The legal ownership of assets acquired via hire purchase (HP) passes to the buyer on signing the contract. In contrast, a leasing agreement is where a company borrows an asset owned by someone else. This document covers these in detail, along with their tax treatment; difference between an operating and a finance lease; long funding leases; car leasing pre/ post-April 2009 and changes post April 2013.
Assets bought on hire purchase
If an asset (eg a machine) is acquired via a hire purchase (HP) agreement, legal ownership of the asset passes to the company at the date the contract is signed. The company will simply pay for the asset over a period of time, normally on a monthly basis.
Monthly HP repayments will contain both an interest and a capital repayment element. The capital element is not an allowable deduction. The interest is a deductible expense.
Capital allowances may be claimed on the capital cost of the asset from the date the HP contract was signed (see below).
Contrast an HP agreement with a leasing arrangement where a company is borrowing an asset owned by someone else.
Costs incurred in leasing or hiring an asset to be used in the trade will be allowable.
There are two ways in which a company will lease an asset: