Can I claim expenses for business equipment bought on finance?

Can I claim expenses for business equipment bought on finance?

Buying business equipment is rarely as simple as paying cash and walking away with a receipt. Many businesses—especially small companies, sole traders, contractors, and startups—use finance to spread the cost of laptops, vehicles, machinery, tools, medical devices, office fit-outs, and specialist kit. That raises a very practical question: if you buy equipment on finance, can you still claim the cost as a business expense for tax purposes?

The short answer is: often, yes—but not always in the way people expect. When equipment is financed, the tax treatment usually splits into two parts: (1) the cost of the equipment itself, and (2) the finance costs, such as interest and fees. The equipment cost is generally dealt with through capital allowances (or depreciation add-backs, depending on your tax system), while the interest element may be deductible as a revenue expense if it’s wholly and exclusively for business.

Because the rules can differ by jurisdiction and by the type of finance agreement, it’s important to understand the structure of the deal you’ve signed. A hire purchase agreement can be treated differently from a lease, and both can differ from a loan used to buy an asset. On top of that, you may need to consider VAT (if relevant), business vs personal use, and what happens if you upgrade, refinance, settle early, or sell the asset.

What “claiming expenses” usually means for financed equipment

When people say “claim expenses,” they often mean one of three things:

First, they may mean: “Can I deduct the monthly payments from my taxable profit?” In many cases, the full monthly payment is not treated as a simple expense, because part of it repays the asset cost (capital) and part is interest (revenue). Many tax systems only allow the interest element as a revenue deduction, while the asset cost is handled via capital allowances or similar rules.

Second, they may mean: “Can I get tax relief for the cost of the equipment?” That is typically possible, but the relief might come through capital allowances (sometimes with immediate relief, sometimes spread over years), rather than as an ordinary operating expense.

Third, they may mean: “Can I reclaim VAT on it?” That depends on whether you are VAT-registered, whether the supplier charges VAT, and whether you have a valid VAT invoice. Finance arrangements can affect when and how VAT is accounted for.

So, yes—financed equipment can generate tax relief, but you’ll generally need to separate the equipment cost from the finance costs, and apply the correct method for each.

Understanding the difference between capital and revenue costs

A useful starting point is the difference between capital expenditure and revenue expenditure. Equipment that provides value over more than a short period—such as machinery, IT hardware, vehicles, furniture, and specialist tools—usually counts as capital expenditure. Tax systems commonly restrict immediate deductions for capital expenditure, instead offering specific relief mechanisms such as capital allowances, write-offs, or depreciation-based deductions.

By contrast, revenue expenditure includes day-to-day running costs such as utilities, consumables, rent, subscriptions, repairs, and in many cases, interest on business borrowing. Revenue costs are typically deductible in the period they are incurred, as long as they are for business purposes.

Financed purchases mix these categories. The payments you make under a finance agreement often include both a capital element (repaying the purchase price) and a revenue element (interest and sometimes service charges). Treating the entire payment as a revenue expense can be incorrect, unless the agreement is structured as a true operating lease where payments are, in substance, rental costs rather than a purchase.

Common types of finance for business equipment

Before you can decide what you can claim, you need to identify what kind of finance you used. Here are the main patterns businesses encounter.

Loan or credit facility used to buy equipment

In this scenario, you borrow money (from a bank, lender, or even a credit card) and then buy the equipment outright from the supplier. You typically own the equipment from day one. Tax-wise, the cost of the equipment is usually treated as capital expenditure. You may claim tax relief through capital allowances or similar rules for the asset, while the interest on the borrowing is often deductible as a finance cost, provided the borrowing is for business use.

This arrangement is conceptually simple because the purchase and the finance are separate: one invoice for the asset purchase, and separate statements for the loan interest.

Hire purchase (HP) or conditional sale

Hire purchase is a very common way to fund equipment and vehicles. You usually pay a deposit, then monthly payments, and ownership transfers at the end (or once a final “option to purchase” fee is paid). Even though legal ownership might transfer later, many tax systems treat HP as an acquisition of the asset from the start, because you are effectively paying to own it.

In that case, the asset cost can often qualify for capital allowances, while the interest element of each payment may be deductible as a finance expense. The practical task becomes splitting the agreement into principal and interest, which is usually shown on the lender’s statement or amortisation schedule.

Finance lease

A finance lease (sometimes called a capital lease in some accounting frameworks) is designed to fund the use of an asset over most of its economic life. Depending on local tax rules, the lessee may be treated as having acquired the asset for tax purposes, or the lessor may be treated as the owner and claim the allowances, while the lessee claims lease payments. The details can get technical, and the contract terms matter.

Businesses often choose finance leases for equipment that needs regular replacement, or where the lessor provides additional services. The tax outcome may depend on whether the lease is considered a “true lease” or effectively a financed purchase.

Operating lease or rental agreement

An operating lease is more like renting. You pay regular rentals to use the equipment, and you usually do not take ownership. If the arrangement is a genuine rental, the payments are often treated as revenue expenses, and the lessor typically claims capital allowances as the asset owner.

Operating leases can be attractive where you want flexibility, predictable costs, and no ownership risk. From a claiming perspective, you may be able to deduct the rentals as a business expense, subject to business use rules.

Subscription-style equipment plans

Some suppliers offer “hardware as a service” subscriptions that bundle equipment, support, insurance, and replacement. These can resemble operating leases, but the accounting and tax treatment depends on the contract. If the subscription includes a purchase option or transfers ownership, it may not be a simple revenue expense. If it’s purely a service/rental, it may be deductible as a recurring expense.

Capital allowances and financed equipment

In many tax systems, capital allowances are the primary mechanism for obtaining tax relief on equipment you buy for the business. Instead of deducting the purchase cost as an ordinary expense, you claim an allowance that reduces taxable profit.

The key point for financed equipment is this: the method of payment (cash vs finance) does not necessarily determine whether you can claim capital allowances. If the business is treated as having purchased the asset—economically and for tax purposes—then the asset may qualify for allowances even if you haven’t fully paid for it yet.

In practice, this often means you can claim relief based on the asset’s cost when it is brought into business use, rather than waiting until the finance is fully repaid. However, local rules can restrict this for certain assets or arrangements, and the timing of ownership can be relevant in some cases.

It’s also important to separate the asset “cost” from the total amount paid over the finance term. If you pay £1,000 for a laptop but pay £1,200 over 24 months, the asset cost is still £1,000. The extra £200 is typically interest and fees, which may be treated separately as finance costs.

Interest and finance charges: what you can usually claim

Interest and finance charges are usually treated as revenue expenses, meaning they can often be deducted in calculating taxable profit—provided the borrowing or finance is for business purposes. This is often the most straightforward part of the claim.

However, you typically need to meet several conditions:

The expense must be wholly and exclusively for business. If the asset is partly for personal use—say you finance a camera you use for both paid work and personal travel—you may need to apportion the interest element between business and personal use.

The interest needs to be properly evidenced. Lender statements, amortisation schedules, or annual summaries help show how much of each payment is interest.

Fees and charges may be treated differently. Some fees are treated like interest; others may be capitalised into the asset cost or treated as one-off expenses. The exact treatment can depend on how the fee is described and its economic purpose.

Penalties for late payment are a special case. Some tax regimes disallow penalties and fines. If late payment charges are considered penalties rather than interest, they may not be deductible.

Can you claim the monthly finance payments as an expense?

This is the question many business owners are really asking. The answer depends on the finance structure.

If you have a hire purchase or a loan-based purchase, you generally don’t claim the full monthly payment as an expense. Instead, you claim capital allowances on the asset cost (subject to your rules), and separately claim the interest element of the payments as a finance cost.

If you have a genuine operating lease or rental agreement, you may be able to claim the payments as an expense because they are, in substance, rental costs for using someone else’s asset. In those cases, the lessor typically claims the capital allowances, not you.

If you are not sure which you have, the agreement documentation is usually clear: hire purchase talks about an option to purchase and ownership transfer; leases talk about rentals, return conditions, and sometimes residual value or extension options.

What if you’re self-employed vs a limited company?

The broad concepts—capital vs revenue and business vs personal use—apply across many business types, but there can be differences in detail depending on whether you operate as a sole trader/partner or through a limited company.

For sole traders and partnerships, mixed use is common. You might buy a laptop that is used 80% for business and 20% personally. In many systems, you can only claim the business portion of allowances and interest. You also need to be consistent year to year, adjusting if usage patterns change.

For limited companies, the business and the individual are separate legal entities. If the company buys equipment and makes finance payments, the company generally claims the relevant relief, assuming the asset is used for the company’s trade. If a director or employee uses the asset personally, there may be additional tax considerations such as benefits-in-kind or payroll reporting, depending on the jurisdiction and the type of asset. From the company’s perspective, you still need to consider business use and any personal benefit rules that might apply.

Business vs personal use: apportioning claims fairly

Financed equipment is frequently used in a mixed way. Phones, laptops, tablets, vehicles, and cameras are common examples. The tax principle in many places is that you should only claim the portion that relates to business use.

There are two layers to consider:

For the asset cost, you may need to restrict capital allowances to the business-use percentage. Some regimes have specific rules about private use, including separate asset pools or restrictions on certain reliefs.

For interest and finance charges, you typically apportion the deductible amount in line with business use. If 70% of use is business, then 70% of the interest is claimed.

Apportionment should be reasonable and supported by evidence. For a phone, you might use call logs or an estimate based on usage patterns. For a laptop, you might use time-based estimates. For a vehicle, mileage logs are often the clearest evidence.

It’s better to choose a method you can explain than to chase perfect precision. Consistency and documentation matter.

VAT considerations on equipment bought on finance

If VAT applies in your jurisdiction and you are VAT-registered, financed purchases can create confusion. The key is to focus on the VAT invoice and the nature of the supply.

In many cases, the supplier sells the equipment to you (or to the finance company, who then supplies it to you), and VAT is charged on the sale of the goods. Often, the VAT is due upfront on the full price, even if you pay over time, because VAT is typically based on the supply of goods rather than the payment schedule.

However, the precise VAT treatment can depend on whether the arrangement is a purchase, hire purchase, or lease, and on who is the supplier for VAT purposes. Some finance agreements result in VAT being charged on each rental payment (common with certain leasing arrangements), rather than upfront on the full value.

If you reclaim VAT, you generally need a valid VAT invoice addressed to your business, and you must follow the rules on input tax recovery, including any restrictions for mixed use or blocked items (such as certain vehicle-related VAT in some systems). For mixed-use items, you may need to apportion the VAT you reclaim based on business use.

Documentation you should keep

Financed equipment claims are much easier when your paperwork is tidy. At a minimum, keep:

The supplier invoice for the equipment (showing description, date, and price). If VAT is relevant, keep the VAT invoice.

The finance agreement, including terms, start date, and any option-to-purchase details.

An amortisation schedule or lender statements showing how each payment splits between principal and interest.

Proof of payments (bank statements) and any deposit payment evidence.

Evidence of business use where relevant (mileage logs, usage logs, time records, allocation rationale).

Asset register details if you maintain one: date acquired, cost, serial number, location, and disposal details later.

Good records not only support your claim if questioned, they also prevent common mistakes such as claiming interest twice, claiming the full payment as an expense when you shouldn’t, or missing out on allowances you are entitled to.

Timing: when can you start claiming?

Timing is another common source of confusion. Many business owners assume they can only claim as they pay. Often, the tax relief for the asset itself is linked to when the asset is acquired and brought into business use, not when the last finance instalment is paid.

For example, if you acquire a piece of equipment in March and start using it immediately, you may be eligible to claim allowances in that tax year (subject to the rules), even though you’ll be paying instalments for the next two or three years.

Interest and finance charges are usually claimed as they accrue or are paid, depending on the accounting basis and local rules. Under an accruals method, interest may be recognised over time. Under a cash basis in some jurisdictions, it may be deducted when paid. The approach you use for your accounts and tax returns can therefore change the timing of relief for interest, even if the total relief over time is similar.

Cash basis vs accruals: does it change anything?

If your business uses a cash basis for accounting (where income and expenses are recorded when money changes hands), you might expect finance payments to be treated simply as expenses when paid. But even under cash-based systems, tax rules often still distinguish between capital and revenue costs. That means you may still need to treat the equipment cost as capital expenditure and claim allowances, rather than deducting the entire payment as an expense.

Under accruals accounting, the split between principal and interest is baked into the accounting treatment: the asset is recognised, a liability is recorded, and interest is allocated over the term. Tax treatment may follow a similar pattern, though not always exactly.

Because rules differ across jurisdictions, the key practical point is: your accounting basis might affect the timing of interest deductions, but it usually doesn’t turn a capital purchase into a simple revenue expense just because it was financed.

What if you pay a deposit or balloon payment?

Finance deals often include deposits, balloon payments, or final option fees. These don’t usually change the core principle: the asset cost is still the purchase price (or capitalised value), and the interest is a separate cost of borrowing.

A deposit is typically part of the capital cost you are paying upfront. A balloon payment is usually a large final principal repayment that reduces monthly instalments. Neither is typically treated as an ordinary expense; instead, they relate to the acquisition cost of the asset. The interest component is still the part that may be deductible as a revenue expense, subject to business use rules.

An “option to purchase” fee in a hire purchase agreement can sometimes be treated as part of the capital cost of acquiring the asset. Whether it qualifies for the same relief as the main asset cost can depend on local rules.

Early settlement, refinancing, and upgrades

Real life rarely follows the neat schedule in the finance agreement. You might settle early, refinance, or upgrade the equipment. Each scenario can affect what you claim and when.

If you settle early, you might pay a settlement figure that includes outstanding principal plus a settlement fee or reduced interest. You would typically still only claim the interest element as a revenue cost. Any settlement fees may or may not be deductible depending on their nature. The asset cost doesn’t magically change just because you settled the finance—your capital allowances claim remains based on the asset’s qualifying cost (subject to adjustments for business use and any specific restrictions).

If you refinance, you effectively replace one finance agreement with another. You should take care not to double-count interest or treat the refinance as a new asset purchase if you already own and are using the asset. Refinancing is usually about the liability, not the asset. Interest on the new borrowing may be deductible if it relates to the business asset.

If you upgrade or replace the asset, you may need to consider disposal rules. In many systems, when you dispose of an asset you have claimed allowances on, you may need to account for proceeds or balancing adjustments. Even if the asset is traded in rather than sold for cash, it can still count as a disposal for tax purposes. Keep trade-in documentation and any new purchase invoices.

What happens if you sell the equipment while it’s still on finance?

Selling equipment that is subject to finance can be tricky legally and tax-wise. Legally, you may not have the right to sell the asset if ownership hasn’t transferred (common under some hire purchase contracts). From a tax perspective, if you dispose of an asset you’ve claimed allowances on, you may need to account for the disposal value and adjust your allowances position.

If you sell an asset you own outright (for example, because you bought it with a loan and owned it from the beginning), then the sale proceeds are typically treated as a disposal. How that affects tax depends on your local rules: you might have balancing charges/allowances, recapture of depreciation, or capital gains considerations.

In any case, keep a clear trail: sale invoice, proceeds received, settlement statement from the finance provider (if applicable), and evidence of how you calculated any tax adjustments.

Special considerations for vehicles and high-value assets

Vehicles and other high-value assets often have additional rules. Some tax systems restrict allowances for cars based on emissions, cost caps, or business use. Some restrict the deductibility of certain finance costs or apply special rules to leased vehicles.

High-value machinery or equipment can also trigger different treatments, such as limits on immediate write-offs, special pooling rules, or different rates of allowances. If your purchase is substantial, it’s worth checking whether there are thresholds, annual caps, or special categories for the asset type.

If the asset is used in a regulated industry—medical devices, construction plant, agricultural equipment—there may be industry-specific guidance or common audit focus areas. That doesn’t mean you can’t claim; it just means documentation and correct categorisation matter more.

Practical examples to make it clearer

Example 1: Laptop on a business credit card with monthly repayments. You buy a £1,500 laptop. The purchase is capital expenditure. You may claim capital allowances (or the relevant relief) on £1,500, restricted for any personal use. If you pay interest on the card balance, the interest may be deductible to the extent the balance relates to the business purchase and business use.

Example 2: Tooling on hire purchase. You finance £10,000 of workshop equipment over three years. Your agreement shows total payments of £11,200. The £10,000 is the asset cost; you claim allowances on that amount (subject to your rules). The £1,200 is interest/charges; you claim it as a finance cost over the period it is incurred, restricted for private use if any.

Example 3: Printer on an operating lease. You sign a three-year rental contract for a printer with maintenance included. You never own the printer. The monthly rental payments are typically deductible as business expenses (subject to business use). You usually do not claim capital allowances because you don’t own the asset.

Example 4: Camera subscription plan. You pay a monthly fee that includes the camera, insurance, and replacement. If the contract is purely a service and you don’t gain ownership, the payments are likely treated as expenses. If there is a built-in ownership transfer or purchase option that is effectively certain, the treatment may resemble a financed purchase.

Common mistakes to avoid

One common mistake is claiming the full finance payment as an expense when the asset should be treated as capital expenditure. This can overstate expenses and understate profit, leading to corrections later.

Another mistake is claiming the total amount paid over the finance term as the asset cost. The qualifying asset cost is typically the cash price (or equivalent), not the cash price plus interest.

A third mistake is forgetting to claim the interest element at all. Some people focus only on capital allowances and miss legitimate finance cost deductions.

Mixed-use errors are also frequent. If the equipment is partly personal, you need a reasonable apportionment for both allowances and interest. Ignoring private use can create issues if reviewed.

Finally, VAT mistakes can happen when people reclaim VAT without a proper VAT invoice, reclaim VAT on blocked items, or reclaim VAT on the wrong amounts (for example, reclaiming VAT on interest that isn’t VAT-bearing).

How to approach your own claim step by step

Start by identifying the type of finance: loan, hire purchase, finance lease, operating lease, or subscription. Read the agreement and note whether ownership transfers and when.

Next, separate the asset cost from finance charges. Use the supplier invoice for the asset cost and lender documentation for the interest split.

Then, determine business use. If there is any personal use, decide on a reasonable percentage and gather evidence to support it.

Apply the correct tax method. For the asset cost, use the relevant capital allowance or asset write-off method available to your business. For the interest, treat it as a finance cost deduction as allowed in your system.

Finally, keep records and be consistent. If you claim 80% business use this year, be prepared to justify why. If use changes, adjust your claims accordingly.

When you might need professional advice

Many financed equipment purchases are straightforward, especially when the asset is used 100% for business and the finance documents clearly show interest. But there are situations where advice can save you money or reduce risk.

If the asset is expensive, unusual, or subject to special rules (common with cars, property-related items, and certain regulated assets), it’s worth checking the correct treatment.

If you have mixed business and personal use and you’re unsure how to apportion fairly, advice can help you create a defensible method.

If you are changing your accounting basis, changing business structure, or moving the asset into or out of a company, the interaction between accounting and tax can become complex.

If you are dealing with leases that include service components, bundled packages, or complicated end-of-term options, the correct classification can be less obvious.

Bottom line

Buying business equipment on finance doesn’t stop you from claiming tax relief. In most cases, you can still claim relief on the equipment’s cost through the appropriate capital method, and you can often claim the interest or finance charges as a business expense. The key is to understand what kind of finance agreement you have and to split the payments correctly between capital and interest.

If your arrangement is a genuine rental or operating lease, you may be able to claim the payments as ordinary expenses instead. If it is effectively a purchase funded over time (loan or hire purchase), you generally claim the asset cost separately from the interest.

Keep solid documentation, apportion for any personal use, and don’t assume the monthly payment is automatically an “expense.” Once you treat the asset and the finance costs separately, financed equipment becomes much easier to handle—and you can be confident you’re claiming what you’re entitled to, in the right way.