Business Car Leasing – What Are Your Options?
Business car leasing, or commercial leasing as it is otherwise known, remains popular with businesses due to the obvious advantage of being a cheaper than buying cars outright. Keeping transport spending to a minimum allows businesses to allocate resources to other core areas of the business and also provides substantial tax benefits.
When entering into a commercial leasing agreement it is very important to select a lease which best suits your business needs. Things which need to be considered are:
- Duration of contacts
- Initial deposit
- Rates of repayment
- Mileage restrictions
- Excess Mileage Charges
- Balloon Payments
- On/Off Balance Sheet Option
Therefore it is important to shop around and evaluate the terms and conditions of the various companies before making your decision. Here is a guide to the most common types of contact available.
Contract hire is an agreement where a customer pays a fixed monthly instalment for a specified time period and an agreed mileage. The amount paid per month is calculated by taking such factors as vehicle cost, use period, mileage and depreciation into account.
These types of agreements are ideal for all types of businesses, and contracts tend to be flexible depending on the needs of the business. In addition initial deposits tend to be low, VAT can be reclaimed, you can categorize the lease as ‘off balance sheet’ if you wish and optional maintenance contracts are also available. In addition businesses can offset the instalments against taxable profit.
Contract purchase is similar to contract hire but at the end of the contract the business has the option to either give the car back or to purchase the vehicle at the stipulated cost which is agreed before the contract starts.
This option is ideal for businesses who may wish to keep the vehicle as an asset at the end of the contract and retains all the benefits of a contract hire agreement although businesses are required to show the car as an ‘on balance sheet’ item with this option.
Lease purchase is similar to contract purchase. However, you do not have the option to return the car at any point and at the end of the contract you must pay the final balloon payment amount. This is the best option if the business definitely wants to keep the car as an asset at the end of the contract. Again with this contract the vehicle must be shown as an ‘on balance sheet’ item.
Finance Leasing is a tax efficient option where you choose to pay either the entire cost of the vehicle, including interest charges, over an agreed lease period or opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle.
At the start of the contract a mileage is agreed and assuming this does not vary, monthly payments and interest rates are fixed for the duration of the contract. Therefore you benefit though fixed costs but do take on the administration and operating risks. At the conclusion of the contract you can continue to use the vehicle on a peppercorn contract although you will at no time take ownership of the vehicle.
Maintenance – Whichever contract you choose you will be given the option of taking a maintenance or non maintenance contract. There are many different types of maintenance contract available but all of them will cover servicing and mechanical failure for the duration of the contract. Non maintenance contracts mean you are responsible for the maintenance of the vehicle and you are required to have the vehicle serviced to standards stipulated by the leasing company.
Contract length – These can be anything from 2-5 years, although 3 years is the most common contract length businesses tend to choose.
Contract Mileage – Before the contract starts you will need to agree an annual mileage with the leasing company. An excess mileage charge will be invoiced at the end of the contract if the agreed mileage is exceeded.
By Simon England, Managing Director of leading UK car leasing company, Car Leasing UK