What is business car leasing?

It can save you a load of money, and get a nice new car or van. But what is business car leasing?

Dec 4, 2018

Business car leasing is an umbrella term for a variety of vehicle leasing products aimed at companies, large and small. They all have one thing in common, and that’s giving a business the ability to rent a car or van for a fixed term at a fixed monthly price.

It’s an alternative to buying the vehicle on a hire purchase basis and cheaper, too, because the customer funds only a portion of the vehicle’s total cost.

Business car leasing products include business contract hire, business contract purchase, finance lease and business lease purchase.

Each has different tax and VAT implications, and termination rights, but all are calculated on the customer’s anticipated future mileage during the rental period and the residual value of the vehicle at the end of the agreement.

All require the customer to pay a monthly rental or lease payment to operate the vehicle, and impose mileage and condition charges if the vehicle is returned to the leasing company in an unacceptable condition. At all times, comprehensive insurance is the responsibility of the vehicle user.

Structure of a business lease

The first is the deposit typically comprising three to six advance payments. The more you pay at this point, the lower your monthly rental.

The second is the rental payments you make during the contract. These will be less than under a hire-purchase agreement because you’re only funding a proportion of the car’s total price, the interest rate may be lower and because leasing companies can source cars more cheaply.

The third is the final payment, also called the balloon, that you may be asked to make at the end of the agreement. It is agreed at the outset and based on the car’s depreciation. The slower a car depreciates, the lower this figure is.

Can I end a business lease early?

You can but it’s very expensive and subject to rules concerning monies paid so far. Speak to your leasing provider.

What are the main forms of business car leasing?

Business contract hire

This is one of the more well-known leasing arrangements. It’s popular with VAT-registered businesses because they can claim back 50% of the VAT due for the supply of the vehicle. Monthly rentals can include the cost of maintenance. The vehicle remains the property of the leasing company.

How does business contract hire work?

You choose the vehicle, how long you wish the contract to be (24 or 48-month periods are common) and declare your anticipated mileage over the leasing term. Based on these figures, the provider calculates the future value of the vehicle at the end of the rental term and the monthly rentals, which are all plus VAT. The customer typically pays three rentals up front.

What’s included with business contract hire?

Vehicle road tax, plus there’s the option to include vehicle maintenance.

What are the options at the end of the business contract hire contract?

The customer must return the vehicle to the leasing company. If the vehicle has exceeded its anticipated mileage the customer must pay the additional mileage charge agreed at the outset. If it is returned in a condition not acceptable to the leasing company and explained in the BVRLA’s fair wear and tear guidelines, the customer may be charged an additional condition penalty.

Pros of business contract hire

✔  Flexibile terms
✔  You can claim back 50% of the VAT on the finance element of the monthly cost
✔  Depreciating vehicles (assets) are removed from the company balance sheet

Cons of business contract hire

Early termination can be expensive
Condition and mileage penalties may be imposed at the end of the contract
You cannot own the vehicle at any time

Business contract purchase

This is a variation on contract hire with the major differences being that on payment of the outstanding balance, a VAT-registered business customer owns the vehicle at the end of the contract, while the rentals themselves are not subject to VAT.

How does business contract purchase work?

You choose the vehicle, how long you wish the contract to be (24 or 48-month periods are common) and declare your anticipated mileage over the leasing term. Based on these figures, the provider calculates the future value of the vehicle at the end of the rental term (called the balloon) and the monthly rentals, which are not subject to VAT (that said, any maintenance option is subject to VAT). The customer typically pays three rentals up front and at the end of the contract the customer must purchase the vehicle at an agreed price equivalent to the balloon or outstanding balance.

What’s included with business contract purchase?

Vehicle road tax for the first 12 months, plus there’s the option to include vehicle maintenance.

What are the options at the end of the business contract purchase contract?

The customer must pay the balloon or outstanding balance and buy the vehicle.

Who does business contract purchase suit?

A VAT-registered business wishing to run expensive vehicles and wanting to own them at the end of the contract period.

Pros of business contract purchase

✔  Fixed payments and a low initial deposit or rental
✔  Value of the vehicle can be written down against taxable profit
✔  A VAT-registered company does not have to pay VAT on the monthly rentals

Cons of business contract purchase 

You will have to find the money to settle the balloon and own the vehicle.

Finance lease

This product allows a VAT-registered business to pay the entire cost of the vehicle, including interest charges, over the rental period, or a portion of the total price, paying the balance, or balloon at the end of the contract. At the end of the term, the customer must settle the balloon payment.

How does business finance lease work?

How does it work? Like the other schemes, the balloon is calculated on the price of the vehicle at the beginning of the contract, the length of the contract, the mileage you propose to cover and the vehicle’s expected depreciation as a consequence. Depending on whether the vehicle is a car or a van, a VAT-registered business can reclaim between 50% and 100% of the VAT payments due. If the business is not VAT-registered, these payments can be spread across the term of the contract. Rentals can be offset against taxable profits. At the end of the contract, the vehicle is not returned to the leasing company. Instead, the customer can sell it to an unrelated third party.

What’s included with business contract purchase?

Vehicle road tax for the first 12 months, plus there’s the option to include vehicle maintenance.

Pros of finance lease

✔  Cheaper to run for high mileage drivers
✔  You can own the vehicle at the end of the term on payment of the outstanding balance
✔  VAT is payable on the rentals and not the purchase price

Cons of finance lease 

You must pay the outstanding balance at the end of the term

Business lease purchase

This form of vehicle financing is like the other packages in that it offers a way of ‘renting’ a vehicle rather than buying it outright. However, it is not quite as popular because it’s a pure finance package with no other add-ons such as maintenance being possible. Unlike some other forms of leasing, the vehicle must be bought at the end of the leasing contract.

How does business lease purchase work?

You pay a monthly rental based on a proportion of the vehicle’s total price and calculated to take account of proposed mileage and future depreciation. Like all such schemes, the slower the vehicle depreciates, the lower the monthly rental since depreciation is a large chunk of the rental cost. At the end of the contract, the customer must pay the outstanding balance, or balloon. It cannot be returned to the leasing company.

What’s included with business lease purchase?

Nothing.

Pros of business lease purchase

✔  No VAT charged on its monthly rentals
✔  Can be entered on the company balance sheet and its value written down against company profits

Cons of business lease purchase

Lack of flexibility at the end of the contract
May get less than the balloon when you sell it, meaning you’ll have to fund the difference

Business car leasing vs personal car leasing

These two types of vehicle leasing are very similar but for one key difference: a VAT-registered business can reclaim 50% of the VAT on the monthly rental payments and all of the VAT on any contract maintenance charges, but a non-VAT-registered business, in all likelihood a private individual, cannot.

A business lease may also be calculated on a vehicle price lower than an individual could find, while some schemes offer support services to help business customers manage their large vehicle fleets, a service not available to a private individual.

However, any private use of a car on a business lease rules out the possibility of reclaiming the VAT. In this case, a business would claim the monthly cost of the lease against its profits – 85% if the vehicle emits more than 160g/km CO2 or 100% if it emits less. There is also benefit-in-kind tax (BIK), also called company car tax, to consider.

What is benefit-in-kind tax?

This is the tax an individual must pay if they use their company car for personal use. If it’s parked at work overnight and you don't use it, your employer can ask that it be classed as a pool car, meaning no BIK or company car tax is due from you.

The car’s BIK liability is calculated on its list price plus extras (called the P11d value) and the amount of CO2 it emits. Your personal tax liability is calculated on this and the income tax bracket you are in. To calculate your liability, you multiply the P11d value by the vehicle’s company car tax rate based on its emissions. The result is your benefit-in-kind amount. Multiply this by your personal income tax rate to find your company car tax liability.

   

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