Guide
Hire purchase or finance lease for energy equipment?
Both structures let you use the equipment now and pay over a term. The difference is ownership, and what that does to the initial outlay, the tax treatment and the end of the agreement.
The short version
- Hire purchase leads to ownership. A finance lease does not.
- Hire purchase usually needs a larger contribution upfront, often the VAT.
- The tax treatment differs and can be the deciding factor on a large project.
- For long lived assets like solar arrays, ownership usually wins. For fast moving technology, leasing often does.
The core difference
Under hire purchase you are buying the asset in instalments. You pay a deposit, repay the balance with interest, and title transfers to you at the end, typically on payment of a nominal option fee.
Under a finance lease the funder buys the asset and rents it to you for a primary period. At the end you can usually extend into a secondary period at a peppercorn rental, or the asset is sold to a third party with most of the proceeds rebated to you. You do not take title.
| Hire purchase | Finance lease | |
|---|---|---|
| Ownership at end | Yes, title transfers | No, title stays with the funder |
| Typical initial outlay | Deposit plus the VAT on the asset | Three to six monthly rentals |
| VAT | Paid upfront on the asset cost | Charged on each rental |
| Tax treatment | Capital allowances on the asset, interest relieved as charged | Rentals generally deductible as an expense |
| Best for | Long life assets you intend to keep | Technology you may replace, or lighter upfront cost |
The cash flow difference at the start
On a £200,000 project the VAT alone is substantial. Hire purchase normally means finding that VAT at the outset, although it is recoverable in the following return for VAT registered businesses. A finance lease spreads VAT across the rentals instead, which is why it can look lighter at the start even where the total cost is similar.
On larger orders, VAT deferral of one to three months is often available under hire purchase, which softens that difference considerably.
Which suits which asset
As a general pattern across the energy projects we place:
- Solar arrays: hire purchase, because the asset outlives the term comfortably and ownership has value.
- Battery storage: either. Ownership suits sites keeping the system long term, leasing suits businesses expecting to refresh as the technology moves.
- Vehicles and charging equipment: leasing is common on vehicles, ownership more common on fixed charging infrastructure.
- Generators and temporary power kit: hire purchase, where the equipment will be worked hard for many years.
A note on tax
Structure decisions made purely on tax without checking the current position are a false economy. Allowance rates and eligibility change, and the right answer depends on your profits, your capital allowance position and how the equipment is used.
We will set out how each structure works and what it does to your cash. Your accountant should confirm the tax outcome before you sign.
Where this applies
FAQs
Common questions
The questions that come up most often on this subject.
Is hire purchase or leasing better for solar panels?
Hire purchase suits most solar projects, because the array has a working life well beyond the finance term and there is real value in owning it outright at the end. Leasing is worth considering where the initial outlay needs to be as small as possible.
Do I pay VAT upfront on hire purchase?
Typically yes, VAT is due on the asset cost at the start, and it is recoverable in the normal way for VAT registered businesses. Deferral of one to three months is often available on larger orders, which helps if delivery and the VAT return do not line up.
Who owns the equipment on a finance lease?
The funder retains title throughout. You have full use of the equipment for the primary period and can usually continue into a secondary period at a nominal rental, but ownership does not pass to you.
Can I switch structure after the agreement starts?
Not on the same agreement, but settling early and refinancing is sometimes possible. It is far easier to get the structure right at the outset, which is why we ask about your tax position and how long you expect to run the asset before quoting.