Business Contract Purchase

Contract purchase gives a business the tax treatment of buying a vehicle and the exit of leasing one. You pay a deposit and fixed monthly payments against a guaranteed future value, claim capital allowances as owner, and at the end you either pay the balloon and keep it or hand the vehicle back. It is the only agreement in our range that does both, and for many companies it is the one that fits.

How contract purchase works

You pay a deposit, then fixed monthly payments across a term of usually two to four years, against an agreed annual mileage. At the outset the funder sets a guaranteed future value, which is its estimate of what the vehicle will be worth when the agreement ends.

Your monthly payments cover the difference between the vehicle's price now and that future value, plus interest. That makes them lower than hire purchase on the same vehicle, because you are not repaying the whole value during the term.

Throughout the agreement the vehicle sits on your balance sheet and your business claims capital allowances on it, exactly as if you had bought it. That is the tax advantage, and it is available because ownership is the intended destination.

You choose at the end, not at the start

This is the feature that distinguishes contract purchase, and it is worth being precise about.

When the term finishes you have three options and you do not commit to any of them when you sign.

Pay the balloon and keep the vehicle. It becomes your business's outright property. If it is worth more than the guaranteed future value, that difference is yours.

Hand it back. Subject to fair wear and tear and your agreed mileage, you walk away with nothing further to pay on the finance. If the vehicle is worth less than the guaranteed future value, that is the funder's problem, not yours. That protection is exactly what "guaranteed" means here.

Part-exchange. Any value above the balloon can go towards your next vehicle.

Compare that with hire purchase, where a final balloon payment is compulsory because ownership is the whole point of the agreement. On contract purchase the balloon is optional. You get the capital allowances of owning without being locked into keeping a vehicle whose value has moved against you.

VAT: where the money actually lands

This is the single most common surprise on contract purchase and it is a timing issue rather than a cost one.

Contract hire is a supply of services, so VAT is charged on each rental as it falls due and recovered as you go. Contract purchase is a supply of goods, so VAT is charged up front on the vehicle price.

For a VAT-registered business the recoverable proportions are the same as elsewhere: broadly 50% on a car with any private use, up to 100% on a car used solely for business depending on circumstances, and 100% on a van, single-cab pickup or other commercial vehicle. What differs is when it hits your cash flow.

The practical effect is that a contract purchase requires more VAT to be funded at the start than an equivalent contract hire, even though the recovery position is comparable. Some funders will finance the VAT element separately. It is worth asking before you commit rather than discovering it at delivery, and we will always set it out in writing.

Capital allowances, and what changed in April 2026

Because your business is treated as the owner, you claim capital allowances rather than deducting rentals. Two recent changes affect the sums.

The main rate writing down allowance reduced from 18% to 14%, from 1 April 2026 for corporation tax and 6 April 2026 for income tax. That covers cars at or below 50g/km CO2. Relief is now slower, which narrows the advantage of owning over leasing.

The 100% first-year allowance for new zero-emission cars continues but expires 31 March 2027 for corporation tax and 5 April 2027 for income tax. It allows the whole cost to be deducted in year one and is by far the most valuable relief available on a car. If a zero-emission vehicle is in your plans, that expiry date belongs in the decision.

One point specific to contract purchase: if you hand the vehicle back rather than paying the balloon, there will be a balancing adjustment in your capital allowances computation. Your accountant will handle it, but it is worth flagging at the outset rather than at disposal.

Rates change at Budgets. Our company car tax guide carries the current figures and is the page we keep updated.

The 100% year-one deduction, and why it only exists if you own

This is the strongest tax argument in vehicle finance and it is regularly buried, so here it is plainly.

A van, single-cab pickup or other genuine commercial vehicle can usually be deducted in full, in the year you buy it. Commercial vehicles are not "cars" for capital allowance purposes, so they are not caught by the restrictions that apply to cars. Two routes get you there:

• Annual Investment Allowance. Up to £1 million a year at 100%, available to companies, sole traders and partnerships alike, and it works on second-hand vehicles as well as new.
• Full expensing. 100% in year one, but companies only, and the vehicle must be new and unused.

A new, unused, fully electric car can also be deducted in full in year one, through the 100% first-year allowance, which runs until 31 March 2027 for corporation tax and 5 April 2027 for income tax. Note the conditions: it must be new, and it must be zero-emission. A second-hand electric car goes into the main pool at 14% instead.

From 1 January 2026 there is also a new 40% first-year allowance on main-rate assets where the Annual Investment Allowance or full expensing are not available, which mainly helps unincorporated businesses that have used up their £1 million and businesses acquiring assets for leasing. It does not apply to cars.

One caveat worth knowing: for sole traders and partnerships the claim is restricted to the business-use proportion, so private mileage reduces it. Companies are not restricted in the same way. Your accountant will confirm your position.

This is where contract purchase does something no other agreement in our range does. You get the full year-one relief that comes with ownership, and you keep the right to hand the vehicle back at the end if its value has moved against you. On contract hire the allowances are the funder's. On hire purchase you get them but you are committed to keeping the vehicle. Here you get both sides.

The one thing to plan for: if you do hand the vehicle back rather than paying the balloon, that is a disposal, and a balancing adjustment arises in your capital allowances computation. Your accountant will handle it, but it is better known at the outset than discovered at the end.

Double-cab pickups: the April 2025 change applies here too

The old test was payload, and it worked the opposite way round to instinct. A payload of one tonne or more made a double-cab a van, the favourable outcome. Under one tonne was already a car.

Since 1 April 2025 for corporation tax and 6 April 2025 for income tax, payload is no longer the test for direct tax. Vehicles are assessed on primary suitability, and most double-cabs are now treated as cars. No Annual Investment Allowance, and writing down allowances at the rate for their emissions, usually the 6% special rate.

VAT is the exception. Payload remains the VAT test, so a double-cab with a payload of one tonne or more still qualifies for recovery. Two tests, two answers, same vehicle.

Vehicles purchased, leased or ordered before 6 April 2025 keep the previous treatment until the earlier of disposal, lease expiry or 5 April 2029. Single-cab pickups and panel vans are unaffected.

Contract purchase against the alternatives

Read the detail on business contract hire, hire purchase and finance lease.

When contract purchase is the right answer

It suits your business if you want the capital allowances that come with ownership but do not want to be committed to keeping the vehicle, your mileage is reasonably predictable, you are buying a vehicle whose future value you are not confident about, or you want to keep the option of owning it without deciding today.

It is particularly worth looking at where a vehicle qualifies for the 100% first-year allowance, because you get the full relief in year one while retaining the right to hand the vehicle back later.

When it is not

We would rather say this now than after you have signed.

If your mileage is high or unpredictable, contract purchase has a mileage limit and excess charges. Hire purchase and finance lease do not.

If you have no interest in ever owning the vehicle, contract hire is usually a lower monthly cost, spreads the VAT across the term, and removes end-of-term decisions entirely.

If you are certain you want to own it, hire purchase gets you there without the mileage restriction.

If funding the VAT up front is difficult, contract hire spreads it. That is a genuine cash-flow consideration and it decides the answer more often than people expect.

If the vehicle will be modified, a finance lease is usually the better home for it.

How we are paid

How Intelligent Vehicle Finance arranges it

Intelligent Vehicle Finance is a credit broker. We do not lend and we do not own the vehicles. We take your requirement, compare it across our funder panel, and set the options out in writing so you can compare like with like.

On contract purchase the numbers that decide whether it is a good agreement are the guaranteed future value, the contracted mileage, the VAT position at the start and the total amount payable. A funder who sets an optimistic future value shows an attractive monthly figure and leaves a larger balloon to deal with later. We will show you both, and say where we think the assumption is generous.

Intelligent Vehicle Finance is also part of Global Vehicle Group, whose brands have funded more than 70,000 vehicles, so behind the personal service sits genuine group scale.

Speak to us on 01752 429950, or request a callback.

Frequently asked questions

This page is general information and is not tax, accounting or financial advice. Tax and accounting treatment depends on individual circumstances and on rates and thresholds set by HMRC, which can change at future Budgets. Please speak to your accountant about your company's position. Where the customer is an individual, sole trader or small partnership, contract purchase is a regulated credit agreement; agreements with limited companies are generally exempt. The terms of your own agreement, including the annual percentage rate where applicable, the total amount payable, the guaranteed future value and any settlement figure, are set by the funder and will be set out in your documentation before you commit. Please read it. Intelligent Vehicle Finance is a credit broker, not a lender, and receives a commission from the lender or funder when an agreement completes. A trading style of XLCR Vehicle Management Ltd, authorised and regulated by the Financial Conduct Authority (FRN 315268). Subject to status and availability. Reviewed by Stacey Smith, Brand Director, Intelligent Vehicle Finance. Last updated: July 2026.