Business Car Leasing Options

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Business Contract Hire - The Main Choice For Business Users

Business Car Leasing is basically a long term rental agreement to lease a vehicle (usually for a period of 2 – 5 years), with a set mileage allowance and a fixed monthly payment. All makes and models of cars and commercial vehicles can be leased, and it is available to Sole Traders, Partnerships and Limited Companies.

These are the main types of Business Car Leasing Contracts:-

• Business Contract Hire
• Business Contract Purchase
• Finance Lease
• Lease Purchase
• Sale & Leaseback

To help you choose which of the Business Car Leasing Options is right for you, here are the main features and benefits of each.

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Business Contract Hire

Contract Hire, also known as Operating Lease, is the most popular type of fleet leasing available in the UK. It is available to all businesses, but is particularly beneficial if you are vat registered.

• Business Contract Hire is simple way to budget and fix your monthly costs
• The costs of Servicing & Maintenance and Roadside Rescue can be included
• Road Fund Licence is usually included for the duration of the agreement
• All you need to do is obtain comprehensive Insurance and put fuel in the car
• Low initial outlay compared to some other forms of leasing
• Reduced administration, as all the costs are rolled into one monthly payment
• Flexible terms, initial payments and mileage allowances to suit your needs
• Ability to amend the mileage allowance if your circumstances change
• No financial risk associated with depreciation of the vehicle over time
• No hassle of vehicle disposal and part-exchange with Business Contract Hire
• Monthly rentals are a fully deductible expense against taxable profits
• Vat registered businesses can claim 50% of the vat back on rental payments
• 100% of the vat is reclaimable on the Maintenance element
• Your car or van is usually delivered and collected free of charge (UK mainland)
• The vehicle appears ‘off Balance Sheet’, as it is owned by the finance company
• Hand the vehicle back at the end with no further commitment or final payment
• Remember that excess mileage and Fair Wear & Tear charges may apply

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Business Contract Purchase

Business Contract Purchase is very similar to Business Contract Hire and, in fact, most of the above points apply. The main difference is that there is an option to own the vehicle at the end of the contract period. This is a much more cost-effective way of eventually owning a vehicle than choosing the traditional hire purchase route, but could have higher monthly payments than Contract Hire.

The main features and benefits of Business Contract Purchase are:-

• The option to retain the vehicle at the end, without any depreciation risks
• The costs of Servicing & Maintenance and Roadside Rescue can be included
• No financial risk associated with depreciation of the vehicle over time
• There is a Guaranteed Future Value (GFV) at which the vehicle can be purchased
• If the vehicle is worth more than the GFV, you can sell it & pocket the difference
• You may be able to afford a better car than you previously thought possible
• The vehicle appears on the Balance Sheet as a business asset
• Capital allowances are available – it can be written down against taxable profits
• The vehicle is owned by the finance company until the final payment is made
• End of Contract options include paying the final payment and keeping the vehicle, selling the vehicle and using any available equity towards your next vehicle, or simply handing back the vehicle with no further commitment or final payment
• Remember that excess mileage and Fair Wear & Tear charges may apply

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Finance Lease

Finance Lease offers the benefits normally associated with owning a vehicle whilst providing the tax advantages of fleet leasing, because a Finance Lease is classed as a hire agreement. Like Business Contract Hire, it is particularly suitable for vat registered business. But unlike Business Contract Hire, you have more flexibility regarding End of Contract options.

The main features and benefits of Finance Lease are:-

• Monthly rentals are a fully deductible expense against taxable profits
• Vat registered businesses can claim 50% of the vat back on rental payments
• The monthly rental can be reduced by agreeing to make a final ‘balloon’ payment
• Without a balloon, you will pay back the total cost of the vehicle over the term
• The vehicle is owned by the finance company until the final payment is made
• At the end of the term you can sell the vehicle to a third party and receive the bulk of the proceeds (less any balloon), re-finance the balloon payment and extend the contract, or keep the vehicle as long as you want by paying a nominal ‘peppercorn’ rental annually

With a Finance Lease, there is an element of uncertainty regarding the value of the vehicle at the end of the term, and whether it will cover the agreed balloon payment. With Business Contract Hire, there is no financial risk associated with depreciation of the vehicle, as you are under no obligation to purchase it and can simply hand it back.

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Lease Purchase

Lease Purchase is basically Hire Purchase but with lower monthly payments, as there is an agreed balloon payment to make at the end of the term. It is ideal for non-vat registered businesses that require ultimate ownership of the vehicle. You are, effectively, purchasing the vehicle from the outset although you don’t own it until the final payment has been made.

The main features and benefits of Lease Purchase are:-

• Monthly payments are not subject to vat
• The vehicle appears as an asset in the business and shows on the Balance Sheet
• Capital allowances are available – it can be written down against taxable profits
• Maintenance and other value added services cannot be included in the contract
• Full vat is payable in advance if it is a commercial vehicle (reclaimable if vat registered)
• As you are purchasing the vehicle, you take the risk on depreciation and residual value
• At the end of the term, you make the final payment and own the vehicle
• Unlike Business Contract Hire, there is no option to simply hand the vehicle back

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Sale & Leaseback

Sale and Leaseback is when a business sells one or more of its vehicles to a leasing company and then leases them back for a long term, usually on Business Contract Hire. In this way, the business continues to be able to use the vehicles but no longer owns them.

The benefits of Sale & Leaseback to a company are:-

• Valuable capital is released to invest in the business or reduce borrowings
• Sale and Leaseback of a vehicle fleet improves cashflow and reduces administration
• There is no impact on drivers, as they stay in their existing vehicles
• Monthly rentals are a fully deductible expense against taxable profits
• Vat registered businesses can claim 50% of the vat back on rental payments
• No more financial risk associated with depreciation of the vehicle over time
• The vehicles appear ‘off Balance Sheet’, as they are now owned by the finance company

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