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Which car finance option is best for my company car fleet? Options explained
We take a closer look at business leasing, contract hire, contract purchase, leaseback and employee car ownership schemes, so you can work out which is best for you...
As with everything to do with company cars, preparation and research are key, and this applies equally to the way your company finances its business fleet.
Your company has a few options, which are dependent on its tax position, cash flow and a few other factors.
It makes total sense for the finance director of a business to have a good idea of how its employees get to appointments during their working day, because there are numerous options to be considered.
For example, you could choose an option that covers not only the cost of the car but also its upkeep, including maintenance and VED, and even breakdowns. If that’s not for your company, then you could choose a deal that gets you a car, but makes you responsible for the upkeep.
Here, we clarify your options...
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Will a car lease suit my business?
There's good news here, because leasing payments are tax-allowable expenses. So if your business is VAT-registered, it can reclaim 100% of the VAT if the car is used exclusively for business. That figure drops to 50% on the finance element of the rental if the car is also used privately, but is still significant.
Better still, the car never appears on the company balance sheet because it isn’t an asset. In addition, the company won’t have had to shell out to buy a fleet of vehicles, which gives it the option of investing that money elsewhere.
There are, as ever, swings and roundabouts, because if your company leases the vehicle, it will be responsible for keeping it fully maintained during its tenure.
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What about business contract hire?
Business contract hire, also known as BCH, works in a similar way to basic leasing, but the package tends to include annual VED, plus any servicing and maintenance costs.
The benefit of this is that a business faces no unexpected expenses, which allows the finance department to have a real handle on its monthly company car outgoings. In turn, this keeps down administration costs, then at the end of the agreement, all you need to do is hand back the vehicle.
The amount your firm will pay each month for the vehicle is largely dictated by its depreciation (the difference between the purchase price and the resale value at the end of the agreement).
As a further boost, if your company is VAT-registered, it can reclaim up to 50% of the VAT on finance payments and 100% on the maintenance agreement costs.
However, BCH doesn’t suit every business. It could prove problematic if you don’t have an accurate idea of how many miles your staff member is going to do over the course of the contract – the penalties for exceeding agreed mileage limits are pretty stiff.
There’s also the fact that the hire company will insist that the car is insured under a fully comprehensive policy, although most companies would do this anyway. For help with that, see our company car insurance guide.
A BCH package is a great solution for companies that tend to change their fleet regularly but don’t want the hassle of actually buying the vehicles.
Read more: Business contract hire explained
What is business contract purchase?
In truth, a business contract purchase is very similar to a BCH deal. The difference is that when you get to the end of the agreed term, the business can pay a previously agreed lump sum to buy the vehicle outright from the finance company.
The finance company will work out your firm’s monthly payments using the initial cost, the expected depreciation, and also what the car is expected to be worth at the end of the agreement, also known as the minimum guaranteed future value (MGFV). The MGFV, which is also known as the balloon payment, is the amount your company will need to pay at the end of the agreement to own the car.
A business contract purchase deal offers the ability to include servicing and maintenance costs, too.
And that’s not all, because such a purchase offers an additional element of flexibility; if your company wants to hang on to the vehicle, but doesn’t fancy the financial impact of shelling out for the balloon payment in one, then it can refinance the remaining amount over a longer period.
The one downside is that if the car is used for personal use as well as business use, VAT cannot be reclaimed on the rental payments.
What is sale and leaseback?
This is a route you can go down if the company finances are a bit tight, and it needs to release funds.
Under this scheme, your company can sell its fleet of vehicles to a leasing company, then lease them back.
There are numerous benefits to this. Firstly and most obviously, your business gets an injection of funds from the sale of the vehicles. Secondly, the monthly outgoings in terms of leasing costs become much more predictable, reducing administration costs and allowing much simpler budget planning. And finally, the company can lease back the vehicles under a servicing and maintenance plan, which further reduces unexpected costs.
Such a set-up isn’t necessarily financial nirvana though. Leasing contracts run over a specified time, which means that once you’re in one, you’re legally obliged to see it through. The financial penalties for exiting the deal early are large. And selling off your business fleet means you’re also removing a rather large asset from your company’s balance sheet.
Read more: The cheapest company cars for BIK tax
Is it time to go ECOS?
ECOS sounds all very environmentally conscious, but it’s nothing to do with saving the world. It stands for Employee Car Ownership Scheme, a set-up that offers the dual benefits of tax incentives to employees and lower business operating costs.
In an ECOS scheme, your company and its employee both contribute to the fixed monthly payments, but the employee is the one who takes ownership of the car.
There are a couple of advantages to this. The employee doesn’t have to pay Benefit-in-Kind (BIK) tax on the vehicle, and the business doesn’t have to shell out for National Insurance on the car benefit.
This also means the company has no depreciating asset on its balance sheet while retaining control over the standard of vehicles its staff are driving.
Such a scheme can be complicated to run, and therefore quite time consuming, which will have a negative impact on administration costs.
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