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Features of leasing and hire purchase
12 Sep 2017 | 0 comments

HIRE PURCHASE (HP)

A hire purchase agreement is an arrangement between a seller and a buyer of a capital asset, such as an item of equipment or a motor vehicle. The seller is often a finance house which purchases the asset from the manufacturer. The manufacturer delivers the asset to the HP buyer, and receives payment from the finance house.

The arragement between the finance house and the buyer is for the buyer to make a series of regular HP payment, which consist partly of payment of the purchase price for the asset and partly of interest charges. The buyer becomes the legal owner of the asset when the final HP payment has been made. The buyer is responsible for maintenance of the asset and for normal repairs.

For tax purposes the buyer is able to claim capital allowance on the purchase price (excluding interest charges) and can also claim interest charges against tax.

HP is therefore a form of instalment purchase for a capital asset.

 FINANCE LEASE

A finance lease is similar in many respects to HP, but there are also significant differences. A finance lease is an agreement between a lessor and a lessee for the 'renting' or leasing of a capital asset over a period of time that covers most of the expected useful life of the asset. The lessor is often a finance house that purchases the asset from the manufacturer, and the manufacturer delivers the asset to the lessee.

The lessor remains the legal owner of the asset throughout the period of the lease and can claim capital allowances. The lessee is not the owner, but pays regular lease rental payments, which are allowable as an expense against tax. The lessee is also responsible for maintenance of the asset.

A finance lease has a primary lease period, covering most of the expected useful life of the asset. At the end of this period, the lessor may take back possession of the asset and dispose of it in the market (sell it as a second-hand asset or dispose of it for scrap). Alternatively, the lessee may continue to lease the asset for a secondary lease period at a much lower rental cost, or may agree to buy the asset for the lessor.

OPERATING LEASE

An operating lease has similarities with a finance lease. It is an agreement between a lessor and a lessee for the 'renting' or leasimh of a capital asset, but the lease period is much less than the expected useful operational life of the asset. The lessor may be the manufacturer of the equipment, such as a manufacturer of photocopier machines or vending machines. The lessor remains the legal owner of the asset.

The lessor, not the lessee, is responsible for maintenance. The lessee is able to claim the lease payment against tax.

At the end of the operating lease period, the lessor takes back possession of the asset and may lease it to another business under an operating lease agreement, or may sell the asset. The lessee may enter into a new operating lease agreement, but for a more up-to-date item of equipment.