How hire purchase works when a business funds solar
You put down a deposit and pay fixed monthly instalments that include interest. The lender holds legal title until the final payment, but for tax you count as the owner from day one, so you can claim the capital allowance on the whole cost in year one while spreading the cash over several years. When the term ends, ownership passes to you for a nominal fee, the payments stop, and the system keeps generating free of finance for the rest of its life. It is the popular middle path for owners who want ownership and relief but not a big cash hit.
Own the system, spread the cost, keep the tax relief
Hire purchase is the middle path most owners land on when they want the economics of owning the array but not the cash hit of buying it. You put down a deposit, often around 10 per cent, pay fixed instalments over the term, and take full ownership at the end for a nominal fee. Crucially, for tax you count as the owner from day one, so you claim the year-one allowance on the whole cost even though you pay over several years. It is close to buying the system with the lender's money while still being treated as the owner, which is exactly why finance-literate businesses reach for it.
How it runs
A funder buys the installation and you repay it under a hire-purchase agreement, typically over two to seven years, priced off the Bank of England base rate plus a margin for your business's credit strength. The lender holds legal title until the final payment, which is what secures the facility, but you use the system and take all its benefits from the moment it is commissioned. Fixed payments mean you know your outgoings for the life of the deal, which is easy to plan against a rising or volatile grid price. Once the last instalment and the small transfer fee are paid, title passes to you and the remaining fifteen-plus years of generation carry no finance cost at all.
The tax position, spelled out
Being treated as the owner from the start is the whole point. You claim the Annual Investment Allowance, giving 100 per cent first-year relief on qualifying spend up to £1m, on the full installed cost in year one rather than on the instalments paid so far, and the interest element of your payments is separately deductible. Solar is special-rate plant, so it does not qualify for full expensing; above the £1m cap a company can use the 50 per cent special-rate first-year allowance, with the balance written down at 6 per cent a year. VAT at 20 per cent is reclaimable if you are VAT-registered, self-consumed rooftop solar is exempt from business rates in England to March 2035, and exported power earns under the Smart Export Guarantee. This is general information, not advice; confirm it with your accountant.
The trade-offs to weigh
You pay interest, so the total cost is higher than paying cash, and the liability sits on your balance sheet with a matching asset, which can matter for gearing and covenants. Because you are the owner in substance, the maintenance and performance risk is yours, so a solid installer warranty and a monitoring plan are worth having. Check whether early settlement is allowed and on what terms. If keeping the asset off balance sheet matters more than owning it, an operating lease or a PPA may suit better. To see whether the instalments clear your projected saving, run the figures in the finance calculator before you commit.
Pros
- You own the asset outright at the end
- Full year-one tax relief despite paying monthly
- Keeps most of your working capital free
- Fixed, predictable payments to budget against
Trade-offs
- Sits on the balance sheet with a matching liability
- You pay interest over the term
- You carry maintenance and performance risk
Because the rate is priced off your credit strength, it pays to see who lends against solar plant: compare hire-purchase and asset-finance lenders. Still weighing this against the alternatives? Line every funding route up side by side before you decide.