How is VAT handled on hire purchase for energy equipment, and can VAT be deferred?

Short answer — the essentials up front

When energy equipment is acquired by hire purchase (HP) it is normally treated as a supply of goods for VAT purposes, so VAT is due on the full taxable consideration at the time of supply. VAT is charged on the price of the equipment, not on the finance (interest), and a VAT-registered business can normally reclaim that input tax subject to the usual rules. Formal deferral of VAT to HMRC is not generally possible, although commercial and accounting approaches (cash accounting, supplier-financed arrangements and payment terms) can affect when VAT cash flows hit your business.

What hire purchase means for VAT: definitions and basic rules

Hire purchase is a form of asset purchase where a business takes possession immediately but becomes the legal owner when final conditions are met. For VAT, HMRC usually treats hire purchase and conditional sale agreements as supplies of goods rather than pure hire (leases), so the supplier must account for VAT on the taxable value at the point of supply. Interest and credit charges are financial services and do not attract VAT.

If the supplier sells the equipment and the finance provider buys it and leases or sells it on HP, VAT still applies to the supply of the goods, and the dealer or finance company will issue the VAT invoice. A VAT-registered business that uses the equipment for taxable supplies can normally reclaim input VAT on its VAT return, subject to partial exemption and capital goods scheme rules. Non-VAT-registered buyers cannot reclaim VAT and therefore must pay the VAT element as part of the cash price.

It is important to distinguish HP from operating leases. Under an operating lease the supplier retains ownership and invoices VAT on each rental payment. Under HP the tax point (when VAT becomes chargeable) is the supply of goods, which usually occurs at the outset rather than spread across instalments. Check the contract wording and invoices to confirm how the supplier and finance company have characterised the transaction.

How VAT is typically handled in practice on energy equipment HP deals

In a common HP flow the supplier issues an invoice for the full cash price plus VAT, but you pay that amount over time via finance instalments to the lender. The finance company often purchases the asset from the supplier and becomes the supplier for VAT purposes, then provides finance to you; VAT remains chargeable on the sale of the goods. The VAT is therefore shown on the supplier’s (or finance company’s) invoice at the point of supply.

If your business is VAT-registered and the equipment will be used for taxable activities, you can usually reclaim the input VAT on your next VAT return. Under the VAT cash accounting scheme you reclaim input VAT when you pay the supplier rather than when invoiced, which can help with timing if cashflow is tight. Where the asset is partly used for exempt activities, partial exemption and the capital goods scheme may require adjustments across several years.

Always check the invoice and VAT registration details of the supplier and finance company. If the VAT invoice is issued to the wrong entity or the transaction is structured as a lease, your ability to reclaim VAT may be affected. Getting the documentation right at the start avoids disputes with HMRC later.

Special VAT rules for energy-saving equipment and when zero-rating might apply

Certain energy-saving materials can attract special VAT reliefs, but these are narrow and typically apply to qualifying installations in residential dwellings rather than general commercial purchases. For example, some insulation and domestic solar installations are eligible for zero-rate or reduced VAT when installed to a private home by an eligible trader. For business premises and most commercial energy equipment the supply is standard-rated.

If you are buying equipment such as commercial solar panels, battery storage, EV chargers for business use, or industrial heat pumps, VAT will usually be charged at the standard rate. However, publicly funded schemes, charity projects, social housing or bespoke grant programmes can change the VAT position — each case needs individual checking. Always confirm eligibility for any relief with HMRC guidance or a VAT specialist before planning finance around any expected VAT savings.

Because VAT reliefs are fact-sensitive, treat claimed zero-rating cautiously in commercial contracts. If a supplier incorrectly zero-rates a supply and HMRC later challenges it, the buyer may have to account for additional VAT or suffer lost recovery. Take professional advice if a project rests on obtaining a tax relief for energy equipment.

Can VAT be deferred or spread when funding by hire purchase?

Legally, HMRC expects VAT on the supply to be accounted for at the tax point, so there is no automatic HMRC “VAT deferral” linked to hire purchase itself. That said, there are practical options to manage timing of VAT cash flows and reduce short-term impact on working capital. These include use of VAT cash accounting, supplier credit, inclusion of VAT in the financed amount, and agreeing payment terms with the supplier.

Cash accounting for VAT lets qualifying businesses account for output VAT when they receive payment rather than on invoice, which can delay when VAT is paid to HMRC and allow input VAT to be reclaimed when invoices are paid. Where the finance provider buys the equipment and fronts the cash to the supplier, the purchaser can effectively spread the VAT cost in instalments by reclaiming the input VAT over a return period while repaying the lender. Note that the VAT liability itself still falls on the supplier/finance company who must account to HMRC.

HMRC has occasionally offered temporary VAT deferral measures during exceptional events, but these are time-limited and not a general route for ongoing VAT deferral. If actual cashflow difficulties arise, businesses can contact HMRC to discuss time-to-pay arrangements, but interest and penalties may apply. Always plan VAT cashflow into your finance decision and check how any proposed HP product treats VAT in documentation.

Practical steps, examples and next actions for UK businesses

Step 1 — Confirm the VAT status of the supplier and the finance company and check the invoice wording to see whether the transaction is treated as a sale (HP) or a lease. Step 2 — If your business is VAT-registered, verify your ability to recover input VAT and whether cash accounting or capital goods scheme rules apply. Step 3 — If cashflow is a concern, discuss including the VAT element in finance with lenders or ask about staged invoicing and supplier terms.

Example: A VAT-registered SME buys a £60,000 commercial PV system on HP with 20% VAT (£12,000). The supplier invoices the £72,000 and the finance company funds the purchase. The SME can normally reclaim the £12,000 input VAT on its VAT return while repaying the financed balance over time, subject to partial exemption rules. The interest on the HP is not subject to VAT and cannot be reclaimed as input VAT.

Best Business Loans does not provide loans or finance directly; we introduce businesses to lenders and brokers who specialise in asset and sustainability finance. If you want help comparing options for spreading the cost of energy equipment and understanding VAT timing, submit a Quick Quote and our AI-driven matching system will connect you with appropriate providers. For projects focused on green upgrades, you may also wish to explore our sustainability loans information page: sustainability loans.

Key takeaways

• Hire purchase is usually treated as a supply of goods for VAT, so VAT is due at the point of supply.
• VAT applies to the equipment price; interest on finance is outside VAT scope.
• VAT recovery depends on your VAT registration, use of the asset and specialised rules (capital goods scheme, partial exemption).
• Deferral to HMRC is not automatic, but cash accounting, finance structures and supplier terms can ease timing pressures.
• Always confirm treatment in contract documents and seek accountant or HMRC guidance for relief eligibility.

If you’d like a fast, no-obligation review of finance options that factor in VAT timing and cashflow, complete our Quick Quote form and get matched to lenders and brokers who understand energy projects and asset finance. Best Business Loans is an independent introducer and will help you find relevant finance partners without charging you to enquire.

About this page: This guidance is general information only and does not constitute tax, legal or accounting advice. For a definitive view on VAT and hire purchase for your project, consult HMRC guidance or a qualified VAT adviser. Best Business Loans does not provide finance directly and is not FCA-authorised for regulated lending activities.