The business advantages of leasing a car tend to come under three main topics;
- Cash flow
- Tax benefits
- Time saving
And we are going to talk about each one in more detail below.
One of the main business advantages of leasing a car is down to cash flow purposes. Cars are expensive, there is no denying that, and in business, cash is King. If you lease a car, then you do not have your cash tied up in a depreciating asset, and you are not using the cash up that you will then need for daily business.
When you lease a car, you can put a small amount down initially, this can be as little as one monthly payment. However, many businesses choose to put more down initially so they can lower their monthly payments. Whichever you choose is what is best for you and your business, but ultimately when you lease a car, you have more free cash in the bank that allows you to do your daily business.
It should also be worth noting that leasing is often cheaper than getting a new car on a finance scheme, such as a Hire Purchase. This is because when you lease a car, you are paying for the difference between the purchase price of the car and the residual value. The residual value is how much the car is worth at the end of the contract.
Essentially, you are paying for the depreciation. When you get a car on a finance scheme such as a Hire Purchase, you are paying for the whole cost of the car but are simply staggering the cost over a few years. Therefore, leasing is often much cheaper.
Another huge business advantage of leasing a car is the tax benefits that come with leasing, mainly with Contract Hire.
To recap, a Contract Hire is where you pay a set monthly fee for a period of time, and when that time is up, you hand the car back with nothing more to pay. With a Contract Hire, you are also subject to mileage and condition restrictions. You can read more about Contract Hire here.
If you have a Contract Hire, then you can claim 50% of the VAT back on the monthly and initial rental in your quarterly VAT return, if you are a VAT registered company. This is because you don’t own the vehicle, and in the eyes of HMRC you are renting it and therefore can claim the VAT back. Why 50%? Well, HMRC will assume that you are using the vehicle for business half of the time, and for personal use the other half of the time.
However, you can claim 100% of the VAT back if you do not use your vehicle for personal use. This means that you will not use the vehicle for travelling to and from work or outside of work hours. The vehicle will usually be kept at the place of work or a compound, and other employees will also be able to use the vehicle for business use only. If this is the case, then the car qualifies as a ‘pool car’. You can then notify HMRC that the vehicle is a ‘pool car’ and then you will be able to claim 100% of the VAT back.
Normally though, you will be able to claim 50% of the VAT back because many like to use their company vehicles as personal vehicles as well.
You can also offset the rentals against your monthly tax bill and how much of this depends on how much CO2 your vehicle emits. If it emits less than 180g/km of CO2 then you can claim 100% of the rental against profits. However, if it emits more than 180g/km of CO2, then you can only claim 85% back. There are some huge advantages to low emission vehicles, and you can read about electric cars here and plugin hybrids here.Another business advantage of leasing a car is that the liability of the vehicle doesn’t show on the accounts. Every set of Limited company accounts have a balance sheet with all your assets and how much you owe. However, on a Contract Hire, the liability of the car, of which can be upward of £30,000, doesn’t show up as a liability on the accounts. This is a huge advantage for business as we are sure you are already aware. If you have strong accounts then you can get lending or borrowing as well as set up credit facilities. It’s a huge advantage.
One of the final business advantages of leasing a car that is often overlooked by business and private individuals alike is that it is simply a very convenient way of getting a new car.
If you go through a vehicle broker, then you tell them your budget and what sort of vehicle, or vehicles, you are looking for and they will do all the legwork for you. They will do the research and find the best deals and then you choose which one is perfect for your situation and your business.
The monthly payments are fixed, and road tax is often included in the lease deal, so that’s one less thing that you have to worry about. Some lease deals also include a maintenance agreement, or you can ask for one to be added on. This is an additional monthly payment that covers all the servicing and maintenance costs over the course of your contract. This means you don’t have to worry about forking out for the full cost of the servicing when the time comes. You can read more about maintenance agreements here.
And, when the time comes for your contract to come to an end, you don’t have to worry about disposing of the vehicle. As long as you have stuck to the mileage and condition restrictions, your car will be picked up and you will have nothing left to pay. You can read more about what happens when your car goes back here.
Ultimately, leasing is one of the most simple and cost-effective ways of getting a new vehicle for your company.
Is business leasing cheaper than personal leasing?
There are occasions where business leasing is often cheaper than personal leasing. This is because on a Contract Hire, the purchase price of the car is not shown on the documents. This is simply down to financial regulations, but it means that the manufacturers are more inclined to put a larger discount on the vehicle. This is different to a Personal Contract Hire, where the purchase price of the car is shown on the documents.
The cost of a lease is determined by taking the purchase price of the vehicle and the residual value and working out the difference. So if there is a smaller difference between the purchase price and residual value then the monthly payments are going to be lower. Therefore, business leasing is often cheaper. You can read more about why business leasing is cheaper than personal leasing here.
In conclusion, there are some huge business advantages of leasing a car including for cashflow purposes and tax benefits. Leasing is one of the easiest ways of getting a brand new car, or a brand new fleet of cars, without having to worry about parting with a huge amount of cash or having your cash tied up in a depreciating asset. You don’t have to worry about the cars being out of warranty nor do you have to worry about road tax in most cases. Essentially, there are some huge advantages to leasing through your business, and these advantages will no doubt benefit you and your business.