Why is business leasing cheaper?
While you have been looking at leasing deals, you may have noticed that business leasing can often be cheaper than other lease contracts. The fact that it is often cheaper is one of the reasons it has risen in popularity over the past few years.
But, why is business leasing cheaper?
We pride ourselves on our transparency and openness at OSV, and we think you deserve to know exactly why business leasing can be cheaper than other types of leasing, how it works and what it could mean for you and your business.
What is business leasing?
Firstly, we need to establish what we’re talking about when we say business leasing.
When we talk about business leasing, we are talking about Business Contract Hire. This is the fastest growing scheme in the UK and is what most people are referring to when they talk about leasing.
Business Contract Hire is simple;
Your business has a car for a set period of time, paying a fixed monthly rate. You have a pre-agreed mileage and you also have an obligation to keep the car in a condition that is in line with the BVRLA Fair Wear and Tear Guide.
Once that period of time is up, you hand the car back with nothing more to pay (subject to mileage and condition restrictions).
For more information, you can watch our Business Contract Hire video below.[vc_video link=”https://www.youtube.com/watch?v=sZTKPhA-th8″]Business Contract Hire is what we are referring to when we talk about business leasing, and what we mean when we refer to business leasing further in this article.
What are the benefits of business leasing?
There are loads of benefits to business leasing, these include;
- You don’t have your cash tied up in a depreciating asset
- Because you don’t own the car you don’t have to worry about the depreciation when the time comes to sell the vehicle on, because you simply hand it back
- You can often get a nicer model for less money
- We will go into more detail about this one below
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- The finance can be “off balance-sheet”
- You can claim 50% of the VAT back off the monthly rental
- You can offset a percentage or all of the rental off corporation tax at the end of the year
- We will go into more detail about the last two points further down the article.
So those are some of the huge benefits that come with leasing through your business. You can read more about the business benefits of leasing here.
How is the cost of business contract hire calculated?
This is important to know before we go onto why business leasing is cheaper, because you have to know how a business lease price is calculated and what affects it.
There are a few things that determine how much a Business Contract Hire costs, and they are;
- Residual value
- Purchase price
- Length of contract
- Annual mileage
A general rule to calculate how much it will cost is as follows;
(purchase price – estimated residual value)/months on contract + annual mileage + admin fees = monthly payments
Essentially, the smaller the difference in the purchase price and the estimated residual value at the end of the contract and the lower the mileage, the lower the monthly payments.
Why is business leasing cheaper?
Okay, so why is business leasing sometimes cheaper than other forms of leasing? We say sometimes, because this is not always the case. There are times when business leasing is more expensive, or simply around the same price.
But, there are also times when it is cheaper to lease through a business, which is what we are going to talk about now.
There is more discount
The automotive industry and the leasing company are tightly regulated, and these regulations can often work in yours and our favour. [vc_single_image image=”56407″ img_size=”article-image”]When you get a business lease, the cost of the purchase price does not show up on the documents. The purchase price is how much the car is actually sold for. Because the purchase price does not appear on the documents, manufacturers are more assured, and therefore add more discounts onto the car. This is different to other schemes such as a purchase agreement where the purchase price has to be declared on the documents because of financial regulations requiring them to do so. If the purchase price has been lowered, then there is less difference between the purchase price and the estimated residual value, thereby lowering the monthly payments. This is one of the main reasons business leasing is often cheaper than other schemes.
How do the discounts work?
Unfortunately as a buyer, you will never know how much discount has been applied to a business lease because it doesn’t appear anywhere on the documents. However, we can tell you what influences these discounts. Say a manufacturer wants to sell an extra 500 SUV type vehicles, they will go to brokers, dealer groups or leasing companies and tell them that they will give them an extra discount if they can commit to selling a certain number of those models. The companies agree, the discounts are applied and the monthly payments become considerably lower than they would on a purchase scheme. [vc_single_image image=”58342″ img_size=”article-image”]Or, you could have manufacturers that are competing with each other. Take Mercedes and Audi, they are constantly competing against each other in a majority of their ranges, and are extremely popular brands when it comes to business leasing. This means that they offer competitive discounts, closing the gap between the purchase price and the residual value.
However, this is not always the case. There will be some manufacturers who do not apply that much discount and therefore there will be a larger difference between the purchase price and the estimated residual value. This is also why you can find cars of different makes that are worth the same price, but one is considerably cheaper than the other to get on a Business Contract Hire.
Another reason business leasing is cheaper is due to the tax benefits. On a Business Contract Hire, you can offset 50% of VAT on the rental.
You can also offset a percentage or all of the rental off corporation tax at the end of the year. How much you can deduct depends on the amount of CO² your car emits. If your car emits 130g/km of CO² or over, then you can only deduct 85% of the rental. Anything under that, however, and you will be able to deduct 100%.
Business Contract Hire is the only scheme in which you can do that, you cannot do that on any other purchase agreement.
This one is a bit of an odd one, but it does contribute to business leasing being cheaper. If you go over your pre-agreed mileage, then you will be subject to an excess mileage charge. This can be anything from 3p/per mile+VAT to £1/per mile+VAT.[vc_single_image image=”58420″ img_size=”article-image”]However, should you be charged for excess mileage then you can claim 100% of the VAT and service charge against your tax bill.
When people first find out about an excess mileage charge then they often assume it is cheaper to opt for a larger mileage and simply not use it, as opposed to going for a lower mileage and having to pay a fee. This is not always the cheapest option, however, and it is not something we recommend. Mileage has a huge impact on the cost of the monthly payments, and there are times when it is cheaper to go for a lower mileage, pay the excess mileage fee and claim back the VAT should you go over your mileage allowance.
It does depend on the leasing company and the manufacturer but don’t always assume that it is cheaper to go for the higher mileage because there are times when it is not the best option. We recommend going through a reputable broker and asking for guidance on this issue, as they will be able to advise you on what is best for you and your situation.