Asset finance: VAT & accounting — Hire Purchase (HP) vs Leases

Summary (Knowledge Bomb): In the UK, VAT and accounting for asset finance hinge on economic substance and contract wording. Hire Purchase (HP) is commonly treated as a supply of goods (VAT charged on the sale; asset and liability on the buyer’s balance sheet). Leases are usually supplies of services — VAT is charged on rental payments where the lessor is VAT-registered — and, following IFRS 16/UK GAAP updates, most lessee leases now create a right-of-use asset and lease liability on the balance sheet. Read on for practical VAT rules, accounting entries, worked examples and decision factors so you can choose the right option for cashflow, tax and covenant impact.

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Introduction / Key takeaways

Choosing HP or a lease affects three things most business owners care about: VAT cashflow (when VAT is due and who can recover it), accounting and balance-sheet presentation (which affects leverage and covenants), and tax relief (capital allowances). In short:

• VAT: HP is often treated as a sale of goods (VAT on the purchase price); most leases incur VAT on rental payments rather than an upfront VAT charge.
• Accounting: HP normally puts the asset and financing liability on the buyer’s balance sheet. Post-IFRS 16/FRS changes, most leases will also create a right‑of‑use asset and lease liability for lessees.
• Tax: Capital allowances usually follow legal/beneficial ownership — often the buyer in HP and the lessor for many leases.

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What we mean by Hire Purchase and Leases

Hire Purchase (HP) — HP is an arrangement where the customer hires an asset and pays by instalments with the intention (or automatic result) of ownership transfer at or after the final payment. Economically this is a purchase financed by the finance company.

Leases — A lease is a contract allowing use of an asset for a period in exchange for rental payments. Two useful commercial categories:

• Finance lease — transfers substantially all risks/rewards of ownership to the lessee (close to HP economically).
• Operating lease — lessor retains material risks and rewards; the lessee has usage rights and pays rentals.

Typical assets: vans and trucks, plant & machinery, manufacturing equipment, IT hardware. UK Business Loans introduces you to lenders and brokers who arrange both HP and leases. How it works — or Get Quote Now — Free Eligibility Check.

VAT: practical treatment and differences

VAT outcome depends primarily on contract wording, whether the supplier/lessor is VAT‑registered, and whether ownership (legal title) transfers. HMRC guidance should be checked for edge cases.

VAT on Hire Purchase

HP is commonly treated as a supply of goods. Where a dealer sells the asset and offers HP finance, VAT is normally charged on the full sale price at the point of supply — the buyer (if VAT-registered) can recover input VAT subject to normal partial‑exemption and business‑use rules. If a finance company effectively makes the supply (buying from dealer then selling on HP), VAT is due on that supply.

Where second‑hand goods and the dealer margin scheme applies, VAT recovery and charging may follow the margin scheme rules — consult your VAT adviser if the margin scheme is used.

VAT on Leases (rentals)

Leases are ordinarily treated as supplies of services (rentals). If the lessor is VAT‑registered and the supply is standard‑rated, VAT is charged on each rental invoice. For finance leases that effectively transfer ownership, HMRC may treat the arrangement similarly to a sale with VAT due in a more upfront manner — again, contract substance matters.

Recovering VAT

A VAT‑registered business can normally reclaim VAT on purchases used for business. Key caveats:

• Passenger cars have special VAT recovery rules — 50% or 100% recovery depends on usage and scheme (e.g. leasing certain cars usually allows 50% recovery unless exclusively business use can be evidenced).
• Partial‑exemption businesses must allocate input VAT according to their recovery method.
• Imported equipment, margin schemes and cross‑border leasing bring additional VAT considerations.

Practical VAT examples

• VAT‑registered builder buys a digger via HP: VAT likely charged on the sale; builder reclaims VAT on purchase if used for taxable business activities.
• SME leases a van: VAT charged on each rental invoice; lessee recovery depends on car rules and business-use evidence.

Important: precise VAT treatment depends on contract wording — always confirm with your broker, supplier and VAT adviser.

Accounting treatment under UK GAAP / IFRS

Accounting classification affects balance sheet, profit & loss and key ratios.

Hire Purchase accounting

Under UK GAAP and IFRS principles, HP where the buyer obtains substantially all benefits of ownership is treated like a purchase financed by debt. The purchaser recognises:

• The asset at the present value (PV) of the payments (or fair value).
• A corresponding liability for the finance element (PV of future payments).
• Payments split between interest (finance cost) and capital reduction; asset is depreciated.

Journal (simplified): recognise asset and liability; record depreciation and interest charge each period; split repayment cashflow into interest and principal.

Lease accounting — lessee view

IFRS 16 (and similar FRS rules) require most leases to be recognised as a right‑of‑use (ROU) asset and a lease liability (PV of lease payments). The lessee:

• Recognises ROU asset and lease liability on balance sheet (except short-term/low-value exceptions).
• Charges depreciation on the ROU asset and interest on the liability — this typically increases EBITDA relative to operating-lease accounting but increases finance costs.

Lessor accounting & operating leases

Lessor accounting remains split between finance‑lessor (recognises a receivable) and operating‑lessor (keeps the asset and recognises rental income). Historically operating leases could be off-balance-sheet for lessees, but accounting standards have tightened for lessees.

Tax vs accounting

Accounting recognition is not the same as tax treatment. Capital allowances and taxable profits follow tax law: frequently, the owner (lessor vs buyer) claims allowances. That affects who benefits from tax relief — important in structuring deals.

Practical decision factors — VAT, accounting and business outcomes

Choose HP or lease depending on:

• VAT cashflow and recoverability needs (immediate VAT recovery on HP sale vs VAT spread across rentals).
• Balance‑sheet impact and covenant considerations (HP and most leases create assets & liabilities; structure affects EBITDA and gearing).
• Tax/capital allowance position (who claims allowances).
• Flexibility, maintenance obligations and upgrade/replacement plans.
• Residual value risk — borne by lessor in many leases, by buyer in HP.

Quick comparison — HP vs Lease (VAT & Accounting)

Feature	Hire Purchase	Lease (Operating / Finance)
VAT	Often VAT on sale up front; buyer can reclaim if registered	VAT typically charged on rentals; recoverability per business‑use and car rules
Accounting (lessee)	Asset & liability on balance sheet; depreciation + interest	IFRS 16: ROU asset & lease liability for most leases; depreciation + interest
Tax / allowances	Buyer typically claims capital allowances	Lessor often claims allowances; lease rentals deductible for lessee

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Worked examples

Example A — Van by HP (VAT-registered company)

Price £30,000 + VAT (£6,000). Under HP: VAT charged on sale at £6,000 upfront (or at point of supply). If VAT-registered and used for business, the purchaser reclaims the £6,000 input VAT, improving cashflow only if arranged via dealer credit/VAT accounting. Accounting: recognise asset £30,000 and liability for finance; depreciate asset; split payments into interest/principal. Tax: purchaser likely claims capital allowances.

Example B — Fleet on operating lease

Monthly rentals £800 + VAT. VAT charged on each monthly rental; VAT can be reclaimed depending on car rules (often 50% for mixed-use passenger vehicles). Accounting (lessee): under IFRS 16 the lessee recognises ROU assets and lease liabilities (unless short-term/low-value exemption), depreciates ROU asset and records interest — rentals convert from operating expense to depreciation + interest.

Which wins? If immediate VAT recovery is a priority and the buyer is VAT-registered with taxable supplies, HP often helps. If you want flexibility, maintenance and residual-value protection, a lease may be preferable — but check balance‑sheet and tax implications first.

How UK Business Loans helps

UK Business Loans introduces growth businesses seeking asset finance (typically loans and finance from around £10,000 upwards) to specialist lenders and brokers who understand VAT, accounting and tax implications.

• Complete a short enquiry form — takes under 2 minutes.
• We match you to lenders and brokers with relevant expertise (HP, finance lease, operating lease).
• Receive fast, no‑obligation quotes and clear explanations of VAT/accounting consequences from the specialist broker or lender.

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For more on typical products we introduce, see our asset finance overview and solutions for equipment and vehicles: asset finance.

Frequently asked questions

Will VAT always be charged upfront on Hire Purchase?

No — HP is frequently treated as a sale so VAT can be charged on the sale price. However, treatment depends on whether the seller or finance company is the supplier and on contract wording.

Can I reclaim VAT on leased vehicles?

Possibly — VAT recovery on vehicles has strict rules. For many passenger vehicles VAT recovery is restricted; commercial vehicles and equipment have clearer recovery positions. Seek VAT specialist advice.

Does IFRS 16 put every lease on the balance sheet?

IFRS 16 requires most lessee leases to be recognised on-balance-sheet as ROU assets and lease liabilities, with exemptions for short-term and low-value leases.

Who claims capital allowances on leased assets?

Capital allowances generally follow ownership for tax purposes. For many leases the lessor retains ownership and claims allowances; for HP the effective owner (buyer) typically claims them. Confirm with your tax adviser.

Do you provide VAT or accounting advice?

We introduce you to expert brokers and lenders. We do not provide regulated tax or accounting advice — always consult your accountant or tax specialist for firm guidance.

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Compliance, transparency & next steps

UK Business Loans acts as an introducer connecting businesses with lenders and brokers. We do not lend or provide regulated financial advice. Any product offers, suitability checks and terms are provided by the lender or broker you are introduced to. Always review terms and seek independent VAT and accounting advice before signing finance documentation.

Ready to get tailored options? Complete our short enquiry and we’ll match you with brokers and lenders who can explain VAT, accounting and tax implications for your situation: Get Quote Now — Free Eligibility Check

1. What’s the difference between hire purchase (HP) and a lease for asset finance?
HP is typically treated as a financed purchase where you effectively become the owner (VAT on the sale, asset and liability on your balance sheet), whereas leases are rental agreements where VAT is charged on rentals and, post-IFRS 16, most lessee leases create a right-of-use asset and lease liability.

2. Will VAT always be charged upfront on a hire purchase?
Not always, but HP is commonly treated as a supply of goods so VAT is often due on the sale price (subject to who the supplier is and contract wording), so check your agreement and HMRC guidance.

3. Can my business reclaim VAT on leased vehicles or equipment?
If you’re VAT-registered you can usually reclaim VAT on leased assets used for taxable business purposes, though strict rules (especially for passenger cars and partial-exemption businesses) can limit recovery.

4. How does IFRS 16/UK GAAP change lease accounting for my business?
IFRS 16 requires most leases to be recognised on the lessee’s balance sheet as a right-of-use asset and lease liability, with only short-term and low-value leases exempted.

5. Who claims capital allowances on assets bought via HP versus leased assets?
Capital allowances typically follow tax ownership — the purchaser under HP usually claims them, while the lessor generally claims allowances for many lease arrangements.

6. Which is better for cashflow and covenants: HP or leasing?
HP can give immediate VAT recovery and ownership benefits but may increase leverage, while leasing can spread VAT and shift residual risk to the lessor, so choose based on VAT cashflow needs, covenant impact and maintenance or replacement flexibility.

7. Will submitting an enquiry to UK Business Loans affect my credit score?
No — completing our short enquiry form is not a loan application and will not affect your credit score; lenders may carry out checks only if you proceed with an offer.

8. Is UK Business Loans a lender and do you charge for your service?
No — we are a free introducer that matches you with trusted brokers and lenders; we do not lend money or charge business owners for the matching service.

9. How quickly will I be matched with lenders or brokers after submitting the enquiry form?
You’ll typically receive responses from suitable lenders or brokers within hours, and our platform aims to match you quickly based on your business type and funding needs.

10. Are the lenders and brokers you introduce FCA‑regulated and trustworthy?
Yes — we work with reputable, UK-based brokers and lenders who operate under FCA guidelines and are selected for sector expertise and transparency.