Guide
Buying or Financing an HGV: VAT, Capital Allowances and Cash Flow
Three routes cover most truck acquisitions: buying outright or on hire purchase, taking a finance lease, or taking contract hire. They can produce a similar monthly outflow and completely different tax, VAT and balance sheet outcomes.
The decision matters more in haulage than in most trades because the asset is large relative to the business, and because the balance sheet is also a licensing document.
Last reviewed
Written by the HGV Accountants editorial team
- Who this is for
- HGV owner-drivers and haulage operators buying or replacing a vehicle or trailer.
- The problem
- The finance decision is usually made on the monthly payment, and the monthly payment is the one thing that does not tell you what the agreement does to your tax, your VAT or your balance sheet.
The Three Routes
| Outright or hire purchase | Finance lease | Contract hire | |
|---|---|---|---|
| Who owns it | You do, or you will at the end | The lessor, with the risks and rewards largely with you | The lessor throughout |
| On your balance sheet | Yes, as a fixed asset with the debt alongside | Generally yes | Generally no |
| Tax relief route | Capital allowances on the vehicle, plus the interest element | Broadly the lease charges, subject to the agreement | The hire charges |
| VAT | Generally recoverable up front on the vehicle where used for business | Generally on the rentals | Generally on the rentals |
| Cash effect | Deposit and, on outright purchase, the full price | Spread | Spread, usually with maintenance included |
| End of term | It is yours | Per the agreement | It goes back |
Capital Allowances on a Truck
Where you buy the vehicle, outright or on hire purchase, the relief comes through capital allowances rather than by deducting the payments. A heavy goods vehicle is plant and machinery rather than a car, which matters: the restriction that applies to business cars does not apply to it.
£1,000,000
Annual investment allowance
The limit on qualifying plant and machinery expenditure that can be written off in full in the year. Source: GOV.UK capital allowances.
Claiming the full cost in one year is not automatically the right answer. Relief is worth more in a year with profit to relieve, and an owner-driver who writes a truck down to nothing in year one may find the following four years carry a full tax charge with no allowance left. The decision is about which years the relief lands in.
The Cash Flow Question
Tax relief is a discount on a cost, never a reason to incur one. The questions that decide whether a truck is affordable are separate from the questions that decide how it is taxed.
- What leaves the bank on day one: deposit, first payment, VAT if it is not recoverable immediately, insurance and any bodywork or livery.
- What the vehicle has to earn each month before it contributes anything, from the cost per mile guide.
- What it does to your operator licence financial standing requirement, from the O-licence guide.
- What happens if the work it was bought for stops. A truck on contract hire can often be handed back at term. A truck on hire purchase is yours either way.
- When the existing vehicles come off finance, because two agreements ending in the same quarter is a very different business from two ending two years apart.
Common Questions
Can I claim the annual investment allowance on a lorry?
A heavy goods vehicle is generally plant and machinery rather than a car for capital allowances, so it can qualify. The exclusion that stops cars qualifying does not apply to it. What matters is that you have incurred the expenditure, on an agreement that gives you the asset, and that the vehicle is used for the business.
Is contract hire worse for tax than buying?
Not worse, different. Contract hire gives a deduction for the rentals as they are incurred, which is simple and spreads evenly. Buying gives capital allowances, which can be front-loaded. Which is better depends on your profit profile, your cash position and how long you keep vehicles.
Can I reclaim the VAT on a truck?
Where the vehicle is bought for business use by a VAT registered business, the VAT on a commercial vehicle is generally recoverable, subject to the normal rules and to any private use. This is one of the ways a heavy goods vehicle differs from a car, where recovery is heavily restricted.
Should I buy the truck personally and hire it to my company?
It is possible and it is rarely as clever as it sounds. It creates a rental income to declare, a question about the operator licence and the vehicle's use, and complications on the finance agreement and the insurance. If there is a reason to do it, it should be a reason other than tax.
Related Guides
- Cost Per MileWhat a mile costs, what empty running does to it, and the rate you need to stand still.
- O-Licence Financial StandingHow much has to be available, how it is evidenced, and what happens if the balance falls.
- One Truck to a Small FleetThe second truck changes the licence, the balance sheet, the payroll and the cash cycle at once.
A Fixed Quote for the Truck or the Fleet
Tell us how many vehicles you run, whether you are a sole trader or a limited company, and what is outstanding. We reply by email with a fixed price and the dates the work has to be finished by.
- A fixed fee agreed before any work starts
- Nothing charged until you accept the quote
- We tell you if you do not need what you asked for
Rather read first? How it works sets out what happens after you send this.
Tell Us About Your Truck or Fleet
A few lines is enough to start. Nothing is charged until you agree the quote, and we only use your details to answer this enquiry.