What is a hire purchase agreement for tax purposes?
Answered 17 March 2026
What is a Hire Purchase Agreement for Tax Purposes?
What the law says
The statutory definition of a hire-purchase agreement is set out in two parallel provisions — one for Income Tax purposes (ITA 2007, s.998A) and one for Corporation Tax purposes (CTA 2010, s.1129). Both definitions are identical in substance.
A hire-purchase agreement is an agreement where all three of the following conditions (A, B and C) are met:
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Condition A: Under the agreement, goods are bailed (or in Scotland, hired) in return for periodical payments by the person to whom they are bailed or hired.
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Condition B: Under the agreement, the property in the goods will pass to the person to whom they are bailed or hired if the terms of the agreement are complied with and one or more of the following events occurs:
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(a) the exercise of an option to purchase by that person,
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(b) the doing of another specified act by any party to the agreement, or
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(c) the happening of another specified event.
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Condition C: The agreement is not a conditional sale agreement. A conditional sale agreement is one where (a) the purchase price or part of it is payable by instalments, and (b) the property in the goods is to remain in the seller until conditions specified in the agreement are met.
In short: a hire purchase agreement involves the bailing of goods for periodic payments, with ownership passing to the hirer upon fulfilment of the agreement terms — but it is not a conditional sale agreement (where title passes automatically on final payment without any option or act being required).
HMRC guidance / practice
HMRC guidance describes the commercial reality of a hire purchase agreement as follows: the seller keeps ownership of the asset until the last payment has been made, but makes the asset available for use by the purchaser. The purchaser usually has the right to acquire the asset at the end of the contract.
For accounting and tax treatment, most hire purchase contracts are of a financing nature — the option to purchase is typically exercisable at below market value (often a nominal amount), so the hirer is expected from the outset to take up the option. Under FRS 102 Section 20, such contracts are accounted for as a finance lease. In commercial reality, such a contract is one of sale and purchase of goods, with the 'hire' (revenue) element of the payments being equivalent to 'interest' on the finance provided.
Less commonly, hire purchase contracts are not of a financing nature (e.g. where the option to purchase is at a relatively high price). These are accounted for as an operating lease under FRS 102 Section 20.
Where a hire purchase contract is treated as a finance lease in the accounts, the implicit financing cost is included in tax-interest — as income for the seller and expense for the purchaser.
The method used in accounts prepared in accordance with GAAP (which spreads the 'hire' or 'interest' element over the term of the agreement) should be followed for tax purposes.
Citation sources
Under a hire purchase agreement, a person may pay for an asset in instalments. The seller of the asset keeps ownership of the asset until the last payment has been made, but makes the asset available to be used by the purchaser. The purchaser usually has the right to acquire the asset at the end of the contract. Conditional sale agreements operate in a similar way, with the title passing automatically to the purchaser once they have made the final payment. Often such arrangements are treated as
Part 16 Income Tax Acts definitions etc Chapter 1 Definitions Meaning of “hire-purchase agreement” 998A 1 This section applies for the purposes of the provisions of the Income Tax Acts which apply this section. 2 A hire-purchase agreement is an agreement in whose case each of conditions A to C is met. 3 Condition A is that under the agreement goods are bailed (or in Scotland hired) in return for periodical payments by the person to whom they are bailed (or hired). 4 Condition B is that under the
The guidance in this section refers to FRS 102 Section 20 Leases. Related standards under other frameworks are: FRS 105 Section 15 Leases IAS: IFRS 16 Leases (from 1 January 2019), which supersedes IAS 17 Leases Old UK GAAP: SSAP 21 Accounting for Leases and Hire Purchase Contracts If you have concerns regarding the accounting treatment of a hire purchase contract, seek advice from an HMRC Advisory Accountant. FRS 102 Section 20 does not separately define a hire purchase contract. Such con
Part 24 Corporation Tax Acts definitions etc Chapter 1 Definitions “Hire-purchase agreement” 1129 1 This section has effect for the purposes of the provisions of the Corporation Tax Acts which apply this section. 2 A hire-purchase agreement is an agreement in whose case conditions A, B and C are met. 3 Condition A is that under the agreement goods are bailed (or in Scotland hired) in return for periodical payments by the person to whom they are bailed (or hired). 4 Condition B is that under the