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.