Reading Time: 3 minutes

BUSINESS car leasing is one way SMEs can run company cars with low monthly payments and agreed mileage over a contract period – usually two, three or four years.

You pay a monthly rental for the lease of the car and at the end of the lease period you hand it back and start again.

If cash flow is tight and free capital at a premium, the last thing you want to do is tie up your business in bank loans and overdrafts for company cars.

Almost  a third of UK companies with 10-99 employees are planning to implement or use more operational leasing – otherwise called contract hire – in the next three years compared to just 8% when asked in 2019.

The 2020 Arval Mobility Observatory Barometer indicates that Small-medium sized enterprises (SMEs) in the UK are increasingly turning to leasing as a means of funding company cars and vans and turning to leasing companies for advice in what appears to be increasing numbers.

SMEs are also turning to leasing companies for advice in what appeared to be increasing numbers. Arval asked if companies were planning to implement or to use more operational leasing during the next three years. The responses in 2020 were 31% for 10-99 employees and 11% for fewer than 10 employees, compared to 8% and 10% respectively for the same question in 2019.

Business car leasing removes the need to find the initial capital to fund company cars, as you only pay the fixed monthly figure – so that cost is expected and can be budgeted for.

When the contract period is over, the car is collected and sold relieving you of the hassle of depreciation and dealing with the sale.

Better cash flow

Buying cars is capital intensive – with contract hire you can invest the money in the business and get better cash flow

One of the best things about business car leasing is that it’s an additional line of credit, meaning you can free up money to invest in your business and ease any cash flow worries.

So, you can stop using your cash on a depreciating asset when it could be used to fund the expansion of your business.

Access to new cars at fleet discounts

With lots of lease and contract hire companies vying for your business, it’s a buyers’ market.

Make sure you shop around to get the best deals on the latest models. Or use the expertise of your small fleet leasing supplier to find the best deals for you.

These small fleet leasing suppliers are experts in this field – and might find you a bargain car you hadn’t considered before.

You can find a wealth of knowledge on the Leasing Broker Federation website.

Some companies also offer a price matching service, so ask before making any deal.

Staff benefits

Your business and staff will benefit from the reliability, durability and exceptional fuel economy of driving the latest makes and models. That will lower your costs and their own personal costs too – and reduce their exposure to company car tax.

Plus, should the worst happen, they will be the best protected with the safest cars.

VAT benefits

Business car leasing is subject to VAT. But on your monthly invoices you will be able to claim 50% of the VAT back.

You can’t claim 100% because there is – in most cases – private use of the car. If your lease car is used solely for business – for example if it’s a pool car with no private usage – then you can claim 100% of the VAT back.

Either way, it’s a VAT efficient way to fund your business cars.

If you have a maintenance contract in addition to the monthly business car rental, then 100% of the VAT on that cost is reclaimable. There is no restriction.

Corporation tax benefits

Choose a car with CO2 emissions under 130g/km and you can save in corporation tax as the full amount of the lease rate is 100% reclaimable against your company’s taxable profits.

If you go above this breakpoint, you can only claim of the lease amount against your corporation tax. So to make the most tax efficient use of a business car lease, go for a sub-130g/km car.

The final decision on whether to take up a business car lease for your SME small fleet depends on multiple changeable factors such as mileage, personal tax arrangements and the type of car.

As a package, business car leasing is a viable outsourcing service that can save you time and uses your finances cost-efficiently as a means of funding new company cars for your SME small fleet.

If you’re still unsure, talk to a small fleet leasing specialist and your financial adviser to find out what’s best for you