Business vehicle finance choices.

Paying for vehicles outright clearly isn’t an option for many companies as it ties up working capital. However, business which run their vehicles ‘into the ground’ often find it cheaper long-term to buy, as to contract-hire a very high-mileage vehicle is expensive – the owner who is hiring it to you will have no value left in it at the end of its period with you so the included depreciation element will make the monthly rentals exorbitant.

Outright Purchase
You’re not tied into finance agreements which can be costly to terminate, and you don’t have to be VAT registered. However, you’ll be typing up capital you may need elsewhere.

You own the vehicle so it cannot be repossessed (unless used to secure a loan)

You can deduct the interest payable on a loan used to buy the vehicle but there are no tax benefits on rentals etc as you can with contract hire.

Finally, you carry the burden of depreciation and repairs and you need to budget for maintenance and servicing etc

Contract Hire
This is the most common method for VAT-registered companies (limited companies, partnerships and sole traders). Your working capital is not touched, you have control of costs and it means reduced administration as the vehicle is not on your balance sheet.

You are hiring the vehicle over an agreed period, the monthly rental includes a figure set by the company hiring it to you, to cover its depreciation over the hire period you are agreeing.

You can recover 100% of the VAT on the monthly rentals if it is for business-use only (or 50% is recoverable if it is also has some private use). If you add a maintenance package to the rental, then the VAT on that maintenance charge is also recoverable.

At the end of the term the vehicle is either returned or you may want to extend the rental. It is is important to forecast likely annual mileage accurately at the start, or you’ll be stung for potentially hefty excess mileage charges at the end of the term.

The company hiring the vehicle to you will either sell the vehicle into the used-car market or lease it again at the end of the agreed term. For you, this means the monthly payments are low as the full asset value does not need to be recovered by the company hiring it to you during the first term.

You will be able to opt into add-on services such as accident management, courtesy car loans, fuel car operation etc if you wish. You can also take optional GAP insurance – this covers any shortfall between the remaining finance/rentals owed and the insured value, should it be written off during the term of hire.

Contract Purchase
Similar to contract hire but it provides an opportunity to purchase the vehicle at the end of the contract by paying a final balloon payment.

The vehicle is owned by the leasing company whilst you pay the fixed monthly instalments, and it is shown on your balance sheet as an asset. You can retain ownership at the end with a final payment, or hand the vehicle back.

This tends to suit companies using fairly high value cars that may have useful valuable life in them after the initial term agreement. It keeps the depreciation risk at arms length, to an extent, depending on your final decision.

Finance Lease
For VAT-registered companies who prefer to administer their own fleet, with the vehicle assets on their balance sheet.

You will be paying the entire cost over the agreed term, so you will own the vehicle. Alternatively, you can pay a lower monthly amount and then pay a larger final amount based on the vehicle’s residual value.

Once again, 100% of the VAT on the finance payments is recoverable if the vehicle is just for business use, reducing to 50% recoverable if it is also used privately.


Lease Purchase
Typically for non- VAT registered companies who are likely to want eventual ownership.

There will be an optional final ‘balloon’ payment at the end to enable you to take ownership. The residual value risk is yours so choose your vehicles carefully.

The term ‘lease purchase’ is something of misnomer. Lease purchase is basically an HP arrangement with a balloon payment at the end of the period. Only when that balloon is paid does ownership pass to you.

Summary points to help you make the right decision for your business:

Contract hire/finance lease repayments are 100% fully tax allowable (can be written off against your profits) unlike outright purchase options where only the capital allowances can be claimed against tax.

If you buy via a lease/contract purchase, or use a bank loan, the interest charges can be reclaimed against tax, but remember interest charges can be changed by your lender.

Status
Contract hire does not impact the credit status of businesses, the lease payments are normally classified as expense, not debt (contract hire is regarded as “off balance sheet”).

Balance sheet
If an asset is purchased (outright or lease purchase) or bought on a finance lease, it is on your balance sheet as it is ultimately owned by your company. Contract hire keeps vehicles off the balance sheet and shores up your credit status.

Leasing (contract hire) leaves your working capital in place, and is tax efficient.

VAT Implications
With purchase options VAT is payable up front but with contract hire and finance leases the VAT is payable over the term of the lease – this is advantageous for your cash-flow.

Risk on Values..and your time
Lease methods enabling you to hand back the vehicle at the end of the term mean that vehicle’s re-sale is not your problem, but if you outright-purchased you not only need to be able to sell the outgoing vehicle, but also get a decent price for it.