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HMRC internal manual

Business Leasing Manual

From
HM Revenue & Customs
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Introduction: Lease taxation: Hire purchase contracts

A hire purchase (HP) contract is a type of finance lease where the user has the option to purchase the asset at the end of the hire period, typically for a nominal sum. In terms of economic effects the differences between a hire purchase contract and an ordinary finance lease are limited. In both cases the user of the asset enjoys the risks and rewards of ownership. But the distinction between the two has significant tax consequences for the purposes of plant or machinery capital allowances:

  • the finance lessor gets the allowances, not the finance lessee;
  • the hire purchase lessee gets the allowances, not the hire purchase lessor (CAA01/S67 and CA23310 onwards).

The parties will usually choose whether or not to enter into a hire purchase contract to maximise the use of the available capital allowances.

Contracts for the hire of an asset that contain a provision giving the hirer an option to acquire title to the asset upon the fulfilment of agreed conditions, sometimes known as HP or lease purchase contracts, fall within the definition of a lease for accounting purposes. For accounting purposes no special classification exists for HP contracts, instead they are classified, and accounted for, as finance leases or operating leases, depending on the nature of the contract. Most HP contracts, which typically have a nominal purchase price, are classified as finance leases. However, in the case where the option to purchase the asset at the end of the hire period is set at a relatively high price (typically around market value), such that the hirer may not exercise the option to buy, the HP contact will be treated as an operating lease.

Further guidance on taxation of lease contracts that contain an option for the lessee to acquire the asset is at BLM39000.