Leasing or Buying Your Business Vehicle: What’s right for you?
If you’re exploring the options for acquiring a new business vehicle, you’ll want to look at the most cost. With all the company vehicle procurement choices available, purchasing vs. leasing is a common question. Below, we’ll have look at the most common options, their financial advantages and how each one can work with your business.
Unusual for businesses, this involves buying the vehicle outright, in full. The advantage is that there are no additional costs to pay; you won’t have the vehicle repossessed if you fail to make payments and you are in total control as to what happens with it. No interest is due on any payments, so you’ll be able to save marginally.
However, buying outright will put you at a disadvantage in the short term. Unless your business does not need a level of liquidity, caution is advised. Additionally, depreciation will be highest in the first years of buying a vehicle. On paper you may be making a loss on the asset as any revenue earned through the use of the vehicle will have to outweigh the depreciation rate.
Tax-wise, the depreciation will be added onto your profits but capital allowances can be claimed too. These will reduce any taxable profits accordingly so you’ll have a lower amount of tax due.
This is a common way for a business to acquire vehicles, more so than purchasing outright. Hire-Purchase Leases function by paying a deposit followed by monthly payments until the full amount of the vehicle has been accounted for, whereby then it becomes yours.
If you’re cash poor then this can be advantageous, a small deposit followed by regular monthly payments means that you’ll keep a reasonable level of liquidity in your business. Due to the way it works you may be able to access vehicles that you wouldn’t usually be in a position to afford via the monthly payments.
Typically this form of financing is secured with the vehicle as collateral, so gaining finance may be easier to access than other forms of loans. Bear in mind though that as the vehicle is not technically tours until the end of the payment period, if you are to default, like any other loan, the vehicle will be repossessed.
However, it’s important to remember that as this is technically a loan, interest will need to be paid which will depend on the payment length and vehicle cost. Furthermore, as you’ll not be the registered owner of the vehicle until all payments are completed, the vehicle cannot be sold without the permission of the creditor.
From an accountancy point of view, the vehicle is classed as being fully paid off as the funds will have been accounted for over the next few years, so depreciation and capital allowances, as described above, would still apply.
Any interest required to be paid off is placed in the profit and loss account, so this can reduce your tax bill too. Once the payments have been made and you are the registered owner of the vehicle, any interest can be considered when looking at tax relief.
Standard business loan
If you have a business bank account, you’ll be aware that there are several business loan options that are available. Taking out an unsecured small business loan can be beneficial if you have a good relationship with your local bank and are in a strong business position. The loan itself is taken out against your business, so any security will come from this, rather than out on the vehicle itself.
An advantage is that the vehicle will belong to your business from day one, giving you full freedom to do with it as you choose; to sell it, modify or lease out etc.
Loans can also be taken out to help cover any of the said modifications required for the vehicle, or for other areas of the business, so if you have a robust business plan in which a vehicle purchase fits then this could be a good option.
The downside is that if you are unable to make the repayments, other areas of your business will be at risk. Additionally, due to the loan being unsecured, the typical APR may be higher than that of a BCH (Business Contract Hire) or BCP (Business Contract Purchase)
Financially the loan is taken into your profit loss accounts, and can reduce any taxable profits. Again, the car itself is treated as if it had been bought outright as an asset. Capital allowances are able to be claimed so any tax paid can be reduced over the extended loan period.
Leasing a car (Business Contract Hire)
This is a relatively new way of accessing vehicles, being popularized in the USA over the last decade and spreading to Europe. After an initial deposit which may be smaller than that of a loan or other purchasing agreement, regular monthly payments are spread over the contract length, which are typically 3 to 5 years.
Leasing has several advantages over other vehicle accessing options. Due to the low monthly payments available on some models and makes, you will not have to part with significant levels of cash, so you’ll be able to free up this for other parts of your business.
Lease cars can be tailored to your specifications, there’s no standard model that you must choose. This means that you’ve got all of the benefits of a new vehicle without the financial downsides.
Typically if vehicles are needed to be replaced every few years due to the nature of your business then leasing is the best option. The newest models, in addition to fuel efficiency and aesthetic looks, are covered by manufacturer warranties, are not due for MOT tests or expensive repairs for most of the contract length and offer fantastic value for money.
Usually worked out with your lease dealer, a lease can be upgraded at the end of the contract or part-way through if desired.
Not necessarily a disadvantage, but actually financially savvy: you’ll never actually own the vehicle. You will not have any capital tied up in your business lease vehicle, so can’t rely on it to sell if you need to free up liquidity. However, this shouldn’t be an issue, as monthly payments will allow you to free up capital to use as you please.
Annual mileage should be worked out in advance, and excessive mileage may incur additional costs but this is best discussed with your dealer as there can be a great degree of flexibility with each contract they are as unique as your business.
Tax-wise a lease car is one of the simplest to account for. Regular payments will be added to your profit and loss accounts, so will reduce any tax due by the total of payment amount each month. Additionally, if you’re VAT registered then up to 50% of the VAT charged can be recouped.
Additional costs of running a vehicle should be included too. Insurance, Road Tax, maintenance and fuel can be accounted for and in most cases have their VAT claimed back depending on the vehicles use.
You should look at each business vehicle lease or purchase on an individual basis. Depending on your business needs there may be some options which are more suitable such as leasing where excess cash isn’t available or buying if you feel you wish to sell the vehicle in the short term.