How is VAT handled on hire purchase vs leasing, and can VAT be financed?

Quick answer — the short, practical position

VAT on hire purchase is usually charged on the full purchase price and can be reclaimed by VAT-registered businesses where the asset is used for taxable supplies. VAT on leasing is normally charged on each rental payment, not on the full value at the start. Many funders will allow VAT to be included in a finance package, but reclaim rules and practical cashflow effects differ and you should check with your accountant and HMRC before committing.

Key VAT concepts for businesses

What VAT applies to and who reclaims it

VAT is charged on supplies of goods and services at the point of sale under UK rules administered by HMRC. A VAT-registered business can usually reclaim VAT on purchases used for making taxable supplies. If an asset is used partly for exempt activities, only the business-use proportion of VAT is reclaimable.

Why the finance structure matters

Whether an acquisition is classed as a sale (hire purchase / conditional sale) or as a lease (rental) affects when VAT becomes payable and how it is reclaimed. The legal treatment depends on contract terms, who has title, and whether there is an option to buy. HMRC guidance differentiates between supplies of goods and supplies of services (rentals), so the finance arrangement changes VAT timing and cashflow.

VAT treatment on hire purchase (HP)

How VAT is charged on hire purchase

Hire purchase is typically treated as a sale of goods subject to VAT on the full price. The seller normally issues a VAT invoice for the full value when the supply is made, even if payments are spread. In practical market terms, many dealers and finance houses will include VAT in the upfront deposit or invoice the VAT on delivery.

Reclaiming VAT on HP

If you are VAT-registered and the asset is used for taxable business activities, you can usually reclaim the VAT shown on the dealer’s invoice in your VAT return. That reclamation can improve cashflow, but you must have a valid VAT invoice and the asset must be for business use. If the asset is used partly for exempt supplies, only the recoverable proportion may be reclaimed.

Who technically charges the VAT?

Often the seller (dealer/manufacturer) charges the VAT when they supply the goods to the finance company or directly to you under HP. In some arrangements the finance company technically buys from the dealer and sells to you under HP, so you still receive a VAT invoice for the full supply. The practical effect is the same: VAT is due on the supply and reclaim depends on your VAT status.

VAT on leasing (operating and finance leases)

Operating leases: VAT on rental payments

An operating lease is a pure rental contract where the lessor retains ownership. VAT is normally charged on each rental invoice at the standard rate and must be paid with each rental instalment. VAT-registered businesses can reclaim the VAT on the rental payments, subject to the usual rules about taxable use and any partial exemption calculations.

Finance leases and VAT implications

Some leases have characteristics similar to a sale and may be treated as a finance lease for VAT purposes. Where a lease effectively transfers ownership risks and rewards, HMRC may view the arrangement as a supply of goods and VAT may be charged on a larger upfront sum. If the lease includes an option to purchase at a nominal sum, VAT treatment can change — always check the contract terms and ask a VAT specialist if in doubt.

Practical differences vs hire purchase

For leasing you usually pay VAT as part of each rental invoice rather than on the full purchase price upfront. That spreads VAT over the lease term but does not change the total VAT liability in most cases. Leasing can therefore be preferable for cashflow if you cannot immediately reclaim or want to avoid a large upfront VAT payment.

Can VAT be financed, and how?

Options to finance VAT on assets

Yes — many commercial lenders and brokers will include the VAT element within a finance package. For hire purchase the VAT can be rolled into the financed sum so you pay it in instalments. For leasing, because VAT is applied to rental invoices, funders sometimes advance or include the first VAT payment in the overall facility to ease the initial cashflow hit.

Common ways VAT is handled in practice

Dealers and funders commonly offer VAT-inclusive hire purchase where the financed amount covers VAT and the capital cost. Alternatively, some lenders provide short-term bridging or VAT loans so you can reclaim the VAT and repay once HMRC refunds are processed. Each option affects interest, monthly cost, and accounting treatment differently, so get quotes and read terms carefully.

Points to check before rolling VAT into finance

Confirm whether the finance provider charges interest on the VAT portion and whether any fees are VATable. Ensure you will be able to reclaim the VAT from HMRC — reclaiming it later does not remove the obligation to pay VAT to the seller initially. Also check whether the lender requires additional security or has different terms when VAT is included in the financed amount.

Practical checklist, examples and next steps

Simple example

Buy a £60,000 piece of equipment where VAT at 20% is £12,000. Under hire purchase the invoice will show £72,000 and VAT-registered buyers can reclaim the £12,000 in their VAT return. If the VAT is financed, you might spread the £12,000 over 3–5 years within your repayments, but interest and fees apply so the total cost increases.

Checklist before deciding

Are you VAT-registered and entitled to reclaim the VAT? If not, don’t finance VAT unless necessary.
Is the asset used for taxable supplies or mixed-use? Calculate recoverable proportions.
Does the contract look like a sale or a lease? That affects VAT timing.
Compare total cost when VAT is rolled into finance versus paying VAT and reclaiming it.
Ask for a clear breakdown of the financed VAT, interest, and any VAT on fees from the funder.

How Best Business Loans can help

Best Business Loans does not provide loans directly, but we connect you with lenders and brokers who specialise in asset finance and VAT-sensitive arrangements. If you want to explore finance that covers VAT, get a quick eligibility check and multiple matched options through our platform. Start with a free Quick Quote to see which lenders are likely to support VAT-inclusive hire purchase or lease structures.

Key takeaways

Hire purchase: VAT is generally due on the full purchase and can usually be reclaimed if you are VAT-registered and use the asset for taxable supplies.
Leasing: VAT is typically charged on each rental payment, spreading the immediate cash outlay but still recoverable subject to use.
VAT can often be financed, but doing so increases total cost through interest and fees and affects accounting treatment.
Check contract terms, reclaim eligibility, and seek advisor or HMRC guidance before including VAT in finance.
Best Business Loans can match you to lenders and brokers who offer VAT-aware asset finance solutions — submit a Quick Quote to get started.

Updated: October 2025. For tailored options on equipment funding and VAT-aware asset finance solutions, see our asset finance overview: Asset Finance. Complete a free Quick Quote to get matched with lenders who understand VAT timing and cashflow needs.

Disclaimer: Best Business Loans is an independent introducer and does not provide regulated credit or financial advice. The information above is general in nature and should not be taken as tax or legal advice. Check HMRC guidance and consult a qualified accountant or tax adviser for your specific circumstances.