
Assets where your business wishes to claim capital allowances against taxable corporation profits
Equipment with strong residual value that your business wants to retain permanently or resell later
Financial, Tax & Accounting Considerations
VAT Treatment
For VAT-registered businesses, 100% of the VAT on the total purchase price is usually payable upfront at agreement inception (or deferred to month 3 or 4 to align with your next quarterly VAT reclaim). Interest payments are exempt from VAT.
Accounting Treatment (IFRS 16 / UK GAAP)
The asset appears on your balance sheet from day one as a fixed asset, with a corresponding liability for the finance outstanding. Your business can generally claim capital allowances (such as the Annual Investment Allowance or Full Expensing for qualifying new plant and machinery). Interest charges can be offset as a financing expense in your profit & loss account.
Term Considerations
Typical repayment terms span 12 to 72 months (and up to 84 months for high-ticket plant). The finance term is generally matched to the asset’s anticipated operational lifecycle.
Residual Value & Balloon Risk
Because ownership transfers to you, the residual value risk and upside belong entirely to your business. If the asset retains high value at the end of term, that equity belongs to you. Balloon payments can be structured to lower monthly payments if agreed with the lender.
Commercial Strengths & Limitations
Commercial Strengths
- ✓Full legal ownership at the conclusion of the agreement
- ✓Fixed monthly payments unaffected by interest rate fluctuations
- ✓Claim capital allowances and full expensing where eligible
- ✓Retain 100% of secondary market value upon eventual equipment resale
- ✓No mileage or usage penalties at end of term
Commercial Limitations
- —Full VAT is required upfront or in early months, impacting near-term cash flow
- —Monthly instalments are typically higher than lease equivalents as you are amortising 100% of the capital cost
- —Your business carries full obsolescence risk if technology advances rapidly
- —The asset and liability must sit on your balance sheet
Worked Scenario: Construction Firm Acquires £120,000 Excavator
Commercial Outcome
The contractor claims £120,000 under the Annual Investment Allowance in Year 1, reclaims the full VAT on their next quarter, and owns the excavator unencumbered at month 60 for ongoing site operations.
Ready to apply for Hire Purchase?
Submit your asset quote and business details through one structured application. TAFM matches your criteria with active UK lenders.