What is Hire Purchase?

Hello! Welcome to ArbLease blog!

Last time we covered a topic that many people ask us, what a Finance Lease?

However, today, we’re focusing on another frequent question. What is ‘Hire Purchase’.

What is Hire Purchase?

Hire Purchase is a traditional product used to fund assets and machinery with a long shelf life such as an agricultural building. It’s sometimes known as a ‘Lease Purchase’, so don’t get confused, they’re exactly the same. The keyword is ‘Purchase’. You’re purchasing the asset.

It’s an agreement where you pay all the VAT up front as well as your capital deposit because most low rate/low-risk lenders do not view VAT as a deposit.

If your VAT registered you then have a small period of time to reclaim this VAT.  This is one of the reasons businesses who are not vat registered are often better placed to select a Finance Lease product.

Here’s an example, imagine you’re purchasing a £15,000 machine. You put a £1,000 deposit down and then let’s just say it’s £250 a month (that’s not exact figures but it’ll do for this example).

  • LEASE:

That’s £1,000 deposit plus VAT followed by £250/month plus VAT for a five-year finance agreement TOTAL UPFRONT DEPOSIT: £1200.00


That’s a £1000 cash deposit plus ALL the vat £3000 followed by £250/month for a five-year finance agreement – TOTAL UPFRONT DEPOSIT: £4000.00

Following this initial payment, your following instalments are spread over a fixed term which is 1 – 7 years depending on the asset you’re financing and the type of business you are.

At the end of the Hire Purchase contract, you will be charged by the finance company a final fee to take ownership of the asset. This is called an ‘Option to purchase fee’. This is usually about £100.00 which we highly recommend you pay as this is the moment you take full ownership from the finance company after the hire period… hence the product name 1. ‘Hire’ 2. ‘Purchase’.

*Tax relief: One for the account! However, the way we understand it… you get the full benefit upfront in that current year, similar to if you had paid for the asset outright. * Please speak to a qualified company for tax advice.

So there you go, that’s Hire Purchase alternatively known as ‘Lease Purchase’

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