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Demystifying Vehicle Finance

A guide to vehicle finance

Dealers, manufacturers, banks, brokers and leasing companies all offer finance. But the choice is usually limited, baffling or both thanks to confusing jargon and complicated options.

If you drive a car or van for business or pleasure, the chances are you’ll have been exposed to some elements of vehicle finance.

This guide gives an outline of the most popular financing methods available across the market to help you choose what’s best for you and your business.

Hire purchase

Probably the best known form of finance for small businesses. You agree to buy the vehicle over a fixed period via monthly instalments.

  • Finance using upfront deposit followed by monthly payments.
  • You get to own the vehicle.
  • You’re responsible for servicing, maintenance and selling the vehicle.

Business contract hire

Contract Hire is the industry term for ‘Leasing’. It’s really just a long-term rental agreement. The leasing company buys the car and leases it to you, usually for three or four years.

Contract Hire offers many advantages:

Minimal deposit and lower monthly costs mean many people upgrade their vehicle choice.

Servicing, maintenance, road tax, tyres and breakdown cover can all be included in the agreement.

Your vehicles don’t appear on your balance sheet*.

For business customers who can recover VAT, there is the opportunity to recover 50% of the VAT charged on the monthly rentals (cars) and there is 100% VAT recovery on vans (subject to your agreed VAT recovery rate with HMRC).

The leasing company takes the risk on the resale of the vehicle so you do not have to worry about selling the vehicle and achieving your anticipated sale price.

Flexible contracts, terms and mileage options to suit your business needs.

Fixed monthly rentals allow you to manage costs more effectively.

You can add ancillary services such as Fleet Management, Vehicle Service Management, Accident Services and Duty of Care.

*Operating leases, which include Contract Hire, are likely to be required to be reported on balance sheet in the future. The timing of this is presently unclear. The current proposal is that this will apply to all organisations reporting under International Financial Reporting Standards and all UK limited companies, except SMEs. A new accounting standard is expected in 2015 and it is likely the new rules will come into force in 2019, with comparative figures required for 2018.

The vehicle should be returned to us within the contracted mileage and in a condition that meets the BVRLA fair wear and tear guidelines otherwise charges may be incurred.

Personal contract hire

In principle the same as Contract Hire, but arranged as a personal lease rather than through the business apart from VAT/Tax treatment.

For that reason there is no Benefit in Kind (BIK) Tax as the vehicle contract is between the individual driver and the leasing company.

The vehicle should be returned to us within the contracted mileage and in a condition that meets the BVRLA fair wear and tear guidelines otherwise charges may be incurred.

Contract Purchase

Contract Purchase offers fixed monthly payments to help businesses manage their costs, enabling them to purchase the vehicle at the end of the contract by making a 'balloon' payment or return it to the leasing company without further cost (subject to excess mileage and any end of contract damage).

  • For VAT registered businesses, full VAT relief is available on commercial vehicles and is recoverable up front against the invoice price (although VAT is payable on the disposal value when returned to the leasing company or eventually sold).
  • Capital allowances are recoverable on the purchase price; in the case of commercial vehicles it is possible to use your Annual Investment Allowance of up to £500,000 to get 100% corporation tax relief (or business income tax relief) on purchase. The current Annual Investment Allowance limit of £500,000 per annum is available until 31 December 2015, after which date the limit will be set permanently at £200,000 per annum.

Finance Lease

Finance Lease offers a particularly flexible form of vehicle funding. You can either enter into a lease to pay the full amount off during the agreed contract period and then receive a rebate of lease rentals equivalent to the sale price when the vehicle is returned to the leasing company and sold at the end of term, or you can pay lease rentals to an estimated residual value at the end of contract and benefit from any upside on sale compared with the predicted figure, however if the resale value is less then you will need to pay the lease provider the difference. Finance Lease comes with optional fixed maintenance contracts.

Key advantages:

  • Same VAT benefits as Contract Hire.
  • No end of contract charges.
  • Opportunity to benefit from potential upside on disposal.
  • It’s possible to pay most of the finance rentals up front, which can accelerate VAT recovery and reduces your interest payments.