Split up into separate stories
Contract puchase is a form of business van funding…Finance lease is a form of van finance etc etc etc
Use case studies to illustrate each one
WHEN the time comes to buy a new van it’s essential to find the most suitable way for your type of business to fund it.
At the time of purchase there may or may not be some vantastic deals out there but there are certainly a number of different ways to pay for the new vehicle.
And, perhaps somewhat surprisingly, the choice could come down to just how dirty your van is likely to get during its working day.
The best way to fund a new vehicle which will be used by a builder or plasterer – and so tends to take a bashing – is usually different to the best way to fund one used in cleaner trades, like plumbing or by electricians.
So if you can guarantee the condition of your vehicle and are VAT registered contract hire is a suitable option.
But if your new van is less likely to stay pristine finance lease could be the way forward.
Here we look at both options and other choices.
Hire Purchase
Hire purchase is a term everyone is familiar with and basically means you agree to buy the vehicle over a set period, normally three years, by paying agreed monthly instalments.
When you make the last payment the van is yours to carry on using or sell on. Stating the obvious you are responsible for its maintenance as well as road tax (VED) while making the hire purchase payments.
The tax man treats hire purchase as a deferred purchase agreement rather than a hire agreement so for corporation tax purposes the van is deemed to belong to you from delivery, so you can claim capital allowances as if you had paid for it in full on delivery.
Advantages: A very simple method of finance; You can obtain capital allowances from the date of delivery; It does not suffer a partial lease rental tax disallowance
Disadvantages: It’s an on balance sheet form of finance; There is no guarantee of the value of the vehicle at the end of the agreement; All the VAT element of the purchase must be paid up front
Contract Purchase
Contract Purchase is for business customers looking to fund a new vehicle in a manageable way. A little like hire purchase. The monthly payments are not subject to VAT, but if you do take out the optional service package you will have to pay VAT on the service costs. This type of funding is ideal for businesses that would like options at the end of its finance agreement.
Customers make an initial payment when they first take out the contract, then pay fixed monthly payments and finally have an Optional Final Payment at the end of the contract. You can keep the van by making this final payment, trade-in your vehicle at a dealership and take another vehicle from them or simply return the vehicle to the funder.
Advantages: Low initial payment; Fixed monthly payments; No depreciation concerns if you want to walk away at the end; Maintenance and servicing can be included; Cost effective
Disadvantages: You must have fully comprehensive vehicle insurance
Lease Purchase
The main difference between Lease Purchase and Contract Purchase is that with Lease Purchase you enter into an agreement to buy the van at the end of the contract while with Contract Purchase you have the choice to buy or not..
Lease Purchase normally lasts 2-4 years and is for people who would like to own a vehicle but don’t have the money to buy one immediately. It’s ideal for non VAT registered customer who eventually wants to own the van they are buying.
You have the flexibility of putting down a larger initial payment to reduce the monthly payments. which are worked out on the difference between the cost of the vehicle and the depreciation value plus interest.
Advantages: Monthly payments are not subject to VAT; The vehicle will become a company asset; Lease Purchase frees up finance for other aspects of your company; Low initial payment.
Disadvantages: In some cases the larger final payment can be larger than the value of the van; No maintenance included.
