Leasing is becoming more popular for businesses who want to supply their workforce with company cars. A funding arrangement can lead to the company owning the vehicle at the end of the deal, which is usually a three year or 60,000 mile period for businesses.
Buying the car means using hire purchase or contract purchase. Just leasing it leaves companies with a choice of contract hire or finance lease. Tax breaks are something any business needs to consider when sourcing its fleet of company cars.
More than half of leased business vehicles are sourced this way. The company gets the car on lease for a set time with a mileage limit. The upfront fee is usually the equivalent of three months rental payments and a monthly charge is then paid until the vehicle is returned.
The business has none of the risks of owning a vehicle. While this means you may save on running costs, you could also miss out if there are savings to be made on maintenance or the car turns out to have a greater than anticipated resale value.
As the car is never owned, it doesn’t have to be declared as an asset and the charges are a business expense that can be claimed against tax.
Finance lease means paying the whole cost of a loan to purchase the vehicle over a set period. Monthly payments can be lowered if you opt for a larger so-called ‘balloon payment’ at the end of the deal. It’s a fixed cost, but you essentially take on the costs of owning a car. 0
When the contract is up you can pay a small fee to keep the vehicle on. It doesn’t become your property though. It will appear on your balance sheet, but the capital part of the remaining rental is listed as a liability. Some of the rental charges can be offset against tax.
Hire purchase is a simple credit arrangement with a deposit and monthly payments paid until the car becomes yours.
The loan is secured on the vehicle, so you could lose it if you don’t pay well. The car is put on your balance sheet, so depreciation of an asset can be claimed against tax as can interest on the fees you pay.
Very similar to hire purchase, contract purchase introduces an element of leasing with a service fee for maintenance which the leaser carries out. The large ‘balloon payment’ is at the end of the agreement rather than the beginning and once it is paid, you own the vehicle. There is usually an agreed price for which you can sell the car back to the leaser.
This is an ownership deal, so you can claim capital allowances for the car as an asset.
Employee Contract Purchase
These are seen as a benefit to staff. There is no company car tax on such schemes, which are divided into:
Personal Car Plans
The employee pays the fees on a car lease deal, possibly with a maintenance and breakdown package, for an agreed contract period. At the end of the deal they can trade in the car for a new one, buy the car with a final payment or just hand it back.
Employees can use their company car allowance to pay the fees but don’t have to pay company car tax. Because businesses can buy in bulk, they can probably get their hands on a better car for less money.
Employee Car Ownership Schemes
This form of Frontier car leasing deal is similar to a personal car plan, but with the employer taking on more of the management – maintenance, vehicle choice, insurance.
This gives more power to the employer, who can choose their own fleet without having to actually own them itself.
Derek Devlin is a long time car leaser and also has owned some fantastic cars in his time.