The acquisition of assets - particularly expensive capital equipment - is a major commitment for
many businesses. How that acquisition is funded requires careful planning.
Rather than pay for the asset outright using cash, it can often make sense for businesses to look
for ways of spreading the cost of acquiring an asset, to coincide with the timing of the revenue
generated by the business.The most common sources of medium term finance for investment in
capital assets are Hire Purchase and Leasing.
Leasing and hire purchase are financial facilities which allow a business to use an asset over a
fixed period, in return for regular payments. The business customer chooses the equipment it
requires and the finance company buys it on behalf of the business.
Many kinds of business asset are suitable for financing using hire purchase or leasing, including:
- Plant and machinery
- Business cars
- Commercial vehicles
- Agricultural equipment
- Hotel equipment
- Medical and dental equipment
- Computers, including software packages
With a hire purchase agreement, after all the payments have been made, the business customer
becomes the owner of the equipment. This ownership transfer either automatically or on payment
of an option to purchase fee.
For tax purposes, from the beginning of the agreement the business customer is treated as the
owner of the equipment and so can claim capital allowances. Capital allowances can be a
significant tax incentive for businesses to invest in new plant and machinery or to upgrade
Under a hire purchase agreement, the business customer is normally responsible for maintenance
of the equipment.
The fundamental characteristic of a lease is that ownership never passes to the business
Instead, the leasing company claims the capital allowances and passes some of the benefit on to
the business customer, by way of reduced rental charges. The business customer can generally deduct the full cost of lease rentals from taxable income, as
a trading expense.
As with hire purchase, the business customer will normally be responsib