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.

By BuyaCar team January 31, 2024

Company cars are still a big part of the British motoring landscape - they make up roughly half of all new car registrations. Generally, these will be financed by the company using a business lease but other types of business deals are also available.

Like other types of car finance, a business lease - also known as Business Contract Hire or BCH - consists of a fixed number of set monthly payments, spread over several years. It’s ideal for businesses that want to upgrade their company cars every few years, with the caveat that they don’t own the car. The monthly cost will be much lower than buying a car on a Hire Purchase basis because it doesn’t cover the full cost of the car.

Each has different tax, 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.

Business car leasing products include:

How does a business lease work?

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.

Business Contract Hire (BCH)

This is one of the better-known leasing arrangements. At least 85% of the monthly lease payment is tax-deductible - this grows to 100% if the car produces less than 110g/km of CO2 - and VAT-registered businesses can claim back at least 50% of the VAT.

With a car of your choice, you can tailor the length of your contract - typically 24 or 48 months - and your mileage allowance as you would with PCP finance in order to determine your monthly payments. You'll be required to make an initial rental equal to the cost of between 3 and 12 monthly payments.

You can opt to include the cost of vehicle maintenance within your monthly payments, which also cover road tax costs.

At the end of your contract, the vehicle is returned to the leasing company. As long as you have kept to the pre-agreed mileage allowance and its condition is acceptable then you will have nothing left to pay. Any additional miles or wear and tear will be liable to additional charges.


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


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

Business Contract Purchase (BCP)

Business Contract Purchase is a version of the most popular private car product, PCP finance. It offers 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.

These agreements also cover car tax for the first 12 months and you have an option to include vehicle maintenance costs if you so wish.

You choose the vehicle, pay a deposit amount, decide 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 - so if eventual car ownership is of interest to your business then this is an option you should consider.


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 monthly payments


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

Finance Lease

Finance lease 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. At the end of the term, the customer must settle the balloon payment.

Like the other schemes, the balloon price 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.

As with the previous options, finance leasing includes car tax for the first 12 months and an option to include vehicle maintenance.


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


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

Business Lease Purchase

Business lease purchase 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.

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 final balloon payment. It cannot be returned to the leasing company.


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


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

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.

Business leasing or personal 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, kept at the business’ address outside of work hours and never used 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. That’s because pool cars tend to be used by more than one person.