Business leasing, contract hire, contract purchase, sale and leaseback and employee car ownership schemes explained. what are the pros and cons of each type of business car lease (including the tax benefits of each type of business car lease)?
Choosing the right way to finance your business vehicles is a minefield and will depend on your individual company’s tax position, cash flow and other borrowings. It’s worth seeking expert help before committing to an agreement.
Business leasing can:
Like a long-term car rental agreement, with contract hire your business pays the car finance company a fixed monthly sum to lease a vehicle for a fixed period. Service and maintenance costs may be included. at the end of the agreement the vehicle is returned. payments are calculated based on the vehicle’s expected depreciation – the difference between the purchase price and the resale value at the end of the agreement, taking into account age and mileage.
Unlike contract hire, this leasing agreement gives the company leasing the car the option to buy it from the finance company at the end of the contract for a pre-agreed final payment.
Monthly payments are worked out based on the difference between the car’s cost and expected depreciation, but a minimum guaranteed future value (mgfv) is also calculated. also known as a balloon payment, this is the amount that will secure ownership of the car at the end of the lease. Alternatively you can refinance the balloon payment, spreading the costs over a longer period, or simply hand the car back to the leasing company. service and maintenance costs can be included.
Sale and leaseback
If a company wants to release funds, it can sell its existing fleet of cars to a leasing company, then rent the cars back again. a maintenance plan may be arranged.
Employee car-ownership schemes
These complex schemes offer tax benefits to employees, and can work out cheaper for the company, particularly if it runs a large fleet and staff turnover is low. Ownership of the car is transferred to the employee, so they don’t pay benefit-in-kind tax, and the employer doesn’t have to pay national insurance on the car benefit. Both the company and employee contribute to the fixed monthly payments.