A contract a customer enters to purchase an asset by way of instalments.
Typically a deposit is paid then instalments paid over a fixed period of time with ownership at the end.
Hire purchase contracts have been in existence for a very long time and traditionally used to purchase equipment such as;
- Forklift Trucks
- Plant and Machinery
- Farm Machinery
Usually, a deposit is paid plus the vat then the balance spread over fixed payment to include interest charges.
Tax Treatment of Hire Purchase
The assets sit on the company balance sheet and are depreciated over time in line with writing down allowances.
More information can be found on the HMRC website as different assets need to be treated in line with government and accounting policies.
If I purchase an asset for £10,000 and the writing down allowances in Year 1 is 40% then you are allowed to write off £4,000 against taxable profits.
Care needs to be given to the asset and how it is treated a good accountant or auditor can verify this however the information it is also freely available on HMRC website.
Some things you didn’t know
Regulated hire purchase contacts are covered by several laws to protect the customer.
One of which allows you to terminate a contract providing you have paid over 50% of what is due. The termination is written on your credit file however it cannot be used in a negative way for any finance requirements in the future.
You can use hire purchase to finance many types of assets from cars to office furniture.