THE VAT increase to 20% in 2011 should make many companies consider switching their business cars from outright purchase to contract hire. If that’s the case, sale and leaseback could be the answer, argues Fleet Alliance’s managing director, Martin Brown.VAT is going up from the current rate of 17.5% to 20% from January 4, 2011. This is one of a raft of other tax rises and, for small businesses that buy their vehicles, the move effectively adds 2.5% to their acquisition costs as the VAT cannot be reclaimed.
The increase coincides with a move by the Chancellor George Osborne to reduce capital allowances from 20% to 18% on all capital assets, including cars and vans. This means that those fleets which buy their vehicles will also have the administrative and financial burden of carrying these depreciating assets on their balance sheets.
On the other hand, contract hire could be set for a boost in popularity as a result of the changes because business car managers that use it can reclaim 50% of the VAT on the monthly finance rentals. In addition, 100% of the VAT can be reclaimed on any maintenance element that’s included with the contract.
For any company considering making the switch to contract hire from outright purchase, a sale and leaseback could be the perfect vehicle for making the transition.
The fundamentals of sale and leaseback
In a sale and leaseback agreement, a company agrees a realistic market value with the buyer for its business cars – typically a leasing or fleet management company. On the sale, ownership passes to the buyer, who promptly leases the existing vehicles back to the customer under a contract hire agreement based on mileage, duration of the term and the estimated future value of the vehicle.
This provides an immediate cash injection to the business with no future risk on the sale of the vehicles or a concern about their second-hand value. And as this is a paper only transaction, the seller continues to have use of the vehicles throughout the transfer process and there is no driver inconvenience involved.
However, while the benefits appear tempting, here at Fleet Alliance we would advise company directors that any switch to contract hire should be made with a number of provisos.
For example, there are considerable disadvantages in entering into a solus deal with one contract hire company, not least that this is almost never the way to optimise the highest value for the sold fleet with the lowest contract hire rentals paid thereafter.
Our advice is to always seek the help of an expert fleet management specialist to manage the sale and leaseback process, and to ensure that you really are getting the best value deal.
This would include ensuring that the sum offered for the vehicles being sold is a fair and known value, perhaps linked to the client’s written down value, and that the vehicle, specification, age, period and contractual mileage are clearly understood and defined.
For example, our approach with a sale and leaseback is to adopt competitive tendering for all vehicles being considered using a panel of preferred lenders. This ensures that the lowest contract hire rental is always going to be paid against the vehicle that is being leased back.
At the same time, we can take care of all driver communications and consolidate all administration into one place for both the legacy fleet and the new fleet going forward.
The benefits of sale and leaseback
Sale and leaseback can offer a company the benefits of a cash injection at a time when the VAT rise will increase buying costs.
The drawbacks of sale and leaseback
The process requires careful management to ensure that pitfalls are avoided and that the highest value is given for the sold vehicles, whilst the client is not paying for this benefit with higher rentals.
