BIM61025 - Leasing: General: hire purchase and finance leasing: distinction

A Hire Purchase contract is a type of finance lease where the user has the option to purchase the asset at the end of the hire period, usually 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 machinery and plant 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 CA29310 onwards).

The parties will usually choose whether or not to include an option for the lessee to buy to maximise the use of the available capital allowances.

Guidance on the tax treatment of hire purchase transactions is at BIM40550 onwards (lessor’s receipts) and BIM45350 onwards (lessee’s expenditure).