Is car leasing right for my business?

Are you a business owner who changes their car every few years or does your industry demands the most up-to-date fleet? 

If either applies, then leasing a car is an excellent way to save your business money, both in the short term and medium to long term too. Originating in the US, leasing has taken off in the UK and around Europe as an affordable and economical way to access the vehicles that you require without breaking the bank.

Let’s have a look at a current business vehicle that you own and do a simple mathematical breakdown:

[what you spent on the vehicle] – [what the vehicle sold for] / [the number of months the vehicle was owned]

Naturally, you will need to calculate in the cost of road tax, plus any interest incurred if the car was bought on credit, plus how much interest you may have lost from savings.

Added to this, you’ll have to factor in the selling fees, advertising, time spent meeting and negotiating or, worst case scenario, how much you were undercut by part-exchanging at the dealer price.

Taking this into account, the stress, not to mention the financial implications and you can see why many businesses choose to lease their business vehicles. Spending the same or less money for identical or similar models, factoring in depreciation and repair fees and you’ll be forgiven for not understanding why you decided to buy a vehicle outright in the first place.

Buying isn’t the best scenario for your business vehicle, especially when you break it down into monthly costs and benefits. Below, we’ll have a look at some of the more popular options when it comes to leasing a car. These are Contract Hire and Personal Contract Hire (PCH).

Personal/Business Contract Hire

In the UK, one of the most popular forms of car is known as Contract Hire. This is available to both business users and private individuals, but businesses can gain tax advantages by claiming back the VAT, so you’re already ahead of the competition by taking this route.

With Contract Hire, you’re able to access most of the benefits of car ownership without the downsides of depreciation, large upfront fees or maintenance. On a basic level, you will lease (that is, a long-term rental), a brand new car to your specification, for a fixed period. This period is usually between two and five years, although contract length can vary and be tailored to your preferences at your local dealership.

Contract Hire is a simple process to fund the acquisition of even multiple vehicles. You simply choose the vehicle make, model, spec and trim that you want and it’s ordered for you – a brand new car. Payments are made monthly with the vehicle being returned to the dealership at the end of the contract. You never actually own the vehicle; you’re only the registered keeper.

You may question why you wouldn’t want to buy an asset rather than lease it, but for vehicles it’s a no-brainer. Excluding classic cars, your vehicles will depreciate at a rapid rate, especially in the first few years.

Naturally, buying a second hand vehicle will dampen the depreciation, but other costs can add up too – reliability, maintenance fees, up-to-date specifications all need to be taken into consideration.

With a new lease car, you’re covered by the manufacturer’s warranty, no MOT is due anytime soon and repairs will be minimal – everything is new.

With the end of your contract, the vehicle is handed back to the dealer and you will be able to extend the lease, walk away or upgrade your vehicle to the latest model. It’s that simple, for you and for your accountant.

As mentioned, you will never actually own the vehicle; therefore it will be excluded from any balance sheets. This means that the vehicle can be classes as a business expense, deducted from any profits and reduce your overall tax bill.

There are a few caveats however, including fair usage and mileage. The vehicles must be returned in a reasonable condition, excessive wear and tear, damage or excess mileage will impact the final costs. It’s important to agree with your lease dealership what the expected annual mileage will be.

Exceeding this will incur a fee, however flexibility is the nature of the leasing game – it’s personally tailored so you can get the vehicle and the contract to fit your business needs. All of this information is used to calculate the final value fee of the vehicle. This is subtracted from the initial cost from the factory to work out the depreciation you’ll pay off over the contract term.

Here’s a quick breakdown on the positives on why you should choose Contract Hire for your business

  • Funding is off your balance sheets
  • Offers company cars in a VAT efficient format
  • Motoring costs are fixed for the period so future calculations can be accurately made
  • The final value of the vehicle is set, so your accountants  won’t need to revalue the vehicle
  • Cash is freed up for other business uses compared to buying outright
  • Your accountants will be happier as there is less paperwork to be done
  • Additional maintenance can be covered with a small surcharge – no unexpected lump fees
  • It is available with an optional monthly maintenance charge (which covers routine maintenance and servicing costs)

Things to take home

As with any business decision, leasing depends entirely on your personal circumstances. If you need to keep cash within the business, then buying outright isn’t going to be the best option. Likewise, if you’d like to streamline your balance sheets, leasing can be beneficial for both time and money saved. Enquire at your local dealer to see if a tailor-made vehicle package and contract is available to you. Push for the best deal for your circumstances, including vehicle trim and contract terms and you’ll wonder why you didn’t lease sooner.

Praseeda Nair

Kellen Rempel

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

Related Topics

Venture capital funding