We explain business leasing, contract hire, contract purchase, sale and leaseback and employee car ownership schemes, so you can work out what's best for you
Choosing how 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:
- Leasing payments are tax-allowable expenses so will help reduce your tax bill.
- 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.
- Money that might have been spent on a fleet of cars can be invested elsewhere
- The car won't appear on the balance sheet
Here are the options you'll be looking at.
Contract hire
Your business pays the car finance company a fixed monthly sum to lease a vehicle for a fixed period, just as it would with a long-term car rental agreement. You can include service and maintenance costs, then at the end of the agreement you simply hand back the vehicle. The vehicle's expected depreciation (the difference between the purchase price and the resale value at the end of the agreement) dictates what your monthly payments will be.
Pros
- Fixed monthly payments and the low deposit are good news for business cash-flow.
- Including maintenance and VED (road tax) cuts fleet administration overheads.
- VAT-registered companies can reclaim up to 50% of the VAT on finance payments and 100% on the maintenance agreement costs.
Cons
- Mileage limits incur stiff financial penalties, so you need to have a good idea of a driver's annual mileage.
- You need comprehensive insurance.
- There's no option to buy the car.
Best for:
- Contract hire is ideal for companies wanting to update their fleet regularly, while avoiding capital outlay.
Contract purchase
This gives the company leasing the car the option to buy it from the finance company for a pre-agreed final payment at the end of the contract.
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. This is also known as a balloon payment, and is the amount that will secure ownership of the car at the end of the lease.
Alternatively, the business 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, too.
Pros
- 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.
Cons
- Unless the car is solely used for business purposes, VAT cannot be reclaimed on the rental payments.
Best for
- Companies that want high-value vehicles on the fleet without 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 at the same time.
Pros
- Releases previously inaccessible capital and removes depreciating assets from the company's balance sheet.
- Allows a company to plan budgets and helps reduce administration.
Cons
- 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.
Pros
- Employee benefits from having a car without paying BiK tax.
- Business does not have to pay national insurance on the car benefit, but retains some control over the quality of the fleet.
- Purchasing power can help secure savings.
- Assets not on the balance sheet.
Cons
- Unsuitable for small fleets, or drivers covering low mileages.
- Complicated to set up and time-consuming to administer.
