Hire Purchase (HP)
Hire purchase is the most straightforward commercial vehicle finance structure. You pay a deposit (typically 10%), then equal monthly instalments over an agreed term (24–60 months), and the vehicle is yours when the final payment is made. Legal title stays with the finance company during the agreement but transfers to you automatically on the final payment.
Best for: businesses that want to own their vehicles outright and claim the maximum tax relief via Annual Investment Allowance.
Tax: claim AIA on the full purchase price in year 1. Interest is deductible as a finance cost.
Balance sheet: asset and liability both appear on the balance sheet (FRS102).
Finance Lease
Under a finance lease, the lender buys the vehicle and leases it to you for an agreed term. You make monthly rental payments. At the end of the term, you do not own the vehicle - but you typically have the option to continue renting at a reduced peppercorn rental, or the lender sells the vehicle and pays you the majority of the sale proceeds (secondary rental).
Best for: businesses that want lower monthly payments than HP, do not need to own the vehicle, and prefer to deduct the full rental as an expense rather than claim capital allowances.
Tax: full monthly rental is deductible. No capital allowances. No AIA.
Balance sheet: on balance sheet as a right-of-use asset under FRS102 (if finance lease criteria met).
Contract Hire (Operating Lease)
Contract hire is the simplest arrangement from an operational perspective. You pay a fixed monthly rental for a set period (typically 24–60 months) and return the vehicle at the end. The rental often includes servicing, maintenance and tyres. You take no residual value risk - that sits with the leasing company.
Best for: businesses that want a predictable all-in cost, do not want to manage vehicle disposal, and prefer an off-balance-sheet arrangement.
Tax: full monthly rental is deductible as a business expense.
Balance sheet: off balance sheet if structured as a genuine operating lease under FRS102.
| Factor | Hire Purchase | Finance Lease | Contract Hire |
|---|---|---|---|
| Ownership at end | Yes | No (share of sale proceeds) | No |
| Monthly payment level | Higher | Lower | Lowest (often) |
| Capital allowances (AIA) | Yes | No | No |
| Tax relief method | AIA + interest deduction | Full rental deduction | Full rental deduction |
| VAT recovery (commercial vehicle) | 100% upfront | 100% on each rental | 100% on each rental |
| Balance sheet (FRS102) | On balance sheet | On balance sheet | Off balance sheet |
| Residual value risk | With you | With you (partially) | With lender |
| Early termination | Possible (settlement figure) | Complex - penalties likely | Penalties apply |
Which Structure is Right for Your Business?
The right choice depends on your tax position, cash flow requirements, balance sheet presentation needs and whether you want to own the vehicle at the end. Most haulage operators and owner-drivers choose HP for ownership and tax efficiency. Fleet operators and larger companies often prefer finance lease or contract hire for cash flow predictability and off-balance-sheet flexibility.