Hire Purchase

A method of gaining ownership of the car by spreading the payments, terms are generally between one and five years with no VAT implications, the total cost of the vehicle including VAT being spread over the contract period.

Vehicles funded through Hire Purchase are viewed the same by the inland revenue as vehicles purchased outright, the 1st April 2009 changes to the taxation laws are detailed below.  In addition to this 100% of interest charges from the Hire Purchase agreement are allowable against tax as a business expense.

 
The expenditure on all business cars is now treated in three ways, depending on the CO2 emissions of each vehicle. Diesel and petrol engine vehicles will be treated the same way.
  • Companies purchasing cars with emissions of 110g/km or below are able to write down the full cost of these vehicles against their taxable profits in the first year of ownership
  • Companies purchasing cars with emissions between 111g/km and 160g/km must allocate the expenditure to the general plant and machinery pool – where they will be able to write down 20 % of the cost of these vehicles against their taxable profits each year, on a reducing balance basis
  • Companies purchasing cars with emissions of 161g/km and above must allocate the expenditure to a ‘special rate’ plant and machinery pool - where they will be able to write down only 10 % of the cost of these vehicles against their taxable profits each year, on a reducing balance basis
What does expenditure mean?
 
Expenditure is incurred as soon as there is an ‘unconditional obligation’ to pay for an asset, providing the expenditure is due to be paid within four months. For example, if a contract to purchase cars was entered into on 31 March 2009 and requires payment to be made on 31 July 2009, the payment obligation is treated as arising on 31 March 2009. These rules cater for situations where expenditure is incurred even though the cars are not delivered for some time after the new regime has started.
 
What if the car is delivered after 1 August 2009?
 
If the contract became unconditional after 8 December 2008 and the car is made available on or after 1 August 2009, the new rules apply even if the expenditure has been incurred before 1 April 2009.
If the contract became unconditional before 8 December 2008 for a car being made available on or after 1 August 2009, the current rules apply.
 
What happens to cars treated under the old regime?
 
The old 'expensive cars' regime for vehicles costing over £12,000 (with an annual writing down cap of £3,000 and a balancing adjustment on disposal) remains in place for five years. Any balance of unrelieved expenditure left after the five years will be added to the general pool of unrelieved expenditure. This transitional period will finish at the close of the businesses’ first chargeable period to end on or after 31 March 2014.
 
Title of the goods does not pass to customer until all payments are made however the vehicle is perceived as being the property of the customer. 
 
Contracts can be straight forward with equal monthly payments or have a large final payment or balloon at the end to help reduce monthly costs.  Products that fall into this category include Personal Contract Plans (PCP).

Advantages

  • Any profit on disposal retained by customer
  • Some flexibility for early termination
  • No mileage restrictions

Disadvantages

  • Large deposits often required
  • No VAT advantage for registered companies

Good for

Non VAT registered companies and private individuals who require flexibility with early termination and are happy to take the full risks of ownership.