WITH company car registrations still on the increase more and more UK businesses are taking a closer look at the best way to finance these expensive acquisitions.
And in a lot of cases they are opting for finance lease as the best way forward.
It’s now seen as a sensible compromise between owning your company car and outright business car usership known as contract hire.
Finance lease has all the benefits of ownership, but many of the cash flow and VAT advantages of contract hire.
VAT advantages of finance lease
Assuming there will be some private use of the company car, 50% of the VAT charged on the rentals of a finance lease can be reclaimed – the same as contract hire.
The finance company which provides the car also gains as it can reclaim the full 100% of the VAT on the purchase of the vehicle; it can then pass on this VAT saving in the form of lower rentals to you.
Cash flow advantages of finance lease
Having decided on a finance lease for your company car you have to decide which of two types available is more suitable for your business. The choice will be based on your company’s current financial position and whether you:
- want to take advantage of reduced initial payments followed by a balloon payment or
- go for a full payout lease.
If you opt for the first you sell the car at the end of the finance lease rental agreement which should cover the final balloon payment – an agreed amount that should cover the residual value of the business car. Be aware, that if the sale proceeds doesn’t cover the agreed amount, you will be liable for the shortfall.
In a full payout lease you can sell the car on behalf of the leasing company, having paid for the cost of the car in the lease rentals, and then receive up to 95% of the proceeds of the sale in the form of a rebate from the rental company.
Alternatively if you still enjoy driving the car you can enter into a secondary rental period with the finance, often called a ‘peppercorn rental’, as it costs very little per month.
In many ways finance lease is very similar to hire purchase. But there is a difference. Under an HP agreement title to the car transfers to you; in a finance lease your business never owns the company car. See the section below.