Asset finance explained: hire purchase vs leasing

Asset finance spreads the cost of vehicles, machinery or equipment over monthly payments instead of paying the full price up front. The main choice is hire purchase, where you own the asset at the end, or leasing, where you rent it and hand it back. The choice changes who claims capital allowances, how VAT is charged and what sits on your balance sheet.

What is the difference between hire purchase and leasing?

The difference is ownership. Under hire purchase the asset becomes yours once you have made every payment; under a lease the finance company owns it throughout.

HMRC’s Business Income Manual at BIM45351 describes hire purchase as an agreement where “the seller retains ownership until the hirer has fulfilled the conditions specified in the agreement”. Title then passes automatically or for a set, often nominal, option price.

How does hire purchase work?

You pay a deposit, then fixed monthly instalments, and own the asset after the last payment. Each instalment has two parts:

• a capital element that pays for the asset; this is not a business expense but can qualify for capital allowances
• a hire or interest element that pays for the finance; this is a deductible business expense, spread over the agreement in line with your accounts

Under CA23310, section 67 of the Capital Allowances Act 2001 treats the hirer as the owner. That lets you claim allowances on payments “that have yet to be made as soon as the asset is brought into use”.

How does leasing work?

You pay rentals to use the asset for an agreed period, then return it, extend the lease or arrange a sale. Common types are finance leases, where you take most of the risks and rewards, and operating leases or contract hire, where the lessor keeps the residual value risk and may include maintenance.

GOV.UK says you cannot claim capital allowances on “things you lease (unless you have a hire purchase contract or long funding lease)”. Lease rentals are normally treated as a running cost of the business instead. Since 1 January 2026, leasing companies can claim the new 40% first-year allowance on new main-rate assets, which may feed through into rental pricing.

What tax relief can you get in 2026/27?

If you buy on hire purchase, the same allowances apply as for an outright purchase. These are the main rates for 2026/27.

The Annual Investment Allowance does not cover business cars, which have their own rules. GOV.UK confirms that on hire purchase you claim for all payments once you start using the item, “but not for the interest payments”. The main rate fell from 18% to 14% from 1 April 2026 for companies and 6 April 2026 for income tax businesses.

How is VAT charged?

On hire purchase, VAT is charged on the goods at the start, not spread over the instalments. HMRC’s VAT Finance Manual at VATFIN3120 says “the full amount of VAT on the goods is normally payable with the first instalment”, while the credit charge is exempt if properly disclosed.

If you are VAT registered, you can usually reclaim that VAT on your next return, subject to the normal rules. On a lease, VAT is charged on each rental, so the cash flow cost is spread. Business cars have separate VAT recovery restrictions, so check before signing.

Which applies to you?

Use this list to narrow the choice.

• If you want to own the asset and use it for many years, hire purchase fits, and you can claim capital allowances.
• If the asset loses value fast or you upgrade often, such as IT or some vehicles, a lease avoids the resale risk.
• If you are a company buying new plant and machinery, hire purchase lets you claim full expensing or the AIA on the whole cost once the asset is in use.
• If you want maintenance bundled in, contract hire or an operating lease may include it.
• If cash flow is tight and you are VAT registered, remember hire purchase VAT falls due up front.

For a vehicle, see our guide to buying a car through a limited company.

What to check before you sign

Run through these steps with any finance offer.

1. Compare the total amount payable, not just the monthly payment.
2. Confirm whether the agreement is hire purchase, a finance lease or an operating lease; the tax follows the legal form.
3. Check for a balloon payment, option fee or return conditions.
4. Ask whether a director must give a personal guarantee.
5. Ask your accountant how the agreement appears in the accounts.

Our guides to types of business finance and business loan interest rates cover the alternatives.

Frequently asked questions

Is hire purchase better than leasing for tax?

Neither is always better. Hire purchase lets you claim capital allowances, including the £1 million AIA, while lease rentals are normally deducted as a running cost.

Can I claim capital allowances on a leased asset?

Generally no. GOV.UK says you must own an item to claim, unless you have a hire purchase contract or a long funding lease.

Is the interest on hire purchase tax deductible?

Yes. The hire or interest element is a revenue expense, spread over the agreement as in your accounts. It does not qualify for capital allowances.

When is VAT paid on a hire purchase agreement?

The full VAT on the goods is normally payable with the first instalment. A separately disclosed charge for credit is exempt from VAT.

Can a sole trader use asset finance?

Yes. Hire purchase and leasing are open to sole traders, partnerships and companies, though full expensing is for companies only.