The Capitalflow team are often asked by our customers how the mechanics of VAT differs between a hire purchase agreement and a finance lease agreement. Obviously, the world of VAT is complex and has many aspects to consider – but for typical business customers it looks like this.
In a hire purchase agreement, VAT is charged at the start of the agreement on the full purchase price of the asset. It is generally paid by the customer along with any initial payment required under the agreement. When the customer makes the final payment, they take ownership of the asset.
In a lease agreement, VAT on the full cost is not required to be paid upfront by the customer, but instead VAT is charged as part of any upfront payments and with all regular rental payments during the lease term. The VAT rate applicable to the lease payments is the VAT rate in force on the due date of each rental, and the standard VAT rate in Ireland is currently 23%.
It’s important to note for both hire purchase and lease agreements in Ireland, if a customer is VAT registered, they may be able to claim back some or all of the VAT paid.
Please also note that there are restrictions on the recovery of VAT on cars even if the customer is VAT registered.
Example 1 – Typical Hire Purchase agreement:
- Customer wants to purchase a van at a price of €30,000 + 23% VAT (€6,900).
- Customers enters into a hire purchase agreement with Capitalflow putting down a €5,000 payment – and financing €25,000 over 5 years.
- Customer also pays the VAT element of €6,900 to Capitalflow and then claims back some or all of this VAT in their next VAT return if they are entitled to do so.
- The copy of the hire purchase agreement is a VAT invoice issued as evidence of the sale of the asset to the customer and of the VAT involved.
- At the end of term (5 years) the asset is owned by the customer once all payments are made.
Example 2 – Typical Finance Lease agreement:
- Customer wants to lease a van at a price of €30,000 + 23% VAT (€6,900).
- Customers enters into a lease agreement with Capitalflow for putting down an advance rental of €5,000 + VAT – and financing €25,000 + VAT over 5 years.
- Customer claims back some or all of the VAT paid on the € 5,000 in their next VAT return if they are entitled to do so.
- Capitalflow invoices the customer for agreed monthly rentals plus VAT over 5 years.
- The customer claims back some or all of the VAT paid on each rental in their VAT returns across the full term of the lease, if they are entitled to do so.
At the end of the lease (5 years), the customer does not own the asset but will be able to take ownership for a nominal payment.
In summary, under a hire purchase, the customer needs to fund and reclaim the VAT at the outset of the agreement (assuming they are VAT registered) – whereas under a lease agreement, the VAT is paid monthly as part of the rental payments, and the VAT is reclaimed across the term of the lease. The decision as to what finance type is most suitable can be down to the preference and ability to fund the VAT element upfront in a hire purchase agreement or to do so across the term in a lease.
Capitalflow finances all businesses from sole traders to partnerships to limited companies. Whether you are a micro enterprise, a small or medium enterprise or a large corporate, we’ll be delighted to speak with you. Give us a call today on 01-5632430
Notice: This material has been prepared for general informational purposes only, and is not intended to provide, and should not be relied on as tax, legal or accounting advice.