The general characteristics of hire purchase contracts:
- Like financial leasing, hire purchase is a tripartite operation whereby:
- The lessee:
- chooses the material and the supplier, and negotiates the purchase conditions
- undertakes to rent the material (number, amount and duration are fixed in the contract)
- checks the conformity of the goods received (record of receipt), the starting date of the rental agreement and the terms of payment of the supplier by the lessor.
- The lessor:
- purchases the material in order to lease it
- takes responsibility for the administrative management of the transaction
- The supplier:
- delivers the material chosen by the lessee
- is paid in full by the lessor, who then becomes the owner of the material.
- The lessee:
- At the end of the lease, and in comparison with financial leasing, the lessee an additional option regarding the lease:
- Either purchase the leased asset, pour an amount established at the beginning of the operation (purchase option)
- Or extend the lease
- Or return the asset to the lessor
- The lessee’s cash position remains intact: comprehensive financing, no VAT advance.
- It is possible to include advance fees, use of subsidies and holdbacks into this option.
- From an accounting perspective, the rents are seen as operating expenses and are tax deductible in most cases.
- The duration of the financing must not overly exceed the period of tax depreciation, except in cases of special usage.
Through hire purchase, the lessee has the possibility of purchasing the material at the end of the lease period but is under no obligation to do so.