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Contract Hire vs Hire Purchase – Tax and VAT Benefits

7th May 2010
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The general tax advantages for a business using hire purchase compared to car leasing are:

  1. 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;
  2. With hire purchase, because the vehicle is classified as an asset, the depreciation of the car can be written off against taxable profits.
  3. 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:

  1. With car leasing/contract hire the monthly payment can be offset against taxable profits thereby reducing the tax a business pays;
  2. 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);
  3. 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.

A helpful tool that gives instant price comparison between car leasing, hire purchase and other car finance for 6,500 cars is available on


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Replies (7)

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By dpa123
26th Apr 2014 23:15

Car leasing offers
Another great site has some of the best offers around.

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By Jaxon Smith
19th May 2014 07:04

car rental
Brilliant post! I certainly like the way you’ve succinctly presented the information. Keep posting great reviews like this! Absolutely fantabulous! 

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By rai277
10th May 2015 07:54

car leasing

one of the great informative articles. i would also like to add that one can also get car loans for car hire and leasing

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By flexxilease23
02nd Apr 2016 10:45

car leasing UK.

FLEXXiLease is a 3 to 24 month car leasing UK.It provides a wide range of cars from leading brands like Audi, BMW, Citroen, Ford, Mercedes, Peugeot, Renault, Vauxhall and Volkswagen. And also its honest pricing, exceptional customer care and efficient delivery service make us the driver’s choice for flexible low cost motoring.

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By Dean Field
23rd Apr 2016 07:54


Thanks for taking the time to explain this matter, it really helped me.

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By MaisieWilliams
01st Jul 2020 12:28

If you are buying a used car then there are a lot of things that need to be checked before buying a second hand car, such as its history, which can reveal to you if the car was stolen or not, whether the car has any outstanding finance or not, written off and much more.

A used car's history is important and that is why it is always good to perform a free car history check before you commit to buy a used car.


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By Vehicle Check
16th Jun 2022 12:51

Buying a used car could not only save you money, but you’ll also have a better chance of getting the car you’ve always wanted. However, buying a pre-owned car can come with certain risks and costs. To save yourself any unnecessary long-term stress, it’s always good to do your online research and ask the right questions.

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