What is commercial leasing?
Commercial leasing is a hugely popular way of getting a van and is becoming ever more popular.
But what is commercial leasing? And, how does it work?
In this article, we look at what commercial leasing is, how it works and the pros and cons.
What is commercial leasing?
Commercial leasing is another term for van leasing. When someone mentions commercial leasing they also mean van leasing and vice versa.
Although many think of cars when they refer to leasing, van leasing is a very popular way of getting a new van, and one that is a viable option for many.
What commercial leasing options do I have?
There are two options for you in terms of leasing a van; Finance Lease and Contract Hire.
Finance Lease is the most common option for a van, and what many would refer to when talking about commercial leasing. You pay a fixed monthly fee for a set period of time, up to 5 years, and at the end of the contract, you will have a final rental that is more than your monthly payments. This is also referred to as a balloon payment. The balloon payment is decided by you and the finance house at the start of the contract and will not change. You can either have a smaller balloon payment but higher monthly payments, or a larger balloon payment and smaller monthly payments, the choice is yours. You can learn more about balloon payments here. To pay off the balloon payment, you will sell the van. You will find a third party to buy the van and introduce them to the finance house. If you sell the van for more than the balloon payment, then you get to keep the equity. If you sell it for less, however, then you will have to make up the difference.
Alternatively, you can pay something called a peppercorn rental and keep the vehicle for one more year. This is usually at the cost of one monthly payment. You can continue to do this for as long as you like as long as the finance house agrees to it. However, you will have to pay off the final balloon payment eventually. One of the advantages of a Finance Lease is that there are no mileage or condition restrictions. So, if you’re vans are going to be doing a lot of mileage or might suffer from a bit of damage, then a Finance Lease is perfect for you. It is also great for vans with conversion units, such as refrigeration units. You can find out more about Finance Lease by watching our video below.
You can also get your van on a Contract Hire. This is often what people talk about when they refer to leasing, but isn’t as common when it comes to vans.
It is similar to a Finance Lease in the way that you make monthly payments for a set period of time. However, at the end of the contract, you hand the van back with nothing more to pay (subject to mileage and condition restrictions). With Contract Hire, you are limited to a pre-agreed mileage and you have to keep it in a condition that is in line with the BVRLA Fair Wear and Tear Guide. You can read more about excess mileage here, and about Fair Wear by exploring the graphic below.
What are the Pros and Cons of Commercial Leasing?
As we have said, commercial leasing is growing in popularity because more and more people are seeing the benefits. Some of the benefits of commercial leasing include;
- Fixed monthly payments
- This makes for easy budgeting
- The balloon payment on the Finance Lease is also fixed so you know how much you are going to have to pay at the beginning of the contract.
- If you are a VAT registered company, then you can claim 100% of the VAT back on monthly payments
- This is if you don’t use your van for personal use.
- If you do use your van for personal use, then you can claim the monthly cost of the lease against profits
- How much of this you can claim back depends on how much CO2 your van emits. If it emits more than 160g/km of CO2, then you can claim 85% back.
- If it emits less, however, you can claim 100% back.
- With a Finance Lease, any equity you make in the final balloon payment is yours to keep (minus a small admin fee)
- If you have a Contract Hire van, then you don’t have your cash tied up in a depreciating asset
- This means you don’t have to worry about losing money should you have to sell it on, because with a Contract Hire you hand your van back
- With Contract Hire, the finance commitments can be “off balance sheet”
- If you have a Finance Lease, then the financial commitment of the van can be “on balance sheet”
So those are some of the advantages of commercial leasing. You can understand why it is so popular. However, there are some disadvantages. And, it’s important that you are aware of these as well before you decide whether commercial leasing is right for you. So, here are some of the disadvantages;
- If you have a Contract Hire then you are subject to mileage and condition restrictions
- You could face additional charges should your van exceed its mileage or not meet the BVRLA Fair Wear and Tear standards.
- On a Finance Lease, if you sell the van for less than the balloon payment, you have to make up the difference
- If you use your van for personal use, then you will have to pay company car tax
- We will talk about company car tax further on in this article
- If you have a Contract Hire then you have to hand your van back at the end of the contract
- This is a disadvantage for some, but not everyone
Those are some of the disadvantages of commercial leasing.
Commercial Leasing and Company Car Tax
As we said, if you have a commercial lease then the chances are you will still have to pay company car tax. Although the car is in the term, it also applies to vans. However, there are some key differences that may make commercial leasing more appealing.
Will I have to pay company car tax on my commercial lease?
You will have to pay company car tax on your van if you are using it for personal use. You do not have to pay company car tax if you are using your van for business journeys. A business journey includes a trip that is;
- Part of work, For example, travelling between appointments
- To a temporary workplace
You can also make ‘insignificant journeys’ in your van and not have to pay company car tax. These sorts of journeys include picking up a coffee on the way to work or grabbing a newspaper. If you use it for the school run or to do the weekly shop, then you will have to pay company car tax. You are also exempt from company car tax if your van is a pool van. This is essentially a van that all employees share, and counts as the following;
- It is available to each employee so they can do the job required
- It Isn’t usually used by one employee to the exclusion of others
- Is available for use and used by more than one employee
- It Isn’t normally kept at or near an employee’s home
- It is only used for business journeys
- Limited personal use is allowed if it is necessary for a business journey. For example, driving home in the van to get an early start the next day
How is company car tax calculated for a van?
The way vans and cars are subject to company car tax is slightly different. A company car is taxed using a sliding BIK rate, dependent on how much CO2 the car emits. However, this does not apply to a van. Instead, there is a fixed BIK rate. How much you pay is determined by your personal tax bracket.
If you have a van and you are eligible to pay company car tax, then the fixed rate is £3150. You then pay a percentage depending on your tax bracket. So if you are in the 20% tax bracket, you will pay £630 a year. This equates to £52.50 a month.
If your van is electric and therefore has zero emissions, then you will only pay £630 a year regardless of your tax bracket.We have touched quite briefly upon company car tax for vans, so for more information then follow the link below. In conclusion, commercial leasing is another term for van leasing. You can either have a Finance Lease or a Contract Hire and each are suited to different people and businesses. There are some huge benefits to commercial leasing including tax benefits. However, it is not for everyone, and we recommend you talk to an expert before you make a decision to determine whether commercial leasing is the right option for you and your business.