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:
- Be tax-efficient: leasing payments are tax-allowable expenses so will help reduce your tax bill.
- Save on vat: a vat-registered business can reclaim 100% of the vat if the car is used exclusively for business, and 50% on the finance element of the rental if the car is also used privately.
- Protect capital: money that might have been spent on a fleet of cars can be invested elsewhere
- Help with gearing as the car won’t appear on the balance sheet
- Here are the options you’ll be looking at.
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.
- It's budget-friendly: fixed monthly payments and the low deposit are good news for business cash-flow. including maintenance and ved (road tax) helps reduce fleet administration overheads.
- Vat-registered companies can reclaim up to 50% of the vat on finance payments and 100% on the maintenance agreement costs.
- Exceeding the agreed mileage will incur financial penalties, so you’ll need to be able to predict your expected mileage accurately.
- You’ll need comprehensive insurance.
- There’s no option to buy the car.
- The most popular choice of lease for businesses, contract hire is ideal for companies wanting to update their fleet regularly, while avoiding capital outlay.
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.
- The car appears on the company’s balance sheet as a depreciating asset, allowing you to claim capital allowances of 25% per year.
- Guaranteed future value of the car means no worries about depreciation: if it has depreciated below the balloon payment value it can simply be handed back.
- Vat cannot be reclaimed on the rental payments, unless the car is solely used for business purposes.
- Companies wanting high-value vehicles on the fleet without taking on the depreciation risk.
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.
- Releases previously inaccessible capital and removes depreciating assets from the company’s balance sheet.
- Allows a company to plan budgets and helps reduce administration.
- Asset value is removed from the balance sheet; leasing contracts have a fixed term so are less flexible than outright ownership.
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.
- Employee benefits from having a car without paying benefit-in-kind tax.
- Employer doesn’t pay national insurance on the car benefit, but retains some control over the quality of the fleet.
- Purchasing power can help secure savings.
- Assets appear off the balance sheet.
- Unsuitable for small fleets, or drivers covering low mileages.
- complicated to set up and time-consuming to administer.