Many businesses use vehicles, and as you begin to explore your options, two terms frequently arise: leasing and hire purchase. While they may sound similar, there are key differences between them, particularly regarding ownership, costs, and flexibility. So let’s explore the question Lease v. Hire Purchase.
Leasing
Leasing a car is similar to renting, but it usually lasts longer. You don’t own the car; instead, you’re paying for the right to use it.
Here’s how it works: You select a car, agree on a lease term (typically between 2 to 5 years), and then pay a fixed monthly fee. At the end of the lease period, you simply return the car. It’s that straightforward.
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Advantages
Predictable costs, low upfront payments, and maintenance coverage are included with package options. Additionally, you get to drive a relatively new vehicle.
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Disadvantage
You don’t build equity in the car. There are usually mileage limits, and going over them can cost you. And because you’re handing the car back, you get no asset at the end.
Hire Purchase (HP)
Hire purchase is essentially a way to buy a car through instalments. Typically, you’ll start by paying a deposit, which is often around 10% of the car’s price. After that, you’ll make fixed monthly payments over the course of several years. Once you’ve made the final payment, the car becomes yours.
So, while you are “hiring” the car during the payment period, there’s a clear path to ownership.
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Advantages
If you plan to keep the car long-term, this is an easy way to buy it without paying the full amount upfront. Additionally, there are no mileage restrictions.
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Disadvantages
Monthly payments are typically higher than those associated with leasing. Since the business eventually owns the car, you are responsible for its resale value, maintenance, and depreciation.
Which is right for your business?
The choice between leasing and hire purchase depends on your cash flow, tax strategy, and how long you plan to use the vehicle.
Leasing is ideal for companies that frequently update their fleets and prefer low-risk, predictable costs. On the other hand, hire purchase is a better option if you’re aiming for long-term value and ownership of the vehicle.
If you want to learn more about how to maintain a healthy cash-flow for your business, why not have a look at our useful tips here.
What are different tax implications between Leasing and Hire Purchase?
Leasing
If you lease a company car, the contract type matters. We’ll focus on Contract Hire, the most common form of leasing.
Corporation Tax Relief
- Yes, you can usually deduct the full lease payments as a business expense against your taxable profits, provided the car is used for business purposes. Relief is restricted if the car emits more than 50g/KM.
VAT
- You can reclaim 50% of the VAT on the lease payments if the car is used for both business and private use.
- If the car is used 100% for business, you may reclaim 100% of the VAT.
No Capital Allowances
- Because you don’t own the car, you don’t claim capital allowances. The lease payments are your main form of tax relief.
Hire Purchase (HP)
With HP, you’re effectively buying the car over time. So the treatment changes.
Corporation Tax Relief
- You will be able to claim the interest charge.
VAT
- If you purchase the car via hire purchase and pay VAT upfront, 100% of the VAT may be recoverable if the car is used only for business.
Capital Allowances
- You can’t deduct the instalments, but you can claim capital allowances on the car’s value.
- Have a look at the guidance on claiming capital allowances for business-cars
Don’t Forget Company Car Tax (Benefit-in-Kind)
Regardless of how the car is acquired, if it’s provided to an employee (including a director) for personal use, it counts as a benefit-in-kind (BIK) and is taxable.
- BIK tax is based on the car’s list price and CO₂ emissions.
- Electric and hybrid cars have much lower BIK rates — making them attractive for both tax efficiency and sustainability.
You report the benefit in kind either via the payroll or completing the form P11d. Incidentally if you have company car benefits you should be completing the form P11d’s right now as deadline is 6th July.
If you need any help in doing this please contact your normal manager or email enquiries@myersclark.co.uk
TAX SUMMARY OF LEASING V. HIRE PURCHASE
| Leasing | HP | |
| Ownership | Not owned | Owned at end of term |
| Capital Allowances | Not claim | Yes |
| VAT | Restricted if mixed use | Yes |
| Corporation Tax | Deduct all or restricted lease payments | Claim interest and capital allowances |
| Interest deductible | No interest | Yes |
| Upfront costs | Usually lower | Usually higher |
| Mileage restrictions | Yes | No |
| P11d – Benefit | Yes if private use | Yes if private use |
What next?
A decision such as whether to lease or hire purchase a car is just one example of cash management, and one where we spend time discussing with clients. Ensuring our clients are managing their cash flow, looking after their profitability and growing their business is just some of the work we do.
Email enquiries@myersclark.co.uk if you are looking to work with Accountants who are serious about you and your ambitions.