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 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.
