Business Contract Purchase
- Rated 4.9/5 on Feefo
- FCA authorised, FRN 315268
- BVRLA leasing broker member
- Part of Global Vehicle Group
Intelligent Vehicle Finance is a trading name of XLCR Vehicle Management Ltd. Authorised and regulated by the Financial Conduct Authority, FRN 315268. We are a credit broker, not a lender, and we may receive a commission from lenders for introducing you to them. All finance is subject to status, availability and individual funder criteria.
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.
Key facts
- Your business claims the capital allowances, because ownership is the intended outcome. Contract hire and finance lease do not allow this.
- You can hand the vehicle back at the end. Hire purchase does not let you do that, because the balloon there is compulsory.
- A guaranteed future value is set at the outset. If the vehicle is worth less at the end and you hand it back, that shortfall is the funder's, not yours.
- VAT timing on contract purchase depends on the agreement. If the final optional payment is set at or above the expected market value, it is normally treated as leasing services for VAT, with VAT due on instalments. If the terms make purchase the rational choice, goods treatment can apply, with VAT due at the outset. Confirm the funder's treatment before signing.
- An annual mileage is agreed and excess miles are charged at the rate in your agreement.
- The main rate writing down allowance fell from 18% to 14% in April 2026. The 100% first-year allowance for new zero-emission cars expires 31 March 2027.
- Cars cannot use the Annual Investment Allowance or full expensing. Vans and other commercial vehicles may qualify, subject to the business, asset, use and allowance conditions.
- Where the customer is an individual, sole trader or small partnership, the agreement is regulated credit and carries statutory protections. Agreements with limited companies are generally exempt.
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 usually 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 every payment, including any final 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
Tax position checked for 2026/27 against HMRC’s optional-payment guidance. VAT treatment follows the financial terms of the contract, not its marketing name.
VAT on contract purchase needs checking at the outset because the agreement determines both timing and recovery.
Contract hire is a supply of services, with VAT charged on rentals. VAT timing on contract purchase depends on the agreement. If the final optional payment is set at or above the expected market value, it is normally treated as leasing services for VAT, with VAT due on instalments. If the terms make purchase the rational choice, goods treatment can apply, with VAT due at the outset. Confirm the funder's treatment before signing.
Where contract purchase is treated as a goods purchase, VAT on a car available for private use is normally blocked. Leasing services follow the car-rental rules instead. Commercial vehicles follow the normal VAT rules, including business use, private use, partial exemption and the VAT scheme. Ask your accountant to confirm the recovery available under your agreement.
The practical effect depends on whether the agreement is treated as a supply of goods or leasing services for VAT. Do not assume that VAT is all due up front, or that recovery matches contract hire. Ask for the funder's VAT treatment and payment schedule in writing, then have your accountant check recovery.
Capital allowances, and what changed in April 2026
2026/27 tax check: HMRC’s main-pool rate is 14% from April 2026; a chargeable period straddling the change uses a blended rate. Car allowances depend on emissions and whether the car is new and unused. AIA and first-year relief have eligibility and timing conditions; they are deductions from taxable profits, not refunds of the purchase price.
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 subject to the qualifying conditions. If a zero-emission vehicle is in your plans, that expiry date belongs in the decision.
| Vehicle | Position |
|---|---|
| New zero-emission car | 100% first-year allowance, until 31 March 2027 |
| Car at or below 50g/km CO2 | Main pool writing down allowance, now 14% |
| Car above 50g/km CO2 | Special rate pool, 6% |
| Used or second-hand electric car | No first-year allowance. Main pool instead |
| Any car, Annual Investment Allowance | Not available |
| Van, single-cab pickup or other commercial vehicle | May qualify for the Annual Investment Allowance or, for eligible companies and assets, full expensing. Eligibility, business use and allowance limits apply. |
| Main-rate asset where AIA and full expensing are unavailable | Qualifying new and unused main-rate assets: 40% first-year allowance from 1 January 2026; cars excluded |
| Double-cab pickup, from April 2025 | Treated as a car. No AIA |
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
The timing of tax relief can affect the funding decision, so it is worth setting it out 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.
The part that decides which agreement you choose: none of this is available if you lease. Capital allowances belong to whoever is treated as acquiring the vehicle. On contract hire or a finance lease that is the funder, and your business deducts the rentals instead. On an ownership route the allowances are yours. For a company buying a van outright, or a new electric car, that difference in year one can be substantial.
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 is not blocked from VAT recovery as a car; the normal recovery rules still apply. Two tests, two answers, same vehicle.
The double-cab pickup transition is different for each tax. For benefit-in-kind, qualifying vehicles bought, leased or ordered before 6 April 2025 can retain van treatment until disposal, lease expiry or 5 April 2029, whichever comes first. For capital allowances, the transition requires a contract before 1 April 2025 for Corporation Tax or 6 April 2025 for Income Tax, with expenditure incurred before 1 October 2025. Hiring-cost expenditure from 1 October 2025 follows the car rules regardless of the hire-contract date.
Contract purchase against the alternatives
| Contract purchase | Contract hire | Hire purchase | Finance lease | |
|---|---|---|---|---|
| Capital allowances | Yes | No | Yes | No, rentals deducted |
| Can you hand it back? | Yes | Yes, always | No | No, it is sold |
| Can you own it? | Optional | No | Yes, automatically | No |
| Risk on end value | Funder, if you hand back | Funder | Yours | Yours |
| VAT timing | Depends on agreement terms | On each rental | Depends on agreement terms | On each rental |
| Mileage limit | Yes | Yes | No | No |
| Monthly cost | Middle | Depends on the quotation | Depends on the quotation | Varies with the balloon |
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 can be 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 your agreement requires VAT up front, 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
Intelligent Vehicle Finance is a credit broker, not a lender. We receive a commission from the lender or funder when an agreement completes. The amount can vary depending on the product and the provider.
You have the right to ask us what commission we will receive before you commit to anything, and we will tell you. We would rather you asked.
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.
Tax and road costs across the agreement
For cars registered from 1 April 2017, the standard annual VED payment after the first year is £200 in 2026/27, before any supplement. First-year tax depends on emissions; the zero-emission first-year rate is £10. Older registration rules can differ. Check what your agreement includes and who pays increases.
The Expensive Car Supplement is £440 a year in 2026/27 for five years from the second licence. It applies above a published list price of £40,000 for petrol, diesel and hybrid cars, or £50,000 for qualifying zero-emission cars registered from 1 April 2025. Relevant options count; a discount or used value does not set the threshold. Check the registration date and current VED rules.
The government plans eVED from April 2028 alongside VED: 3p per mile for electric cars and 1.5p for plug-in hybrid cars. It is not a current charge; legislation and implementation remain to be completed. The published starting rates are not a promise of later rates. Ask how your funder would handle the charge if the agreement crosses its introduction. See the government’s consultation response.
For a zero-emission company car available for private use, the published BiK percentages are 4% in 2026/27, 5% in 2027/28, 7% in 2028/29 and 9% in 2029/30. The percentage is applied to the taxable car value; the driver’s tax then depends on their tax rate and circumstances. Petrol, diesel and plug-in hybrid cars have different bands. See the current HMRC tables and the later-year changes.
Tax information checked 27 September 2026. Rates and rules may change. This is general information; ask your accountant to confirm your position. These tax amounts are not vehicle-finance quotations.
Frequently asked questions
What is the difference between contract purchase and contract hire?
Two things. On contract purchase your business is treated as the owner, so you claim capital allowances rather than deducting rentals, and you have the option to pay the balloon and keep the vehicle. On contract hire the funder owns it throughout, you deduct the rentals instead, and the vehicle always goes back. VAT timing on contract purchase depends on its terms; confirm whether the funder treats it as goods or leasing services. Contract hire normally charges VAT on each rental.
What is the difference between contract purchase and hire purchase?
The balloon. On hire purchase the final payment is compulsory, because ownership is the point of the agreement. On contract purchase it is optional, so you can hand the vehicle back at the end instead. Both give your business capital allowances. Hire purchase has no mileage limit, contract purchase does.
Can my business claim capital allowances on contract purchase?
Yes. Because ownership is the intended outcome, the vehicle goes on your balance sheet and you claim capital allowances rather than deducting rentals. A new zero-emission car currently attracts a 100% first-year allowance, expiring 31 March 2027 for corporation tax. Cars at or below 50g/km go into the main pool, where the writing down allowance fell from 18% to 14% in April 2026. Cars above 50g/km go into the special rate pool at 6%. If you hand the vehicle back rather than paying the balloon, a balancing adjustment will arise.
When is the VAT payable on contract purchase?
VAT timing on contract purchase depends on the agreement. If the final optional payment is set at or above the expected market value, it is normally treated as leasing services for VAT, with VAT due on instalments. If the terms make purchase the rational choice, goods treatment can apply, with VAT due at the outset. Confirm the funder's treatment before signing. Where contract purchase is treated as a goods purchase, VAT on a car available for private use is normally blocked. Leasing services follow the car-rental rules instead. Commercial vehicles follow the normal VAT rules, including business use, private use, partial exemption and the VAT scheme. Ask your accountant to confirm the recovery available under your agreement.
What happens if the vehicle is worth less than the balloon?
Hand it back. The guaranteed future value means the funder carries that risk, not your business, provided the vehicle is within its agreed mileage and fair wear and tear. That protection applies at the end of the agreement on the terms in your contract. It does not apply if you want to exit early, where a settlement figure is calculated differently.
Is there a mileage limit on contract purchase?
Yes. An annual mileage is agreed at the outset and it determines the guaranteed future value. Excess miles are charged at the rate set out in your agreement. If your mileage is high or genuinely unpredictable, hire purchase or a finance lease may suit you better because neither restricts it.
Does contract purchase work for vans and pickups?
Yes. Commercial vehicles can qualify for VAT recovery and capital allowances, subject to the relevant business, asset and use conditions. Double-cab pickups need separate checks for VAT, capital allowances and benefit-in-kind. The double-cab pickup transition is different for each tax. For benefit-in-kind, qualifying vehicles bought, leased or ordered before 6 April 2025 can retain van treatment until disposal, lease expiry or 5 April 2029, whichever comes first. For capital allowances, the transition requires a contract before 1 April 2025 for Corporation Tax or 6 April 2025 for Income Tax, with expenditure incurred before 1 October 2025. Hiring-cost expenditure from 1 October 2025 follows the car rules regardless of the hire-contract date.
Does Intelligent Vehicle Finance receive commission on contract purchase?
Yes. We are a credit broker, not a lender, and we receive a commission from the lender or funder when an agreement completes. The amount can vary depending on the product and the provider. You have the right to ask what we will receive before you commit, and we will tell you.
What happens if I need to end a business contract purchase agreement early?
Ask the funder for a written settlement figure and compare it with the vehicle's value. The guaranteed future value is an end-of-term feature subject to return conditions; it does not remove an early-settlement shortfall. Statutory rights depend on the customer and whether the agreement is regulated, so check your own documentation.
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. Existing review: July 2026.
Editorial responsibility: Stacey Smith, Brand Director, Intelligent Vehicle Finance.
Last updated: September 2026