What is Business Car Leasing?
Finding the right vehicle option for your business can quickly become an overwhelming experience. The most obvious way to obtain a vehicle for business use historically was simply to buy one, but this can be a very difficult commitment to make financially as the buyer is obligated to paying for the vehicle over the next 5 to 7 years, depending on the terms of a loan. That is of course unless the buyer is fortunate enough to have the cash up front.
But there is still an underlying issue in purchasing a vehicle in that the payment for the vehicle itself is not the end, next comes the road tax, and maintenance costs, which quickly becomes far more of an expensive option that originally considered.
Vehicle leasing is the solution to this; you do not have to be locked into the above purchase limits. Leasing is, in a way, renting a vehicle without some of the additional costings and risks of owning the vehicle outright. In this article we will briefly touch on what a Personal Contract Hire lease is (PCH) and then compare the differences of a Business Contract Hire (BCH) to help you decide whether business car leasing is a good idea for your company.
We recommend reading our in depth article on the the differences between purchasing or leasing a vehicle to begin with if this is your first experience with leasing in general.
Personal Lease Vehicles For Business
With the benefit in kind taxation system in place, many company car users have questioned the validity and cost of having a company expensed car. The upside of this is often negated by the amount of tax incurred. Naturally for many employees a company car is an essential business tool, as much as a laptop or mobile phone.
For this reason, more and more companies are instead offering alternatives to company cars, such as an increased salary or tax free mileage allowances for their own cars. It is now possible for people to enjoy the inherent benefits of a company car without the tax burden. Personal contract hire or Personal leasing are all offered in abundance, and more and more individuals are realising the benefits of leasing a car rather than owning one.
Business Vehicle Leasing
One of the most popular forms of car leasing for companies is Business Contract Hire (BCH) or simply Business Vehicle Leasing. Whether a company has a few cars or a much larger fleet, contract hire is one of the most popular forms of car leasing. It is occasionally also known more technically as an ‘operating lease’.
Businesses generally opt to lease and hire vehicles instead of buying them. Business Contract Hire is ideal for companies that want to reduce the financial risk of running company vehicles, whilst at the same time reducing the burden of buying, servicing, administering and selling company cars.
What Does a Business Car Lease Mean?
Simply put, your company hires a vehicle for a pre-determined period with annual mileage limitations for a simple fixed monthly price. At the end of the car lease period, the company returns the car to the leasing company. The car leasing company always owns the vehicle and is responsible for the taxing and maintenance of the car, providing a maintenance package has been added to the contract.
Business Car Leasing Benefits
Fixed Monthly Cost and Low Startup Costs
A contract hire agreement offers a fixed monthly payment for the contract period with normally around three months rentals paid at the initiation of the contract as a deposit. Contract periods are most commonly three years but one, two and four year periods are also available. Because Contract Hire offers a fixed monthly rental rather than ad hoc payments, a company can budget more easily and have a more predictable cash flow.
Free Choice of Vehicle
Business car leasing allows you to choose any type, make or model of vehicle to suit your needs. Whether you want a small sports car, a van or an executive car, you will be able to have it with a contract hire lease agreement.
In some circumstances, it is possible to lease ‘used’ or lease ‘nearly new’ vehicles as well. If certain criteria are fulfilled then companies can enjoy the benefits of contract hire, including all the VAT benefits (more on that shortly), to enjoy very affordable car leasing.
Off Balance Sheet Funding
In a business vehicle lease, the leasing company always owns the vehicle, therefore it will not appear as an asset on a company’s balance sheet. What this means is that the company’s ‘gearing’ is improved allowing the company to have the ability to borrow capital if required without any added debt values. Contract hire rentals are allowable against taxable profits as well (commercial vehicles fully, passenger cars proportionally).
Business Administration Reduction
Once you have chosen your business vehicle to lease, the car leasing company takes over from there. They will source your desired vehicle at the very best price (reflected in the monthly rental) and arrange for the vehicle to be delivered to you. They will ensure the tax disc is always current and very often provide breakdown assistance (e.g. the AA, RAC, and Green Flag).
At the conclusion of the lease the lease dealer will collect the vehicle and will be responsible for selling the car, taking any residual risk themselves. If you opt for a maintenance package all servicing, tires, batteries, oil etc., will be covered by the car leasing company as well. Again using their purchasing power they are able to attain very competitive prices which will be reflected in the monthly rental price.
Business Car Leasing VAT Benefits
The car leasing company can claim back the VAT on the purchase price of the new car. This saving is also passed on to the end user which is why you generally find vehicle leases to be so cost effective.
The monthly rental is split into two elements, financing and maintenance (if additionally opted for). A VAT registered company can claim back 100% of the VAT on the servicing element of the rental cost, and 50% of the finance rental cost of which would be a huge benefit in tax reclaims.
Business Car Leasing Financial Benefits
The company leasing the vehicle to your company takes all the risks involved in running a company car, from purchasing, selling, financing and servicing. This removes more things for your business to worry about.
All your company has to do is fuel the vehicle, insure it and of course enjoy driving it! The rentals are expenses and are allowable against taxable profits, as detailed above.
Standard lease plans generally offer maximum annual mileage allowances of around 15,000 miles, if your business requirements exceed this then we suggest you read our article on high mileage leasing plans.
How Does a Business Car Lease Work?
Here we will describe a very basic overview as to what you can expect the process of leasing a business vehicle to look like. The reality is that there are many more steps such as credit checks and agreement terms to decide, but this should give you a good initial idea.
Business vehicle leasing is a fixed term operating lease. You make an initial payment followed by fixed monthly rentals for the duration of the contract hire agreement.
- Pick the vehicle you would like
- Select the vehicle lease length (typically 24 – 60 months)
- Decide whether to include an additional maintenance package
- Select your annual mileage allowance
- Receive a quote
- Complete the agreement and receive your vehicle
- At the end of the agreement you return the vehicle to the contract hire company and start the process over again
Conclusion
We hope this article has helped to answer your business vehicle lease questions and that you now better understand some of the benefits compared to other options available. We also encourage you to read our article on the tax benefits of car leasing.
If you are a business owner already running lease vehicles, we strongly encourage you to register a free account with us and add your fleet so that you can easily monitor your mileage to ensure you stay within your agreed allowance, and most importantly avoid any potential end of term fees.