Hire purchase
Hire purchase is an agreement with the option to purchase at the end of the contract period.
The company hiring the vehicle has all the risks and rewards of ownership, including residual value, so the car or van must be shown as an asset on the balance sheet.
Although there is no contractual obligation to take ownership of the vehicle at the end of the agreement, it is usual for ownership to occur at the end of the agreement for a nominal amount.
As a result, for corporation tax purposes, the vehicle is deemed to belong to the hirer at the outset of the agreement and therefore capital allowances also apply.
Lease purchase
Similar to hire purchase and therefore a method of deferred purchase with a balloon payment to secure ownership of the vehicle at the end of the contract. Also on-balance sheet.
The inclusion of the balloon payment means the monthly charges will be lower than with a hire purchase agreement.
The balloon payment will be calculated as equivalent to the value of the vehicle at the end of the lease period.
Therefore, the company, if it chooses to sell the vehicle, should be able to cover the cost of the balloon payment from the sale proceeds.
Alternatively, the company could continue to operate the vehicle as the owner.
Alastair Kendrick - 02/01/2014 13:18
Sorry but depending on the value of the car being leased and its CO2 emissions there could be clear advantages of leasing a car on contract purchase to contract hire.