Date: 10/05/2022 | Written By: Karl Hodson
Hire purchase is a form of asset finance commonly used by businesses investing in hard assets, such as vehicles and equipment. Under a hire purchase agreement, the asset is viewed as rented until the repayments have been made, but the business owns it outright on payment of the final lump sum.
Hire purchase is a lending facility that enables effective budgeting, as repayments are at a fixed rate and over a specified term. Flexibility is also inherent when businesses use hire purchase to buy assets, as the monthly repayments can be adjusted according to the level of deposit and final lump sum amount.
One negative aspect of a hire purchase agreement is that businesses must pay the full amount of VAT upfront, which can jeopardise healthy cash flow. The VAT due on a hard asset can be considerable, and this liability may make a business owner reconsider the purchase.
It’s important to know that there are VAT deferral solutions available in this instance, however, which can prevent business cash flow being compromised whilst adhering fully to the terms and conditions of borrowing.
So what are the VAT deferral solutions for UK businesses, and how do they benefit the organisations involved?
The requirement to pay the VAT upfront when purchasing an asset on hire purchase can create financial difficulties for businesses, even though the payment is recoverable from HMRC at a later date.
A VAT deferral programme exists for VAT-registered businesses, whereby the payment can be deferred for three months from the date of the hire purchase agreement. The timing of this arrangement means that businesses retain use of the cash that would otherwise have been used to pay HMRC. Although there’s an interest charge for taking this option, it can greatly benefit some businesses.
VAT lump sum payments can severely compromise cash flow for businesses with unstable working capital. Healthy business cash flow is crucial to success, whether a business is starting up or in a period of growth.
Retaining use of substantial sums of cash, rather than paying them over to HMRC, may be critical in some instances, and support a business in challenging economic times. Various external elements can quickly jeopardise business stability, and potentially lead to long-term financial decline despite the best efforts of directors and business owners.
Although deferring a VAT payment for three months when taking out a hire purchase agreement does incur a cost, it can still make sense if a negative cash flow is a serious risk. It can be seen as a valuable ‘backstop’ that protects the business from financial distress.
For more information on VAT deferral solutions for businesses, please visit MAF Finance Group on Practice Portfolio.
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