Hire purchase lets your limited company spread the cost of a vehicle, machine, or piece of equipment: a deposit, fixed monthly payments, then a small option-to-purchase fee that passes ownership to the company. iwoca doesn't offer hire purchase, so what follows is the cost, the VAT and tax position, and when a lease or a loan fits better.

The deposit isn't your day-one number. On a £24,000 machine a 10% deposit is £2,400, but the £4,800 of VAT falls due at the start too, so £7,200 leaves the account before the asset has earned anything.

‍

What hire purchase is, and who owns the asset

Hire purchase is a finance agreement in which your company hires an asset, pays for it in instalments, and owns it at the end. The finance company holds legal title until the last payment is made.

That split between using an asset and owning it is the whole idea. Your company runs the machine or drives the van from the day it arrives, so it can earn while it's being paid for, and the lender keeps the title as its security. Hire purchase is often shortened to HP, and it's one of the main forms of asset finance. iwoca doesn't offer it, so we have no stake in whether you choose it.

‍

How a hire purchase agreement works

A hire purchase agreement has three parts: a deposit, usually 10% or more of the price; fixed monthly payments over 12–60 months; and a small option-to-purchase fee at the end that passes ownership to your company.

In order, an agreement runs like this:

1. You choose the asset and agree the price with the supplier.
2. You pay the deposit, and the lender pays the rest to the supplier and takes title to the asset.
3. You use the asset and make fixed monthly payments, each one part capital and part interest.
4. You pay the option-to-purchase fee at the end, and the asset becomes your company's.

Rates are often fixed, which makes the monthly cost predictable. Fixed doesn't mean cheap, though, and some lenders offer variable rates instead, so compare the total cost of credit rather than the monthly figure alone.

Some agreements replace part of the monthly cost with a large agreed final payment, a balloon payment, also called lease purchase. It lowers the monthly payment, raises the total interest, and leaves your company a lump sum to find at the end. That's a variant, not the standard shape of hire purchase.

‍

Hire purchase, conditional sale, and credit sale: when ownership passes

The three agreements differ in one thing: when ownership passes. Under hire purchase your company hires the asset and buys it at the end. Under a conditional sale it passes once the full price is paid, and under a credit sale it passes at the start.

That timing decides what your company can do with the asset, and what the lender can do if payments stop.

All three are defined in VAT Notice 701/49 on GOV.UK.

‍

What hire purchase costs: a worked example

On a £24,000 machine with a £2,400 deposit over 48 months at an assumed 9% a year, the monthly payment is about £538 and the total interest about £4,201. The number that catches companies out is £7,200, because that's what leaves the account on day one.

The figures are illustrative, not a quote. They assume a £24,000 machine excluding VAT, a 10% deposit, a 48-month term, and a 9% a year interest rate. Your lender's rate and fees will differ, and the option-to-purchase fee sits on top.

Most quotes lead on the monthly payment, and that's the easy part to plan for. The deposit and the VAT land together, in the same week the machine arrives and before it has made anything.

‍

VAT falls due at the start, not with each payment

VAT on a hire purchase agreement is charged on the full price at the start, not spread across the payments, so a VAT-registered company pays it up front and reclaims it on its next return.

Hire purchase is normally treated as a supply of goods for VAT, which is why the VAT arrives in one go. The interest is exempt where the agreement shows it separately, so your company doesn't pay VAT on the finance charge.

On a quarterly return, that can leave the money out of the business for up to three months. Some lenders will structure the deposit around the VAT or defer it, so ask before you sign.

The asset and the debt both go on your company's balance sheet, which means reported gearing rises. That's worth checking if your company has bank covenants to keep to.

‍

Capital allowances and the interest deduction

Once the asset is in use, your company can claim capital allowances on all the payments it will make under the contract, but not on the interest, which comes off profits separately as a finance cost.

GOV.UK puts it plainly: 'If you buy something under a hire purchase contract, when you start using the item you can claim for all payments you'll make under the contract. You cannot claim on the interest payments.' HMRC treats your company as the owner for allowances once it's entitled to the benefit of the contract and the asset is in use, even though legal title only passes at the end (Capital Allowances Manual CA23310).

Which allowance applies depends on the asset:

• The annual investment allowance covers up to £1 million of qualifying spending a year, unchanged since 1 January 2019.
• Full expensing lets a company paying Corporation Tax deduct 100% of the cost of qualifying new and unused plant or machinery bought on or after 1 April 2023. Cars don't qualify.
• Cars follow their own rates: 100% in the first year for a new and unused car at 0g/km, 14% a year for a car at 50g/km or less (18% before April 2026), and 6% a year above that.

These rules are as at 13 October 2026. Tax treatment depends on your agreement and your company's position, so check it with your accountant before you sign. This section is general information, not tax advice.

‍

Hire purchase, a lease, or a business loan

Hire purchase ends in ownership, a finance lease and contract hire don't, and a business loan buys the asset outright from day one. The choice turns on whether your company wants to own the asset, and who carries the risk that it loses value.

Four things change between the columns below: what you own at the end, when the VAT falls due, how the tax relief works, and who takes the hit if the asset is worth less than you hoped.

A finance lease suits a company that needs the asset but not the ownership, and contract hire suits one that swaps the asset every few years and wants servicing bundled into the payment. A business loan suits a company buying used or from a private seller, which many asset finance lenders won't fund. It also suits one that wants the asset free of any lender's claim from the start.

Hire purchase usually costs less than unsecured borrowing, because the asset is the lender's security. In return, the lender vets the asset and the seller, and it can take the asset back. That security is the real difference between asset finance and an unsecured business loan.

‍

Leaving a hire purchase agreement early

Ask the lender for a settlement figure: that's the way out of a business hire purchase agreement, and what it costs depends on the agreement rather than on any statutory right.

A limited company usually has no right to hand the asset back and walk away. The Consumer Credit Act 1974 protects an 'individual', which section 189 defines as a natural person, a partnership of two or three partners who aren't all companies, or an unincorporated body. A limited company is none of those, so voluntary termination and the half-the-price rule don't reach your company's agreement.

What does apply is whatever the agreement says. Check the early settlement terms before you sign, and ask how the lender works the figure out, because interest is often front-loaded. If your company sells or part-exchanges the asset, the dealer can usually settle the balance with the lender directly.

If payments look like becoming difficult, talk to the lender early. The lender owns the asset until the agreement ends, so it can take it back, and missed payments will show on your company's credit file.

‍

When hire purchase fits, and when it doesn't

Hire purchase suits a company that wants to own an asset it will keep for years and can cover the deposit and the upfront VAT. It fits less well if you'd rather swap the asset every few years, or if day-one cash is tight.

Both lists below assume the asset is genuinely for the business and that your company can afford the monthly payments. If that second part is in doubt, a smaller asset is usually a safer route than a longer term.

It could fit if:

• Your company will keep the asset well beyond the end of the agreement.
• The asset earns from the day it arrives, like a machine on a production line or a van on a round.
• You want to modify, rack, or brand the asset, which a lease usually won't allow.
• Your accountant confirms the asset qualifies for capital allowances.

It probably doesn't if:

• The deposit and the VAT would take more cash than your company can spare in one month.
• The asset dates quickly, so owning it at the end is worth little.
• You want maintenance and servicing included in the payment.
• You're buying used or from a private seller, which many asset finance lenders won't fund.

‍

Covering the deposit or the upfront VAT with an iwoca Flexi-Loan

Where the monthly payments work but the day-one cash doesn't, borrowing that cash separately is one option. It's also the one point at which iwoca can help, because iwoca doesn't offer hire purchase.

Take the £24,000 machine above. The deposit and the VAT come to £7,200, due the week the machine arrives, and the £4,800 of VAT only comes back on the next quarterly return. That's a cash flow problem rather than an affordability one: for up to three months the machine is earning, but the cash is with HMRC and the lender.

An iwoca Flexi-Loan is a business loan with flexible repayment options, and it's the repayment side that fits a gap like this one. We only charge interest on what's outstanding, for the days you use it, and there are no early repayment fees. So your company can borrow the day-one cash, pay the VAT share back as soon as the return clears, and have paid interest for a few months rather than a full term. Loans run from £1,000 to £1 million, for any business purpose, including an asset deposit, the upfront VAT, or a used machine an asset finance lender won't fund.

The timing matters as much as the money, because the cash has to be there in the same week as the machine. A decision is made within 24 hours, but it might be longer depending on the complexity of the request.

A loan isn't automatically the cheaper route. Hire purchase is secured on the asset, so its rate is usually lower, and borrowing for the deposit leaves two agreements running at once. Compare the total cost of both before you decide.

‍

What lenders check, and how to apply

Lenders look at your company's filed accounts, how long it has traded, the asset itself, and its credit record. Many ask a director to guarantee the agreement personally, especially where the company is new.

Expect to be asked for:

• Filed accounts, plus management accounts or forecasts if the agreement is large.
• Recent business bank statements, so the lender can see what your company can afford.
• Details of the asset: what it is, how old it is, and who's selling it.
• Your company's credit record, including any county court judgments.

A newer company can still be funded, usually on tighter terms: a larger deposit, or a director's guarantee. Some lenders publish their full process, including credit searches on everyone connected to the business, so it's worth reading before you apply.

You can apply through a bank, a specialist asset finance company, a broker, or the supplier or manufacturer of the asset. Rates and fees vary a lot between them, so get more than one quote and compare the total cost of credit, the deposit, and any documentation fee. For machinery and kit rather than vehicles, the market is mostly specialists: equipment finance providers rather than high-street banks.

‍

Frequently asked questions about hire purchase

What can my company buy on hire purchase?

Hire purchase covers assets your company will keep and use: vans and other commercial vehicles, machinery, catering equipment, gym equipment, and IT hardware.

Lenders set limits on how old an asset can be and how long it should last, so an older machine is harder to fund than a new one.

‍

How long does hire purchase take to arrange?

Arranging hire purchase usually takes days rather than hours, because the lender has to check your company and the asset before it buys it. A small agreement through a dealer can be quicker, and a large one through a bank takes longer.

‍

Does hire purchase affect my company's credit score?

A hire purchase agreement is credit, so it shows on your company's credit file: paying on time helps the score, and missed payments damage it. iwoca reports Flexi-Loan repayments to Experian and Equifax every month, and many asset finance lenders report to the credit reference agencies too.