Buy outright? Lease purchase? Contract hire? Find out which company car funding method best suits your business.
Fleet funding is a complex area, with potentially serious and expensive consequences for the wrong decision. Each method has its advantages and disadvantages, depending on the nature and needs of your organisation. In the first instance, a company that is cash-rich may choose to buy a car or fleet of cars outright.
1. Outright purchase
The benefits here are that the car is the property of the company from the outset, and so has complete control over its use. However, the company then takes on complete responsibility for the service and maintenance of the car, presenting a regular draw on finances. There are also tax implications for this type of funding: tax deductible capital allowances are permissible only up to a total of 25% of the value of the vehicle, or £3,000, depending on which is higher.
2. Hire or lease purchase
For those who want to own the vehicles but don’t want to pay outright there are hire purchase schemes. Under these arrangements the car remains the property of the leasing company until final payment has been made by the employer. Again, the company takes on responsibility for maintenance and service, but this option can ease cashflow and finance concerns as a payment of around 15% will be needed up front, rather than the full 100% required for outright purchase. Finance payments can be offset against tax.
3. Finance lease
This is similar to hire purchase, with a 15% payment being required at the outset, but the employer never gets to own the vehicle, so it’s basically a very long rental agreement. As this is essentially a service, not a purchase, the monthly rental payments attract tax. However, half of the VAT on rental payments, and all of the VAT on maintenance, can be reclaimed.
4. Contract hire
Becoming more popular, the contract hire industry is highly developed in the UK; around 40% of all fleets are funded this way. Under these arrangements, the funding company retains ownership of the vehicle for the lifetime of the hire, but it will also take responsibility for maintenance and servicing. Only 6-7% of the purchase price is required up front, and the tax treatment is the same as for finance leasing.
5. Contract purchase
This is where the funding company retains ownership of the car until final payment has been made; if a lump sum payment is made by the employer at the end of the contract, ownership of the car will pass to them. Aside from this, the tax implications are the same as for contract hire, although it is not possible to reclaim VAT on regular contract payments.