Both fixed rate and variable interest rate hire purchase are available. Under a hire purchase agreement, the VAT on the total cost of the asset would be paid together with the deposit at the outset of the agreement. The level of deposit would depend upon your trading history and the age and life expectancy of the asset being financed.
The advantages of Hire Purchase are as follows:
- Writing Down Allowances: this is the percentage of the cost of the asset that can be offset against taxable profits. Under current rules, you can set off the first £200k of plant purchased against taxable profits as AIA (Annual Investment Allowance) in the financial year purchased. Anything remaining over this can be offset at 18% per annum on a reducing balance basis from year two onwards.
- Interest: All interest paid can be offset against taxable profits.
- Ownership: Ownership of the asset would transfer to you upon payment of the option to purchase fee included in the final installment of the loan or upon early settlement of the agreement.