Hire Purchase vs Finance Lease - The Real Differences

• Hire purchase: you own the asset at the end of the agreement. The finance company holds title during the term, but it transfers to you on the final payment.
• Finance lease: the finance company retains ownership throughout and at the end. You use the asset, but you never own it. At the end, you can sell the asset on behalf of the finance company and receive a rebate of proceeds, extend the lease on secondary rental terms, or return the asset.

• Hire purchase: capital allowances are available to the business from the point of purchase, as if you had bought the asset outright. For qualifying assets, the Annual Investment Allowance allows the full cost to be deducted against corporation tax in the year of purchase - potentially a significant upfront tax saving.
• Finance lease: the lender claims capital allowances (as they retain ownership). You can deduct the lease payments as operating expenses against your taxable income - a different but still tax-efficient treatment.

• Hire purchase: the asset and the corresponding liability are both on your balance sheet from day one. Your business appears to have both the asset and the debt.
• Finance lease: under IFRS 16 (which applies to most UK limited companies), most finance leases must now be recognised as a right-of-use asset and lease liability on the balance sheet. The days when finance leases were 'off balance sheet' are largely over for most UK businesses.

Finance lease typically has lower monthly payments than hire purchase on the same asset over the same term, because the lender retains some residual value at the end - they are only financing part of the asset's life rather than its full cost.

Hire purchase amortises the full asset value over the term, so monthly payments are higher, but you end up owning a tangible asset worth money at the end.

Choose hire purchase when:

• You want to own the asset long-term.
• The asset has strong residual value you want to capture.
• Capital allowances produce a significant tax saving in the purchase year.
• You want to sell the asset at the end of its life and receive the proceeds.

Choose finance lease when:

• You want lower monthly payments.
• You plan to refresh or upgrade the asset regularly.
• You are less interested in ownership than in using the asset at minimum cost.
• The asset depreciates quickly (technology, some vehicles).