Hire purchase vs leasing in Ireland: a guide for companies

With hire purchase (HP), a finance company buys the asset and hires it to your company. You usually pay a deposit, then fixed monthly instalments. Once the final payment and any small option-to-purchase feeA small fee payable at the end of a hire purchase agreement to transfer ownership of the asset to the company. are paid, ownership passes to your company. Until then the finance company owns the asset, and it can repossess it if payments are missed.

Hire purchase suits assets with a long working life that you intend to keep, such as plant, machinery, commercial vehiclesA vehicle, such as a van or truck, that Revenue does not treat as a passenger car for VAT purposes. and production equipment.

With leasing, the finance company buys the asset and your company pays rentals to use it for an agreed period. At the end, depending on the agreement, you may return the asset, extend the lease, upgrade to newer equipment, or in some cases arrange a sale to a third party. Ownership generally stays with the finance company.

Leasing suits assets that date quickly or that you plan to replace regularly, such as IT equipment, some vehicles and technology-heavy machinery.

Finance lease vs hire purchase

Leases come in two broad forms. Under a finance lease, your company uses the asset for most of its working life and carries most of the risks and rewards of ownership, but title stays with the lessor. Under an operating lease, you rent the asset for part of its life and hand it back. The main difference between a finance lease vs hire purchaseA form of asset finance where the company pays for an asset in instalments, often after a deposit, and takes ownership once the final payment and any option-to-purchase fee are made. is the end of the term: with HP the asset becomes yours, while with a finance lease it usually does not. Our guide to finance lease vs operating lease explains the two types of lease in more detail.

VAT is one of the biggest practical differences, because it affects cash flow at the start of the agreement.

VAT on hire purchase

Revenue treats hire purchase as a supply of goods by the finance house, which accounts for VAT when the goods are handed over. The VAT is based on the value of the goods, not the finance charges, and Revenue confirms that the finance house is exempt from VAT on its finance charges. In practice this means VAT on the full asset value is usually due at the start. A VAT-registered company can normally reclaim it on its VAT return, subject to the usual rules, but it needs the cash to pay it first. Some lenders offer short-term VAT funding to bridge that gap.

Agreements with a large optional final payment need extra care. Following the CJEU judgment in Mercedes-Benz Financial Services (C-164/16), Revenue's guidance treats such an agreement as a supply of goods only where buying the asset at the end is the only economically rational choice for the customer. Where the final payment is set well above the asset's expected market value, so that handing it back is a realistic option, the agreement may instead be treated as a lease, which is a supply of services, with VAT charged on each payment rather than upfront. Revenue's guidance was written with personal contract plans (PCPs) for cars in mind, so ask your accountant how it applies to your agreement.

Leasing vs hire purchase: VAT on rentals

With leasing, VAT is charged on each rental rather than upfront. Revenue applies the standard rate of 23% to plant and machinery hire, although certain plant hired with an operator may qualify for the reduced rate. Spreading VAT across the rentals can make leasing easier on cash flow.

VAT restrictions on cars

Passenger cars are a special case, and our guide to commercial vehicle finance, VAT and BIK covers vans and other vehicles. A VAT-registered business can generally reclaim only up to 20% of the VAT on a qualifying car. For cars first registered from 1 January 2021, CO2 emissions must be below 140g/km, and business use must be at least 60%. For a leased qualifying car, the deduction is 20% of the VAT on the monthly leasing charges. If a purchased car is sold or business use drops within two years, part of the VAT reclaimed must be repaid. Your accountant can confirm whether a particular vehicle qualifies. Our van finance and business car finance pages explain how those products work.

Usually, capital allowances on hire purchase go to your company, because it is working towards ownership. On a lease, the lessor normally claims them and your company deducts the rentals instead.

For tax purposes, Irish companies cannot deduct the cost of equipment as an ordinary expense. Instead they claim capital allowances. Revenue's standard rate for plant and machinery is 12.5% a year over eight years.

• Hire purchase: because your company is working towards ownership, it is generally the company that claims capital allowances on the cash price of the asset. Revenue's guidance on cars confirms that the interest element of HP payments is allowable as a deduction.
• Leasing: the finance company usually owns the asset and claims the allowances. Your company typically deducts the lease rentals as a business expense instead, although some longer leases have special rules.
• Cars: capital allowances and lease deductions for cars are capped and linked to CO2 emissions, so they are often lower than for other assets.

Accelerated capital allowances for energy-efficient equipment

The Accelerated Capital Allowance (ACA) scheme allows a company to claim 100% of the cost of qualifying energy-efficient equipment in the year it is first used, instead of over eight years. Revenue confirms the scheme runs until 31 December 2030. The equipment must be new, must appear on the list maintained by the Sustainable Energy Authority of Ireland (SEAIThe Sustainable Energy Authority of Ireland, the State body that supports energy efficiency and renewable energy.), and must meet minimum spend thresholds, such as €1,000 for most categories and €3,000 for lighting.

Revenue's guidance states that the business must own the equipment, and SEAI says qualifying equipment cannot be leased, let or hired to any other person. In practice, if your company leases equipment, the finance company owns it and is letting it to you, so the ACAA Revenue tax relief that lets a company write off the full cost of qualifying energy-efficient equipment against its taxable profits in the year it is bought, rather than over several years. is not available on that equipment. Hire purchase works towards ownership, but if the ACA matters to your decision, ask your accountant to confirm how your proposed agreement will be treated before you commit.

A balloon payment is a larger final payment at the end of an HP agreement. It lowers the monthly instalments, which helps cash flow, but you need to plan for the final sum. Some companies refinance the balloon when it falls due, though that is subject to the lender's approval at the time.

Deposits work in a similar way. A bigger deposit lowers the amount financed and the total interest. Leases usually need an advance rental rather than a deposit, and some leases include residual valuesThe estimated value of an asset at the end of a lease or finance agreement., which work like a balloon in that they affect the rental level.

Whatever the structure, compare the total amount payable, not just the monthly figure, and ask about fees for settling early or ending a lease before its term.

Many lenders will finance used vehicles, plant and machinery, as well as new. What they expect can differ for younger and established companies. Lenders usually consider the asset's age, condition, expected working life and resale value, and may limit the agreement term so that it ends before the asset becomes too old. Buying from a recognised dealer can make approval easier than a private sale, because invoices and asset history are clearer.

Keep in mind that the ACA applies only to new equipment, so a used asset will normally fall under standard capital allowances.

These questions will help you decide:

1. Do you want to own the asset at the end? If yes, hire purchase is usually the better fit.
2. How long will the asset be useful? Long-life assets suit HP; fast-changing technology often suits leasing.
3. Can the company fund VAT upfront? If not, leasing spreads VAT across the rentals, or VAT funding may bridge the gap on HP.
4. Are capital allowances or the ACA important to your tax planning? Ownership usually matters here.
5. Is the asset a passenger car? VAT and tax restrictions make specific advice especially worthwhile.
6. What is the total cost, including deposit, balloon, fees and end-of-term charges?

Both options are forms of borrowing, so the lender will look at your company's accounts, trading historyHow long a company has been actively trading, and the record of that trading shown in its filed accounts, bank statements and tax returns. and Central Credit Register report, and approval is subject to status. Many lenders also ask directors for a personal guarantee. That means a director could be personally liable if the company cannot pay, so make sure you understand the commitment and take independent legal advice if needed.

Tell us what your company needs and we'll tell you honestly whether our panel can help, or where to apply instead. We are paid commission by lenders. We do not charge your company a fee and never ask for payment upfront. Welcome Finance is a commercial finance broker, not a lender, is not regulated by the Central Bank of IrelandIreland's financial regulator and part of the Eurosystem., and arranges business-purpose finance only for companies registered in Ireland (LTD, DACA type of Irish private company under Part 16 of the Companies Act 2014 that keeps an objects clause in its constitution, limiting what it can do, and uses the suffix DAC., PLCA company type under Part 17 of the Companies Act 2014., ULC).