Guide
Hire purchase vs finance lease
The two most common ways UK businesses fund equipment, vehicles and machinery. Both spread the cost, but they differ on ownership, VAT, tax and how they appear in your accounts. Here's how to choose.
Last updated: October 2026
The short answer
- Choose hire purchase if you want to own the asset and keep it for a long time.
- Choose a finance lease if you want to use the asset without owning it, and prefer VAT spread across monthly payments.
How hire purchase works
The lender buys the asset and you pay for it in instalments, usually after an initial deposit. Once the final payment and a small option-to-purchase fee are paid, ownership passes to you. For tax you are treated as the owner from the start.
How a finance lease works
The lender buys and keeps ownership of the asset, and you pay rentals that cover most or all of its cost over the primary period. At the end you can usually keep using it for a small "peppercorn" rental, or sell it to a third party on the lender's behalf and receive most of the proceeds. You never take legal ownership.
Side by side
| Hire purchase | Finance lease | |
|---|---|---|
| Ownership | Yours at the end | Stays with the lender |
| VAT | Usually paid up front on the full price | Added to each monthly rental |
| Tax relief | Capital allowances plus relief on interest | Generally follows the rental cost in your accounts |
| Balance sheet | Asset and liability shown | Usually shown as an asset and liability too |
| End of term | Pay the option fee and keep it | Keep renting cheaply, or sell and share proceeds |
| Best for | Long-life assets you want to keep | Assets you want to use, not own, or VAT-sensitive cash flow |
Questions to ask before you choose
- Do you want to own the asset outright at the end?
- Can you fund the VAT up front, or would you rather spread it?
- Are you making profits that capital allowances could reduce this year?
- How long will the asset be useful to your business?
Common questions
What is the main difference between hire purchase and a finance lease?
With hire purchase you own the asset once the final payment and any option-to-purchase fee are paid. With a finance lease the lender keeps ownership. You use the asset for its working life, and at the end you usually keep renting it for a small fee or sell it and receive most of the sale proceeds.
How is VAT treated?
On hire purchase, VAT on the full price is normally payable up front, though VAT-registered businesses can usually reclaim it. On a finance lease, VAT is added to each rental, which spreads the cost and can help cash flow.
Which is better for tax?
Under hire purchase you are treated as the owner, so you can usually claim capital allowances, such as the Annual Investment Allowance, plus tax relief on the interest. Under a finance lease, tax relief generally follows the rental cost as shown in your accounts. The better option depends on your profits and plans, so check with your accountant.
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This guide is general information, not financial, tax or accounting advice. Tax treatment depends on your circumstances and may change. Speak to your accountant before deciding.