Advantages and Considerations of Business Car Leasing

What is Business Car Leasing?

A business car lease, or Business Contract Hire (BCH), involves leasing a vehicle for a fixed period and making monthly payments. At the end of the agreement, the vehicle is returned. While similar to personal car lease agreements, business leasing involves leasing through a company.

Top Eight Benefits of Business Leasing

Improved Cash Flow

Leasing a car for your business minimises the initial financial burden associated with outright purchases. Buying a vehicle outright can significantly impact your cash flow, making a large dent in your available capital. This sizeable expense can appear as a liability on your balance sheet, potentially affecting your creditworthiness. By opting for a business lease, you pay monthly instalments over a predetermined period, allowing for better cash flow management. This financial flexibility enables you to allocate funds to other areas of your business, fostering growth without tying up substantial capital in vehicle purchases.

Centralised Motoring Costs

Business leases simplify your budgeting by consolidating all motoring costs into one fixed monthly payment. This includes the cost of the vehicle, road tax, and, if chosen, additional services like maintenance, insurance, and breakdown cover. The convenience of a single, predictable expense streamlines financial planning, making it easier to manage your budget effectively. This comprehensive package ensures that unexpected motoring expenses won’t disrupt your financial planning, providing stability and transparency in your business finances.

Avoiding Depreciation Costs

When you buy a new car, its value typically starts depreciating immediately. Over time, the vehicle’s resale value diminishes, and you may not recover the full amount spent when selling it. Business car leasing eliminates the concerns associated with vehicle depreciation. Your monthly lease payments account for the expected depreciation of the vehicle during the leasing period. At the end of the lease term, you simply return the vehicle without the hassle of selling it. This avoids the risk of negative equity and allows you to regularly upgrade to newer models without worrying about the residual value of the vehicle.

Access to Advanced Safety Technology

In the fast-evolving automotive industry, new vehicles often come equipped with advanced safety features and technology. Business leasing ensures that your fleet stays current with the latest safety innovations. This is particularly important for providing your staff with secure and modern transportation. Newer cars not only incorporate enhanced safety features but also come with a manufacturer’s warranty, providing additional peace of mind for your business and employees.

Affordable Electric Cars

Business leasing can make electric and eco-friendly cars more accessible to your company. Due to lower upfront costs associated with leasing, you may find it more feasible to incorporate electric vehicles into your fleet. Beyond the environmental benefits, electric cars can lead to substantial cost savings, especially in regions where energy-efficient vehicles receive tax incentives. Additionally, lower CO2 emissions from these cars can result in potential tax advantages for your business, contributing to both environmental sustainability and financial efficiency.

Cost Savings Compared to Personal Leasing

Businesses often enjoy cost savings when opting for business leases compared to personal leases. One significant factor contributing to this is the availability of Value Added Tax (VAT) breaks for business leases. If your business is VAT-registered, you can potentially reclaim a portion of the VAT on both initial and monthly lease costs. The ability to recover taxes makes business leasing a more financially attractive option for companies compared to individual consumers.

Tax Reclaim through Corporation Tax

Limited companies can leverage tax advantages by offsetting business lease payments against their corporation tax. The percentage of tax reclaim depends on the intended use of the leased vehicle. If the car is used solely for business purposes and kept on the company premises overnight and during weekends, businesses may be eligible to reclaim 100% of the payments and VAT. Even when personal use is involved, businesses can still claim back a significant portion of the costs, providing additional tax relief.

Employee Perks

Providing company cars through business leasing can serve as a valuable employee benefit. This perk, however, comes with tax implications in the form of Benefit in Kind (BIK) tax. The BIK tax amount varies based on the car model and emissions value, as determined by His Majesty’s Revenue and Customs (HMRC). Opting for zero or low-emission cars can result in lower BIK tax rates, making it an attractive benefit for eligible staff members. Offering company cars can enhance your overall employee benefits package, contributing to employee satisfaction and retention.

Considerations of Business Leasing

While the benefits of business leasing are substantial, it’s essential to consider some limiting factors before choosing this option:

• Mileage Limits: Business leases come with annual mileage allowances. It’s crucial to accurately estimate your expected mileage at the beginning of the contract to avoid excess mileage charges. If you anticipate exceeding the agreed-upon mileage, some leases offer the option to adjust it.
• Non-Ownership of the Vehicle: With a business lease, you do not own the vehicle at the end of the contract. This arrangement is advantageous for those who prefer regular vehicle upgrades without the complexities of selling an owned vehicle. However, if outright ownership is a priority, alternative finance options may be more suitable.
• Fair Wear and Tear Charges: Business leases typically have fair wear and tear policies, allowing for minor scratches and marks expected over the lease period. Excessive damage may incur additional repair charges. Understanding and adhering to these policies is crucial to avoid unexpected expenses at the end of the lease.
• Costs of Early Contract Termination: While it’s possible to terminate a business lease early, this may come with associated charges, and the amount can vary based on the remaining lease duration.

Tax Benefits of Leasing for Business

Understanding the tax benefits associated with business car leasing is vital for informed decision-making:

• Off-Balance Sheet Accounting: Leased cars do not appear on the balance sheet, contributing to a healthier bottom line. This approach simplifies financial reporting by eliminating the need for complex depreciation calculations associated with vehicle ownership.
• VAT Reclamation: VAT-registered businesses can potentially reclaim 100% of the VAT on lease payments if the vehicle is used exclusively for business purposes. If personal journeys are involved, the reclaimable percentage may reduce to 50%. This VAT advantage makes business leasing financially attractive for eligible entities.
• Offsetting Lease Costs Against Tax Bills: Businesses can offset up to 100% of the lease costs against their tax bill, depending on the emissions of the leased vehicle. Vans, regardless of emissions, are typically 100% tax-deductible. This provides additional tax relief for businesses, contributing to overall financial efficiency.
• VAT Reclaim on Maintenance Packages and Excess Mileage Charges: Businesses opting for maintenance packages and incurring excess mileage charges may be eligible for 100% VAT reclaim on these additional costs. This further enhances the financial benefits of business car leasing.

Tax Deductibility of Business Car Lease Payments

Businesses can deduct monthly lease payments from their corporation tax if they are structured as Limited Companies. The deductibility percentage is determined by the emissions of the leased car. Importantly, vans are usually 100% tax-deductible, irrespective of their emissions. This tax advantage provides businesses with additional financial flexibility and incentives to choose business car leasing.

In summary, business car leasing offers a range of financial advantages, from improved cash flow and centralised motoring costs to tax benefits and access to advanced vehicle technology. However, businesses should carefully consider factors like mileage limits, non-ownership of the vehicle, fair wear and tear policies, and potential costs associated with early contract termination. Understanding the tax benefits associated with business leasing is crucial for maximising financial advantages and making informed decisions aligned with the business.

We offer flexible and affordable car leasing solutions for both personal and business customers. We can supply everything from eco-friendly hybrids to high-performance sports cars by any finance method so our team of experts are sure to find your perfect vehicle at the right price. Whether you’re looking to lease an EV or upgrade your company fleet, we’ll guide you every step of the way.