difference between lease financing and hire purchase
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Answer Posted / viswanatha
Hire purchase is a type of instalment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last instalment is paid.
A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals). The important feature of a lease contract is separation of the ownership of the asset from its usage.
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VAT - With hire purchase (often referred to as lease purchase) you pay all of the VAT with your first instalment. Leasing spreads the cost of the VAT which is applied to each monthly or quarterly instalments. In both cases you recover the VAT but with hire purchase the initial VAT can be a sizeable amount of cash for you to find for a few months.
TAX - Both finance methods provide you with savings to offset against your year-end taxable profits. With HP, you can claim 25% of the equipment cash price in the first year, then 25% of the balance in the second year and this continues on a reducing balance basis each year. With leasing, all the lease payments you make in the financial year can be offset against your taxable profits for that year.
Leasing can therefore be more tax efficient in the short term, if you buy something early in your financial year. On the other hand, if you make a sizeable purchase near your year-end, then hire purchase might be more tax efficient for you.
OWNERSHIP - At the end of the hire purchase agreement, title to the goods passes to you for a small transfer fee, usually £50 - £100.
At the end of a lease you generally have two options:-
To continue leasing, on an annual basis for an annual.
You can gain title to the equipment via a third party.
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