What is business car leasing?

Low monthly payments in exchange for a brand new car or van: find the right kind of business car leasing for you

BuyaCar team
Jan 14, 2019

Business car leasing is one of the most affordable ways that a large or small company can run a new car or van. Vehicles are rented over a fixed term for a fixed monthly price.

It’s an alternative to buying the vehicle on a hire purchase basis and comes with lower monthly payments because they don't cover the full cost of the car.

Business car leasing products include:

Each has different tax and VAT implications, and termination rights, but all are calculated on the customer’s anticipated 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

Most business leases begin with an initial payment, which is typically the equivalent of three to twelve monthly instalments, and can be adjusted. The more you pay at this point, the lower your monthly rental.

Next, you make rental payments during the contract. These will be lower than under a hire-purchase agreement because you’re only renting the car and not paying for the full cost.

The final step depends on the type of finance that you choose. You may be required to return the car, or to pay a lump sum to own it. Some options offer you the choice.

Can I end a business lease early?

It is possible, but may not always be affordable. Much will depend on the type of arrangement that you have; the current value of your car; and the amount outstanding. Speak to your leasing provider.

 

What are the main forms of business car leasing?

Business contract hire

This is one of the better-known leasing arrangements. At least 85 per cent of the monthly lease payment is tax deductible (100 per cent for greener cars emitting less than 110g/km CO2) and VAT-registered businesses can claim back at least 50% of the VAT. 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 monthly rental fees, which include VAT. The customer typically pays the equivalent of between three and twelve monthly instalments as an initial payment.

What’s included with business contract hire?

Vehicle road tax, plus there’s normally 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

✔  Flexible terms
✔  50% of VAT is reclaimable
✔  Tax deductible payments and depreciating asset on your balance sheet

Cons of business contract hire

Early termination can be expensive
Condition and mileage penalties apply
You cannot own the vehicle at any time

 

Business contract purchase

Business Contract Purchase is a version of the most popular private car finance product, offering a choice at the end of the agreement of whether to return the car or to buy it for a lump sum. For business users, it's not as simple as leasing because the car appears on the balance sheet. You can claim capital allowances, and claim interest payments as an expense. Payments are not subject to VAT.

How does business contract purchase work?

You choose the vehicle, a deposit amount, 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 estimates 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 (any maintenance option is subject to VAT).

At the end of the agreement, you can either return the car or make the balloon payment to own the vehicle.

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 make the balloon payment or return the vehicle.

Who does business contract purchase suit?

Non VAT-registered businesses and companies looking to own vehicles 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
✔  VAT is not charged on monhtly payments

Cons of business contract purchase 

Vehicle must be listed as an asset on the balance sheet
✘ Condition and mileage penalties apply if the car is returned.

 

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?

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 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 used solely for work, and never for personal use (including travel to and from work), 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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