Belmont Vehicle Leasing

There are numerous ways by which a vehicle can be funded. What you want to know is “what is the right option for you”. We want to advise and help you to choose the right method applicable to your personal circumstances.
To this end we have summarised the various ways of funding below and ask that you take the time to read and understand thus making an informed choice. Of course we are always on hand to offer advice and impart our knowledge to you throughout the process taking into account all of the relevant factors.

Below is a brief summary of the most popular funding methods:

1. Ownership

A company car is treated by the revenue in the same way as any other capital asset that you purchase. You can offset the cost of the asset against profit based on an annual writing down allowance. The system in place is based on the vehicles CO2 output, and is aimed at rewarding fleets that produce low CO2.

If you buy instead of lease, the writing down allowance on cars below 75 g/km is 100%, 76 to 130 g/km is 18%, and 131 g/km and upwards is 8%.

(i)Outright Purchase

Outright purchase is without doubt the simplest way of acquiring a vehicle. There are however sometimes smarter ways. If you buy a vehicle outright then the cost of the vehicle in question will be purchased from the supplier using money from the company bank account using cash reserves or via a loan.

This vehicle can then be used over any period of time. Most companies do however have a set period of use or company policy and refer to this as a guide as to when the vehicle will be changed. This is usually based on either mileage or years of use.

Obvious benefits are that the company, if they purchase the vehicle, will avoid any interest charges as they own the vehicle outright and they also have the option to sell the vehicle at any time. However the downside to this is loss of readily available capital to the business or user. To evaluate this cost effectively, the business or user should look at the true cost of the loss of this capital. If a loan is used to buy the vehicle then you will pay interest on that loan. Should you decide to settle the loan early then the finance company will probably still require all of the outstanding interest on the loan as this is their projected revenue stream.

Tax relief is not restricted in the same way lease vehicles are. You cannot recover the VAT that you have been charged in the cost of the new car there unless you can prove the vehicle is used as a pool car, in which case the vehicle may only be used for company business and not privately. As detailed above (section 1), tax relief regulations are making outright purchase very inefficient for tax purposes.

Things to consider:

As in all purchase schemes the costs that should be considered are fuel and insurance, however you will also need to consider depreciation, Road Fund Licence, and maintenance.

(ii)Hire Purchase (HP)

Hire Purchase is really a loan which is secured against the value of the vehicle. Much the same as a conditional sale in that the contract runs for an agreed length of time. The vehicle may not be disposed of until an option to purchase fee is paid at the end of the agreement. The fee is usually added to the final monthly payment, and is around £150.

Things to consider:

(iii)Lease Purchase

Lease Purchase roughly follows the same principals as a Hire Purchase agreement. The finance company calculates the predicted future value of the vehicle and defers a fixed amount to the end of the primary rental period. The customer is liable for this “balloon” or “residual payment” (RV) once they have made all of the monthly rental payments. The monthly rental amounts are therefore lower as you will have a lump sum to pay at the end of the agreement. Similar to a HP agreement in that you will reduce the capital employed vs outright purchase. A disadvantage is that you still pay interest on the whole amount including the residual value and this will be more than a conventional HP agreement.

Things to consider:

(iv)Contract Purchase/Personal Contract Purchase

Contract Purchase or Personal Contract Purchase (PCP) is actually very similar to Lease Purchase. The intention is that ownership will pass to the user at the end of the primary period after the fixed amounts of repayments have been made.

Some repayment schemes will include service and maintenance but obviously monthly payments reflect this. There are an increasing amount of cases where the vehicle can just be returned to the dealer.

You have voluntary termination rights but dealers aren’t keen on you exercising them and will deter you from doing so. At the outset of the contract the dealer offers a fixed sum based upon mileage and condition that he will buy the vehicle from you for but the residual value the dealer has committed to is often low to reduce his risk as he will sell it on. If you exceed the contracted mileage there will be a pence per mile charge. Often the market value of the vehicle is greater than the fixed sum the dealer has committed to (subject to condition).

Things to consider:

2. Finance Lease

A finance lease is one in which the lessee assumes substantially all risks and rewards associated with the asset.

Finance lease is a long term hire agreement usually arranged over a specific fixed number of months during which time the leasing company still retains title to the vehicle. The user, the person to whom the vehicle is leased is, in effect, being loaned the vehicle for a fixed term paying a monthly rental.

The rentals costs are based on the buying cost of the vehicle. This figure is used as a base rental with current rates of interest influencing the rental amount you will pay.  

This is classed as an operating lease as you are not making repayments but paying rentals so they are subject to vat and tax deductible against end of year profits. The rentals are calculated to take into account the usual costs incurred whilst running a car, such as depreciation, interest charges and optional maintenance.

At the end of the agreement the user can:

1. Return the vehicle to the finance company.

2. Sell the vehicle to a third party*

* The user has to gain permission from the finance company in order to sell the vehicle and to find out what figure is needed in order to “discharge” or settle the lease. If you decide to sell the vehicle and you achieve more than the sum needed to discharge the lease then the finance company will claim a small percentage of that extra revenue. If you deduct the net amount from the settlement the finance company require then any remaining equity is yours.

If you do not achieve the “discharge” amount you will need to fund the difference.

If you want a prestige vehicle or in some cases a rare vehicle that you are going to look after to a high standard thus it retains a high residual value then this type of agreement may be for you.

Monthly rentals are subject to vat so you need to factor in an additional 20% when you look at the rental costs.

Things to consider:

3. Contract Hire

Contract hire is similar to a finance lease in that the agreement is fixed for a specified number of months during which time the leasing company still retains title to the vehicle. The user, the person to whom the vehicle is leased is, in effect, being loaned the vehicle for a fixed term paying a monthly rental. The rental payments though influenced by the capital cost of the vehicle are not necessarily governed by this cost and other external factors such as fleet discounts and bulk purchasing can reduce costs that are passed on to the customer.

It differs from finance lease as when the contract finishes you simply return the car back to the finance company. This is classed as an operating lease as you are not making repayments but paying rentals so they are subject to vat and tax deductible against end of year profits.

Rental payments are fixed for the 2, 3 or 4 year term and this allows simple budgeting.

Deposits or initial rentals are usually 3 monthly rentals in advance followed by 23, 35 or 47 monthly payments. There are occasions when a 12 or 18 month contract hire deal is available and rentals are notably more affordable when compared to other forms of funding.

Mileage levels are agreed at the outset (advice from our representatives is always available) and an excess mileage charge disclosed. However, future rentals do not show as a business liability on the balance sheet and may help to improve the ratios of the business for alternative forms of financing in the future.

Contract hire vehicles are usually bought in bulk with large discounts negotiated for volume and these savings are reflected in the rental payments you make. If vehicles are returned damaged in excess of “fair wear & tear” or if the agreed mileage has been exceed then the user can expect to be billed for these things.

Things to consider:

               (optional maintenance packages are available to you)   

Summary

Who owns the asset?

Who takes the residual value risk?

Who is responsible for maintenance and repairs?

What is the length of the lease?

On/off balance sheet?

Finance Lease

The leasing company

Not applicable

The lessee

Majority of economic life

On balance sheet

Operating Lease

The leasing company

The leasing company

The leasing company, if a maintenance contract is taken out – otherwise it is the lessee.

Part of economic life

Off balance sheet

The classification of a lease as either a finance lease or an operating lease is based on if the risks and rewards of ownership pass to the lessee. This can be subjective and it is important that the leasing contract is carefully reviewed.
 

If there’s anything you think needs clarifying further please contact your accountant.