Firstly, let’s look at what vehicle leasing is.
Leasing is where you have a car for a period of time, usually between 2-5 years. During this time, you pay a pre-agreed monthly fee. After that time is up, you hand the car back and get a new vehicle. It is essentially renting a car for a period of time.
There are a few leasing options if you are a business, which is what we are going to look at now.
What vehicle leasing options are there for businesses?
There are three options that are available to you if you are looking at business vehicle leasing;
- Business Contract Hire
- Business Contract Purchase
- Finance Lease
What is Business Contract Hire?
Business Contract Hire or BCH, or just plain old Contract Hire, is the most common form of leasing, and is often what people are talking about when they refer to leasing.
Business Contract Hire is where you or your business have a car for a set period of time while paying a monthly fee. Once that time is up, you hand the car back with nothing more to pay (subject to mileage and condition restrictions).
When you get a Business Contract Hire, you agree to a mileage allowance that you are not to go over. You are also contractually obliged to keep the car in a condition that is in line with the BVRLA Fair Wear and Tear Guide. If you go over your mileage or your car is judged to be in a condition that exceeds Fair Wear and Tear, then you could be subject to charges. You can read more about excess mileage fees here.
What are the pros and cons of Business Contract Hire?
There are several advantages to Business Contract Hire, including;
- The monthly payments are set
- This makes for easy budgeting
- You don’t have your cash tied up in a depreciating asset
- Because you hand the car back at the end of the contract, you don’t have to worry about depreciation
- Road tax is often included
- This is one less thing to worry about
- You don’t have to worry about negative equity
- Again, because you hand the car back at the end of the contract, you don’t have to worry about losing money when it comes to selling the car on, because disposing of the vehicle isn’t your responsibility.
- There are tax benefits to Business Contract Hire
- We will go into more detail about this further in the article
However, there are some disadvantages, for example;
- You are subject to mileage and condition restrictions
- This means that Business Contract Hire might not be best for those who are going to be doing a lot of mileage or think their vehicle might get damaged beyond Fair Wear and Tear
- You don’t own the vehicle
- Leasing is designed so you give the car back at the end of the term so you never own it. This disadvantage can be subjective, as some people don’t mind the fact that they hand the car back. But, for some, it can be a dealbreaker.
- You have to get the vehicle serviced throughout
- This is a condition in your contract
You can read more about Business Contract Hire here, or watch our video below.
What is Business Contract Purchase?
Business Contract Purchase works in the same way as Business Contract Hire for the duration of the contract. That is, you pay a monthly fee for a vehicle for a set period of time. However, when the contract comes to an end, you have three options;
- Hand the car back with nothing more to pay
- Subject to mileage and condition restrictions
- Part-exchange the car
- Buy the car for a pre-agreed value
- This is called the Minimum Guaranteed Future Value (MGFV) and is set at the beginning of the contract.
How is the Minimum Guaranteed Future Value calculated?
The MGFV is calculated by working out how much your car will be worth at the end of the contract.
This takes into account the mileage, the length of the contract, the make and model of the car and the expected depreciation. The MGFV will not change for the duration of the contract, so you will know how much you will be expected to pay at the start of the contract.
What are the pros and cons of Business Contract Purchase?
Some of the advantages of Business Contract Purchase include;
- It’s flexible
- This is probably the biggest advantage of Business Contract Purchase as it gives you three options at the end of your contract
- Therefore it is perfect for those who aren’t sure what they want to do at the end of their contract
- The vehicle can be depreciated into company accounts
- The purchase price is pre-agreed
- This means you can budget for it if you want to buy your vehicle at the end of the contract
- It’s an asset to the business
- This means it can help towards a company’s balance sheet
However, there are some disadvantages, for example;
- The monthly payments can be higher than Business Contract Hire
- Sometimes the interest rates are marginally higher
- The whole cost of the vehicle is shown on your credit file
- You are responsible for taxing the car
- You are still subject to mileage and condition restrictions
- This is because there is a chance you will hand the car back
You can read more about Business Contract Purchase here, or watch our video below.
What is Finance Lease?
A Finance Lease is one of the traditional ways of getting a vehicle for a business, and is more suited to vans or vehicles that are going to be doing excessive mileage or suffer damage that falls outside of Fair Wear and Tear.
You pay monthly for the vehicle for a set period of time, like a normal lease contract. However, once that time is up you will sell the vehicle to clear the remaining finance. This remaining finance is called a balloon payment and is set at the beginning of the contract.
Alternatively, you can pay something called a peppercorn rental and continue to keep the vehicle for another year. The peppercorn rental is usually one monthly payment.
What are the pros and cons of a Finance Lease?
Some of the advantages of a Finance Lease include;
- Any equity you make when selling the vehicle on is yours to keep
- The agreement can be ended early
- As long as you clear off the remaining finance
- There is no mileage or wear and tear restrictions
However, some of the disadvantages include;
- If you sell the vehicle for less than the balloon payment you have to make up the difference
- You don’t own the vehicle
- Unless you then buy the car off the person you have sold it to, but that’s completely down to you.
You can read more about Finance Lease here, or watch our video below.
What are the benefits of vehicle leasing for businesses?
We’ve already gone through the individual benefits of each lease option, but there are others, general benefits of vehicle leasing for businesses, including tax benefits.
If you are leasing your vehicle through a VAT registered company then you can claim 50% of the VAT back on the monthly payments, and 100% of the VAT if you have a van. You can read more about van leasing here.
However, there is an exception. The exception is if you use your vehicle for personal use. If you use your car out of work hours for personal journeys, then you cannot claim the VAT back.
That said, you can claim the monthly cost of the lease against profits. If your car emits more than 160g/km of CO2, then you can claim 85% back. If your vehicle emits less than 160g/km of CO2 then you can claim 100% of the monthly cost back.
Off and On Balance Sheet
If you have a Business Contract Hire, the liability of the finance can be “off balance sheet”.
If you have a Finance Lease, then it can be “on balance sheet”, both of these are beneficial to businesses.
So those are some of the benefits of vehicle leasing for businesses.
Who can get a business lease?
You are eligible for a business lease, or a company car, if you;
- Are a Sole Trader
- Are in a Partnership
- Have a VAT registered Business
- Have a Limited Company
- Are a Limited Liability Partnership (LLP)
- Are a PLC
- Are a Charity
- Are part of Central Government
- Are a Local Authority
- Are an Embassy
You can read more about the criteria for business leasing here.
Company Car Tax and Vehicle Leasing
If you have a company car then you may have to pay company car tax. You will have to pay company car tax if you use your company vehicle for personal use, including travelling to and from work.
The amount you pay will depend on the type of vehicle, your personal tax bracket and how much CO2 the vehicle emits. However, a general rule is that the more CO2 the car emits, the higher the company car tax.
You can read more about company car tax here.
Hopefully, this has given you an idea of vehicle leasing for businesses including what options are available to you and the pros and cons of each of those options. We have also touched upon the overall business benefits of vehicle leasing. We have also touched briefly upon company car tax. We have an extensive range of articles, infographics and guides on vehicle leasing for businesses, so for more information on all aspects of business leasing, you can head to our Learning Centre.