VAT on asset finance and VAT deferral, explained
On hire purchase, VAT on the full price is usually due on day one. That can be a big cash outlay even if you get it back later. Here's how VAT works on hire purchase and finance lease, and how VAT deferral helps.
The short answer
Hire purchase: VAT on the full price is normally paid at the start, then reclaimed on your VAT return if you’re VAT-registered. VAT deferral lets the lender cover it for up to three months, so you can reclaim it before you pay it. Finance lease: VAT is added to each rental instead, so there’s no large VAT payment upfront.
How VAT is charged on each type of finance
| Question | Hire purchase | Finance lease |
|---|---|---|
| When VAT is charged | On the full price, at the start. | On each rental, as it is paid. |
| Is VAT financed? | Not normally. The lender finances the price excluding VAT, unless the VAT is deferred. | Not needed. VAT simply follows each rental. |
| VAT deferral available? | Often, for up to 3 months. | Not applicable. |
| Reclaiming | The whole VAT amount on one VAT return, if eligible. | The VAT on each rental, on the return for the period it is paid. |
How VAT deferral works
With VAT deferral the lender pays the full price, including the VAT, to the supplier. You pay your deposit as normal, and the VAT is repaid to the lender as one payment at an agreed point, up to three months in. In the meantime you reclaim the VAT from HMRC on your VAT return, so the money comes back to you before it goes out.
Deferral isn’t free: the lender charges for funding the VAT for those months. On DCF quotes that cost is usually spread across the monthly instalments, and it’s shown separately so you can see what it adds.
An excavator priced at £60,000 + VAT, on hire purchase
- Price (ex. VAT)
- £60,000
- VAT at 20%
- £12,000
- Deposit, 10% of the price
- £6,000
- Paid at the start, without deferral (deposit + VAT)
- £18,000
- Paid at the start, with a 3-month deferral (deposit only)
- £6,000
- VAT repaid to the lender in month 3
- £12,000
Illustrative figures, not a quote. In both cases a VAT-registered business would normally reclaim the £12,000 on its VAT return. Deferral changes when the VAT is paid, not how much.
When VAT works differently
Vans, trucks, plant and equipment
VAT-registered businesses can normally reclaim the VAT in full when the asset is used for the business.
Cars
VAT on buying a car usually can’t be reclaimed unless it’s used only for business. On car lease rentals, usually only half the VAT can be reclaimed if there’s private use.
No VAT on the price
Buying from a seller who isn’t VAT-registered, or a used vehicle sold under the margin scheme, means no reclaimable VAT is added. You finance the price as it is.
Not VAT-registered? Then you can’t reclaim the VAT, and a finance lease, which spreads VAT across the rentals, may help your cash flow more than hire purchase. See hire purchase vs finance lease vs contract hire.
Frequently asked questions
Do you pay VAT upfront on hire purchase?
Normally, yes. On hire purchase VAT on the full price of the asset is due at the start, usually alongside the deposit. VAT-registered businesses can usually reclaim it on their next VAT return. VAT deferral can delay paying it to the lender for up to three months.
What is VAT deferral?
The lender pays the VAT to the supplier for you at the start, and you repay that VAT to the lender as a single payment a short time later, up to three months. It means you can reclaim the VAT from HMRC before you have to pay it. There is a small cost for this, which is usually built into the monthly payments.
Is there VAT on a finance lease?
Yes, but it is charged on each rental rather than on the full price at the start. That is one reason a finance lease needs less cash upfront. VAT deferral is not needed on a finance lease for the same reason.
Can I reclaim the VAT on a van or a piece of machinery?
VAT-registered businesses can normally reclaim VAT on commercial vehicles, plant and equipment used for the business. Cars are different: VAT on buying a car usually cannot be reclaimed unless it is used only for business, and only part of the VAT on car lease rentals can usually be reclaimed if there is any private use. Your accountant should confirm how the rules apply to you.
When is there no VAT to pay at all?
If you buy from a seller who is not VAT-registered, such as a private individual, or a used vehicle is sold under the VAT margin scheme, no VAT is added that you can reclaim. In those cases the price you see is the price you finance.
Does it matter when in my VAT quarter I buy?
It can. If you pay VAT quarterly, buying early in the quarter means a longer wait before you can reclaim, so a deferral that ends after your VAT refund is likely to arrive is the most useful. Your accountant can tell you when a refund would be expected.
Related guides
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