Hire Purchase is an instalment payment arrangement that spreads the cost of any capital purchase.
Specific features are:
- The finance company has legal title to the asset funded whereas the hirer has tax title. (The hirer can claim writing down allowances)
- At the end of the hire period legal title passes to the hirer on payment of a nominal sum.
- Repayments do not attract VAT - any reclaimable VAT on the original purchase price is payable in advance and would usually not form part of any loan.
From a balance sheet perspective assets funded via Hire Purchase are capitalised and included in the assets of the company.
N.B. Lease Purchase is Hire Purchase