Business car leasing

What is business leasing?

Business car leasing (also known as ‘Business Contract Hire’) allows companies to hire a brand-new vehicle for work purposes. If you’re an employee or company director, you pay a fixed monthly price for the car, with each deal lasting two to four years. Once the contract has finished, you then hand the car back to the leasing company and decide whether you want to lease a newer model or walk away.

Just like a personal car lease deal, you’ll be asked to specify how many miles you intend to drive the car each year. Some businesses tend to select a higher annual mileage (i.e. 20,000 to 30,000 miles), especially if the work requires a lot of driving, such as a courier service or taxi firm.

Businesses have the option to lease a fleet of vehicles if they need to, with typical fleet sizes of between three and 10 cars. This can be a cost-effective way of having multiple company cars, without having to worry about the price and hassle of ownership.

What are the benefits of business leasing?

There are numerous benefits of leasing a car for your business, including:

• Claim back 50% of the VAT on monthly payments and maintenance: If your business is VAT-registered and the car is only used for work purposes (excluding commutes to and from work), you can claim back 50% of the VAT on the monthly lease payments and 100% VAT on any maintenance package payments
• Payments are ‘off balance sheet’: Business car lease payments aren’t shown as a liability/asset on a company’s balance sheet. This can make it a lot easier to receive funding from investors or bank loans due to healthier-looking finances
• Low BIK (benefit in kind) tax rates available: Employees of a company which use a business lease car can benefit from low BIK tax rates. This is a tax on employees for receiving a perk from an employer, including use of a business vehicle. It’s often much cheaper than paying for and using your own vehicle, and models with lower CO2 emissions fall into a cheaper tax band

What is the business leasing process?

Leasing a car for your business is a simple process, which can be done entirely online:

1. Search for your ideal car: there are multiple ways you can find a car which fits the needs of your business. For example, using the make/model of a vehicle if you have a preference, or your monthly budget if you know how much you want to spend each month to lease a vehicle
2. Choose your contract terms: Once you’ve found the car you want, you’ll then need to decide how much initial rental you’ll pay, how long you want the car for and the number of miles you wish to drive it each year. Remember that these factors will affect the monthly price you’re quoted for a lease car
3. Undergo a quick credit check: Part of the finance approval process for a business lease car involves a quick credit check. This helps the funder of your chosen lease deal ensure that you can make the monthly payments
4. Arrange delivery: After passing the credit check and making the initial rental payment for the lease car, it’s time to arrange delivery. You can choose the location of delivery to be the premises of your business or your home, depending on where the car will be kept overnight

Who is eligible for a business car lease?

New and existing businesses can lease a car, providing they have the right documents and pass a credit check to ensure they can afford the monthly payments.

• Details of the business: The name, address, yearly revenue and company registration number
• Company director information: Full name, marital status and date of birth
• Business bank details:  Bank name, account number and sort code

Start-up companies with little or no financial history will probably need some more details in order to prove that they can make the monthly payments. This will likely include:

• Three months of business bank statements and/or audited accounts
• Management accounts for your business
• A director’s guarantee promising to pay the remaining lease payments if the company defaults on them

Closed-end leasing vs open-end leasing

The option of having either a closed-end or open-end lease deal is available to business lease customers.

A closed-end lease is the most common type of lease agreement, whereby the finance provider takes on the depreciation at the end of your term. However, conditions of the contract tend to be less flexible (you’ll need to stick to the annual mileage and ensure that the car is returned in good condition). If you don’t, the finance provider will charge you excess damage or mileage fees.

On the other hand, open-end leasing comes with more flexible lease terms, but your business will be responsible for any depreciation on the car above what would be expected during the term of the lease.

For example, if you leased a car for your business which has a residual value of £15,000 but ends up being worth £14,000 at the end of your agreement, you’ll be responsible for making up the £1,000 difference. This may suit your business if you plan to lease a fleet of cars and can’t afford to be restricted by annual mileage.

If a vehicle ends up being worth more than its residual value at the end of your contract, you could even get a refund for the difference.

Remember to check with your lease provider whether or not the deal they’re advertising is a closed-end or open-end agreement before signing the contract.

What should I consider when choosing between an open-end lease and a closed-end lease?

Choosing between an open-end or closed-end business lease will depend on the monthly budget your business has and how the car will be used.

Before deciding on an open-end or closed-end business lease, consider the following:

• Annual mileage: Closed-end lease agreements will stipulate in the contract that you must stick to the agreed annual mileage. If you’re confident that you’ve calculated your business miles correctly and will stick to them, then this deal might be the best option for keeping the lease payments predictable
• Monthly budget: If your business has a set budget in mind that it must stick to for the monthly lease payments, a closed-end lease deal might be the best option. There tends to be greater predictability of your car’s cost with these types of deals, provided that you stick to the annual mileage and keep the car in good condition. On the other hand, if company finances allow you to be flexible with your budget and you want less restrictions on vehicle use, an open-end lease could give you the best value for money
• Depreciation: Open-end lease deals will require your business to take some of the brunt of the car’s depreciation if it’s worth less than its residual value. It’s important if you choose this type of agreement that you stick to the manufacturer’s recommended service schedule to avoid having to pay a large difference at the end

Is there a price difference between personal and business leasing?

Business car leasing is cheaper than personal car leasing because VAT-registered businesses can claim up to 50% of the VAT on the monthly payments. Advertised business contract hire agreements won’t include VAT, whereas personal lease deals include it in the monthly price.

Remember that any personal miles you travel in a business lease car will need to be deducted from your work mileage. They’ll then be subject to the same VAT you’d pay on a personal agreement.

Why are lease payments lower than finance payments?

Car leasing payments cover the depreciation of a car’s value over the time and mileage that you use it. This tends to make them cheaper than finance payments, which are similar to a loan whereby you borrow the total amount of a vehicle and pay interest on top.

There’s also greater flexibility when it comes to car finance agreements. For example, Personal Contract Purchase (PCP) and Hire Purchase (HP) deals allow you to own the car at the end. However, this comes at an additional cost in the form of higher monthly payments (HP) or a large ‘balloon payment’ (PCP) at the end.

Who is responsible for insuring the leased vehicle?

Most business lease deals won’t include insurance, so it’s up to you as the finance holder to arrange insurance for the leased car.

Finance providers which own lease vehicles will usually require you to take out fully comprehensive insurance in order to protect the car in the event of an accident.

Remember to arrange the insurance policy to begin from the date that the car is delivered. You can ask the leasing provider for the registration number of the vehicle in order to get a more accurate quote too.

Why does the monthly payment increase with the number of miles?

Monthly payments for a business lease primarily go towards the depreciation of a new car during the time you have it and the miles it’s driven for.

Because a car depreciates quicker when more miles are put on its clock, you’ll have to pay a higher monthly rental if you choose a larger annual mileage. This is because at the end of a lease agreement, the finance provider takes responsibility for the depreciation.

You can calculate projected mileage by multiplying your average weekly miles by 52 and adding around 5% of this total to cater for any unplanned/emergency miles you may need. By doing this, you can avoid end-of-lease charges for excess mileage.

Don’t worry too much if you think you’ve underestimated the number of annual miles. Most leasing companies will allow you to update the terms of your agreement if you contact  them before you go over your agreed mileage allowance.

How many miles per year can I choose for my business lease?

There’s a wide range of annual mileage options you can choose from for a business lease car. Most agreements start from a minimum of 8,000 miles per year but go up to a maximum of 30,000 miles.

If your business needs a higher mileage allowance, you may be able to find high-mileage lease agreements from certain leasing companies.

You won’t be penalised for doing more miles one year and less on another providing you don’t exceed your overall limit. For example, if you have a car on a three-year agreement and 10,000 miles per year, you’ll have a total mileage limit of 30,000 miles. So, you could drive 20,000 miles for the first year and 5,000 miles for the remaining two years.

Can I buy the vehicles at the end of the lease?

Unfortunately, you won’t be able purchase a lease car at the end of your agreement because the vehicles belong to the finance provider. However, if you really like the car, you can choose to lease the same model or similar on a separate agreement once your contract is up.

Is a business car lease tax deductible?

Business car leasing payments can be claimed as a tax-deductible expense for corporation tax purposes.

The amount of tax which can be claimed against business profits will depend on the CO2 emissions of the car you’re leasing. Vehicles with CO2 emissions of more than 110g/km aren’t fully tax-deductible, so you’ll only be able to claim for tax relief on 85% of the car lease costs.

You won’t be able to claim capital allowances for a lease car, as these only apply to owners of a vehicle wanting to deduct part of the vehicle’s value from profits before paying tax. In this instance, capital allowances would fall with the finance provider.

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