You repay the capital plus interest charges over the agreed finance term. The ownership of the asset automatically passes to you upon final payment (unlike hire purchase, there is no option fee to acquire ownership).
- Income tax treatment
- You deduct the interest cost, as well as any capital allowances (wear and tear), as if you own the asset outright.
- VAT treatment
- The seller charges the full VAT on the cost price, including interest.
- You are able to claim the full VAT input.
- Accounting treatment
- The asset is recorded as an "on-balance sheet" item.
- The outstanding debt is shown as a liability.
- You deduct depreciation and the interest cost.
