Vehicle finance options

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There are three main options when it comes to financing vehicles:

  • Financial lease
  • Hire purchase
  • Rental

Each has its own strengths and weaknesses.


VAT effects

If you are a registered VAT vendor, VAT can be claimed as input VAT on your VAT return if the vehicle is a commercial vehicle. Just how this VAT is recovered depends on the method of finance.

Financial lease

With a financial lease, the full value of the input VAT is claimed when you purchase the vehicle.

Hire purchase and rentals

With hire purchase and rentals the VAT is claimed as you pay the instalments. (I'm not sure how the VAT in HP's is calculated, though. Is it the capital VAT spread over the instalment period, or is the VAT calculated on the value of the instalment).

Balance sheet effects

Each method of finance has a different effect on your balance sheet, which in turns affects your capital-to-return ratios.

With a financial lease the vehicle is capitalised on the balance sheet immediately and then depreciated at the allowable depreciation rate for the class of vehicle.

With a hire purchase agreement, the vehicle is only capitalised on the balance sheet at the end of the agreement.

There is not effect on the balance sheet with a rental.