The most typical and readily available credit facility is Hire Purchase.

Having sourced your asset and negotiated the final purchase price with the supplier, you pay a deposit to the finance company (typically 10-20%) and they then take title direct from the supplier. You are technically not the owner of the asset during the agreement but subject to eligibility you can still claim the writing down allowances as though you had made the purchase outright.

On taking out a Hire Purchase agreement you would usually be required to pay a documentation (administration/arrangement) fee and the full purchase VAT. You then, subject to eligibility, recover the VAT yourself. The outstanding amount and interest is then repaid in pre-agreed instalments over the period of the agreement.

Agreements can be fixed or variable rate, and the monthly commitment can often be reduced by the inclusion of a balloon/residual value clause.

Some points of value for Hire Pirchase:

• Ownership title passed on completion of the agreement.
• Monthly payments do not attract VAT.
• On balance sheet for the business user.
• Capital cost can be written down for tax purposes on a reducing balance up to £3000.00 against taxable profits per annum.
• Interest (usually without limit) is also allowable against taxable profits but may be restricted for private use.

With a Finance Lease the finance company takes full ownership of the asset and rents the goods to you over a predetermined period. The finance company can claim the writing down allowances and convey this benefit to you by reducing the rentals.

The purchase price used to calculate the rental is the purchase price net of VAT. When acquire a VAT qualifying car, if leased, the rental is calculated on the net price of the car and not the gross price as it would be in a Hire Purchase.

For finance lease, you will source the supplier, and having paid the documentation fee and an initial payment of a multiple of rentals, substantially all of the remaining cost of the asset is spread over the agreed primary period in accordance with the pause.

The rentals attract VAT that can be recovered subject to eligibility. As the finance company is the owner of the asset, you will not need to pay the purchase VAT at inception.

You can include a balloon rental to reduce the value of the primary rentals and at the end of the agreement you may have the option to enter into the secondary period. As you have generally covered the entire capital cost of the asset and hire charges (interest) in the primary period, should you wish to continue to use the asset, a secondary or peppercorn rental is charged. This rental typically approximates to 3% of the original cost and is a one off annual payment. As you are not the owner of the asset, you cannot sell the asset during the rental period. However, as you are generally covering the total cost and hire charges within the primary period, you will be entitled to a share of the sale proceeds should the leasing company allow you to sell on their behalf. Your share of the sale proceeds is usually agreed at inception and is typically 95-99%.

Some points of value for Lease Finance:

• Funding option with a minimum deposit or upfront instalment and fixed monthly payments.
• The agreement can carry a final payment called the balloon or residual which reduces the monthly payment during the agreement.
• A percentage of the sale proceeds are returned after the vehicle has been sold, usually 95%.
• Ownership title retained by the finance company.
• Off balance sheet for the business user.
• Monthly payments attract VAT.
• 50% of VAT on monthly payments reclaimable as long as the user is VAT registered.
• Monthly payments allowable against taxable profits subject to Inland Revenue guidelines.