At www.FinanceAcar.co.uk, we compare all forms of Car Finance, such as contract hire, contract purchase, hire purchase and business car loans. We will endeavor in this blog to explain the benefits and pitfalls of each financing method to help readers choose the best financing method according to their needs.
Contract Hire vs Hire Purchase – Tax and VAT Benefits
The general tax advantages for a business using hire purchase compared to car leasing are:
- If ownership is a priority (even though the business will not own the vehicle until the final payment after 3 or 4 years) hire purchase is an extremely cost effective method of borrowing;
- With hire purchase, because the vehicle is classified as an asset, the depreciation of the car can be written off against taxable profits.
- Businesses might be able to claim tax relief on the interest charged across the period of the hire purchase contract;
The general tax and VAT advantages for a business using car leasing (or contract hire) over hire purchase are:
- With car leasing/contract hire the monthly payment can be offset against taxable profits thereby reducing the tax a business pays;
- A vehicle on contract hire is an operating lease classified as "off balance sheet" which has accounting benefits as it improves the financial ratios (gearing) for a business. With hire purchase the vehicle is treated as an asset as soon as you take possession (even though you won’t own it until the final payment);
- With car leasing/contract hire, if the business is VAT registered it can reclaim 100% of the VAT if it is used exclusively for business or 50% on the finance element of the rentals if the vehicle is used privately.
It should be noted that businesses cannot claim any VAT relief for the purchase of a car (or via hire purchase) unless the car is used exclusively (100%) for business purposes or if the car is used mainly as a taxi or a car for a driving school.