Hire Purchase - Balance Sheet and P&L
When a company buys a commercial vehicle on HP, it recognises the asset at full purchase price on the balance sheet with a corresponding HP liability. Over time: the asset depreciates through the P&L as an operating expense; the HP liability reduces as capital is repaid; and the interest element of each HP payment goes through the P&L as a finance cost. The capital allowance claim for tax (AIA) is typically more accelerated than accounting depreciation, creating a deferred tax position.
Finance Lease - FRS102 Section 20
Under FRS102 Section 20, a finance lease is one where substantially all risks and rewards of ownership transfer to the lessee. For most commercial vehicle finance leases, this test is met. Accounting treatment: recognise a right-of-use asset and lease liability at the lower of fair value and present value of minimum lease payments; depreciate the ROU asset through P&L over the shorter of the lease term or useful life; allocate the finance charge on the lease liability across the term using the effective interest rate method.
Contract Hire / Operating Lease - Off Balance Sheet
A contract hire arrangement structured as a genuine operating lease under FRS102 remains off the balance sheet. You debit the monthly rental to the P&L as an operating expense. This matters for companies with bank covenants tied to gearing ratios, or for those presenting an asset-light model to investors.
| Structure | Balance Sheet | P&L Treatment | Capital Allowances |
|---|---|---|---|
| Hire Purchase | Asset + HP liability | Depreciation + finance interest | AIA in year 1 |
| Finance Lease (FRS102) | ROU asset + lease liability | Depreciation + finance charge | None - rental deduction |
| Contract Hire (Operating Lease) | Off balance sheet | Rental as operating expense | None - rental deduction |
Bank Covenant Implications for Haulage Companies
Many haulage companies operate with revolving credit facilities or term loans with gearing covenants (net debt to EBITDA or debt to equity). Taking a fleet onto the balance sheet via HP or finance lease significantly increases reported debt. Before choosing your finance structure, review your existing loan agreements with your CFO. A broker can help model the balance sheet impact of different structures across a fleet replacement programme.
IFRS 16 vs FRS102 - Which Applies?
IFRS 16 applies to listed companies and requires all leases (with limited exceptions) to go on the balance sheet as right-of-use assets - eliminating the operating lease off-balance-sheet treatment. Most UK SMEs and owner-managed haulage businesses use FRS102, which retains the operating vs finance lease distinction. FRS102 is under review and may be updated to align more closely with IFRS 16 in future.