Hire Purchase

Let’s say that you buy a van on hire purchase. The legal fiction is that you are renting the van over the HP period, and you only become the owner after paying an additional fee with the last HP installment. This fee is called the option fee and is usually in the area of £25 – £30. While you are still paying for the van, it is not yours, and you cannot sell it in a private sale without committing a fraud. However, you can often sell it to a motor dealer who will have a special arrangement with the loan company which permits good title to the van to be acquired without having to refer back to them.

For tax purposes, the acquisition of the van is treated in the same way as outright purchase of the van for cash, which is good news. You can just claim capital allowances up front, and often you can claim 100% of the cost of the van straight away. A savvy accountant will avoid too large a claim which may fail to make use of your personal allowance.

You are likely to need to pay interest as part of the HP deal. This interest is also tax-deductible, and it is a topic on which David Porthouse can expand at length. Anyway, we always use the Actuarial Method to allocate interest between periods, which is the best method in practice because if you decide to terminate the HP agreement before it is finished, we can readily work out the closing balance on the HP account. It’s just a matter of having a spreadsheet to do it.

Sometimes you have a company, but you bought the van privately. The HP interest can still be claimed as a charge upon your personal income. This is one not to overlook.

Hire Purchase gives a small business access to capital which it might not otherwise have, and enables it to punch above its weight. You might consider have an HP agreement on the go all the time, even when you don’t need one, to build up a good credit history showing loans and reliable repayments. This is something to discuss with your accountant.