Full Comparison Table
| Feature | Hire Purchase (HP) | Finance Lease |
|---|---|---|
| Ownership | Passes to you at end of term (after final payment) | Remains with the lender throughout; you have use |
| Deposit | Typically 0-20%; zero deposit available for strong credits | Often one or three monthly payments in advance; sometimes nil |
| Monthly Payment | Higher (covers principal + interest + ownership) | Can be lower - does not include full ownership cost |
| VAT Treatment | VAT charged upfront on the asset value | VAT charged on each monthly rental payment |
| Balance Sheet | Asset capitalised; liability recognised (finance lease treatment under IFRS) | Under IFRS 16 / FRS 102, most finance leases now also on-balance-sheet |
| Capital Allowances | You claim allowances (incl. Annual Investment Allowance) | Lender claims allowances; you expense lease payments |
| Early Repayment | Settlement available; charges typically 1-3 months' interest | Break costs can be higher; lender calculates outstanding liability |
| End of Term | Pay final option fee (often £1-£200), plant is yours | Return, re-lease or sell on lender's behalf |
| Who It Suits | Businesses wanting to own their fleet long-term | Businesses wanting flexibility, lower monthly cost, or planning to upgrade |
| Typical Term | 24-84 months | 24-84 months |
Hire Purchase Explained - With a Worked Example
How HP Works for Plant Finance
Hire Purchase
- You hire the plant during the agreement term
- Monthly payments cover the loan principal plus interest
- At the end, you pay a small option-to-purchase fee (commonly £1 to £200)
- The plant legally becomes yours - free to sell, keep or use as security
- From day one, you can claim capital allowances on the asset
- Lender takes a charge over the asset as security
Who HP is Best For
HP in Practice
- Plant operators who run kit until it's worn out - 10+ years
- Businesses wanting a clean asset register with owned equipment
- Directors who want to maximise capital allowances in year one
- Companies using the plant as security for further borrowing
- Businesses where the plant's residual value is high and they want to capture it
- Sole traders and partnerships where ownership simplicity matters
Worked Example: JCB 3CX Backhoe Loader - Hire Purchase
| Asset | JCB 3CX Backhoe Loader (2024 model, new) |
|---|---|
| Asset Value (inc VAT) | £66,000 (£55,000 + £11,000 VAT) |
| Deposit | £11,000 (20% of ex-VAT price) |
| Amount Financed | £44,000 |
| Term | 60 months (5 years) |
| HP Rate | 7.5% APR |
| Monthly Payment | approx £879 |
| Total Paid (60 payments + option fee) | approx £52,756 |
| Total Cost of Finance | approx £8,756 (interest only) |
| Capital Allowances Available | £55,000 in year one (subject to AIA) |
| End of Term | Pay £1 option fee - JCB is yours |
Indicative example only. VAT on the purchase is payable by the VAT-registered buyer and reclaimable in the normal way. Exact payments depend on lender pricing at time of application.
Finance Lease Explained - With a Worked Example
How Finance Lease Works
Finance Lease
- The lender buys the plant and leases it to your business
- You pay monthly rentals - VAT is charged on each rental
- Ownership never passes - lender retains title throughout
- Lender claims the capital allowances, not you
- Lease rentals are 100% allowable as a business expense
- At end of term: return, extend or arrange sale with rebate to you
Who Finance Lease is Best For
Finance Lease in Practice
- Businesses who plan to upgrade plant regularly (3-5 year cycles)
- VAT-registered businesses who prefer to spread VAT across payments
- Companies where P&L treatment of lease costs is preferred to balance sheet recognition
- Businesses financing high-tech or rapidly-depreciating plant
- Groups where tax relief via lease expenses is preferable to capital allowances
- Larger companies with sophisticated tax planning
Worked Example: Same JCB 3CX - Finance Lease Comparison
| Asset | JCB 3CX Backhoe Loader (2024 model, new) |
|---|---|
| Asset Value (ex-VAT) | £55,000 |
| Rentals in Advance | 3 (common for finance lease) |
| Term | 60 months (5 years) |
| Finance Lease Rate | 7.0% APR |
| Monthly Rental (ex-VAT) | approx £845 |
| Monthly VAT on Rental | approx £169 (reclaimable) |
| Total Rentals (60) | approx £50,700 ex-VAT |
| End of Term | Return asset; or extend at peppercorn; or sell - receive ~95% of sale proceeds as rebate |
| Tax Relief | Full rental deductible as business expense |
Indicative example only. VAT treatment, tax allowances and end-of-term options should be discussed with your accountant. Actual lease terms vary by lender.
When Operating Lease Makes Sense
Beyond HP and Finance Lease, an Operating Lease (or contract hire) is worth considering for certain plant types. Under an operating lease, the lender takes on the residual value risk - they set a guaranteed future value for the asset, and your monthly payment only covers the depreciation to that point, not the full cost of the asset.
This results in lower monthly payments than either HP or Finance Lease, but with more restrictions - typically on hours run, condition requirements, and no option to own the plant. Operating leases work best where:
- The plant has strong residual value supported by the market (MEWPs, scissor lifts, well-maintained telehandlers)
- You plan to replace the plant on a regular cycle (every 3-5 years)
- You want the lender to absorb the risk of a market value fall at end of term
- You want the simplest possible treatment - operating lease is off-balance-sheet under some accounting standards for qualifying short-term or low-value leases
For tower cranes, high-end MEWPs and technologically complex plant, operating lease is increasingly the product of choice among larger contractors. Lenders offering operating lease on plant include Lombard, Siemens Financial and specialist MEWP lessors.
Decision Matrix: 8 Questions to Help You Choose
Question
If yes → points to HP If yes → points to Lease
Do you want to own the plant outright at the end?
Yes - HP gives you full ownership for a small option fee Less important - consider Finance or Operating Lease
Do you plan to keep this plant for more than 5 years?
Likely HP - you'll want to own an asset you're running long-term Less likely - a shorter economic life favours lease flexibility
Do you want to maximise capital allowances this year?
HP lets you claim AIA on the full asset value in year one Finance lease allows lease expense deduction only - no AIA
Is cash preservation more important than asset ownership?
Less relevant - HP can be structured with low/zero deposit too Finance lease VAT spreading preserves cashflow better
Do you plan to upgrade the plant in 3-5 years?
Can still HP - sell/trade it on when done Finance lease end-of-term flexibility suits a planned upgrade cycle
Are you a sole trader or partnership?
HP is simpler - ownership is clean and unambiguous Finance lease works, but tax treatment may need advice
Do you need the asset on your balance sheet for lending purposes?
HP puts the asset on balance sheet from day one Under IFRS 16, most finance leases are also on-balance-sheet now
Is the plant high-tech or likely to depreciate quickly?
HP still works - you take the depreciation risk Operating lease shifts residual value risk to the lender - consider it
This matrix is a guide, not a substitute for specific tax or accounting advice. Your accountant will be able to advise on the optimal treatment for your business structure.