Is it better to buy or lease a car for your small or mid-sized business?

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For many entrepreneurs, the decision whether to lease or buy a company car is a difficult one, especially as the terminology and tax rules can be confusing for non-experts.  We have set out a summary of the key issues below.

What is vehicle leasing?

Vehicle leasing or business contract hire (BCH)  is where your business pays set monthly payments over an agreed period in return for an individual car or cars. With a BCH, your monthly payments cover the depreciation costs of your vehicle. The monthly payments are calculated by the contract hire company who use the value of the vehicle now and how much the car will be worth at the end of the agreement, or its guaranteed minimum future value (GMFV).When your contract ends, the individual car or fleet is simply returned. There will be no further charges, as long as the vehicle is returned within the agreed mileage and wear and tear guidelines.


Advantages of leasing

  • For a relatively low initial payment, followed by regular monthly payments, you get all of the benefits of running a brand-new vehicle. This includes full manufacturer’s warranty cover, which typically lasts for two to five years.
  • For corporation tax/income tax purposes, leasing can be an attractive option because you are able to claim back part of the VAT. Exact figures depend on the VAT scheme that your business falls under but as a general rule companies can claim back 50 per cent of the VAT if a car is used for mixed private/business use. It is also worth bearing in mind the Lease Rental Restriction on high emission vehicles. If you lease a low-emission car, you can claim 100 per cent of the finance element of the lease rental cost against your annual taxable profits. If your car emits over this amount, then you can only claim 85 per cent.
  • Leasing agreements can have servicing and maintenance added to the monthly package. This allows you to better predict the cost of motoring and avoid unexpected repair bills.
  • Most lease agreements offer a degree of flexibility at the end of the lease, allowing you to choose between purchasing the vehicle outright, refinancing or simply handing the vehicle back.

Disadvantages of leasing

  • You don’t own the vehicle and therefore it cannot be taken to cover any debts if the business has financial difficulties.
  • Annual mileage is one of the main factors that determines cost of leasing a new vehicle – the more miles you do, the more expensive the monthly payment will be. If you do more than 30,000 miles per annum it may not be possible to lease a vehicle from certain providers.
  • When purchasing a vehicle outright you only have one upfront payment to make (albeit for a large amount). With vehicle leasing you are committing to paying a regular amount each month for the duration of the lease.

Buying a car

As most of our clients are familiar with the process of buying a car, we will not treat this in any detail.

Advantages of buying

  • You have a better chance of negotiating the list price down than you do with leasing.
  • Because a vehicle is an asset, it can be taken to pay an outstanding debt.
  • You own the asset and can decide to sell or trade it in any time. You are not tied into running the vehicle for a specific period as you are with leasing.
  • There are no mileage restrictions when you own the vehicle.

Disadvantages of buying

  • Depreciation begins as soon as a vehicle leaves the forecourt. According to the AA, a new car will have lost around 40 per cent of its value by the end of the first year alone. Half its value may be lost within the first three years.
  • You need to have or borrow a large amount of capital available to purchase a vehicle outright, which you are then tying up in a depreciating asset.

Cash Flow Comparison
 

LeasingBuying
Fixed monthly paymentsNo monthly payments
Low-up front costs so funds are not tied upLarge up front cost and potential borrowing costs to finance purchase
Purchasing power of leasing companies mean a better value for your business 
 Purchase price can be written off
The business can recover 50% of VAT if car is used for both business and pleasure 
 The business retains the cash from a future sale

Risks Comparison

LeasingBuying
Depreciation is the leasing company’s issueThe vehicle quickly loses value
Maintenance cover can be included in leasing payments, to cover servicing and repairsMaintenance costs increase as vehicle ages
There are usually penalty fees for early termination of the leaseIt can be sold whenever the business wishes

Exit Comparison

LeasingBuying
At the end of the contract, you return the vehicle.Finding a buyer and negotiating the second-hand price is your responsibility
You can be penalised if you exceed the pre-agreed mileage allowanceNo rules about how many miles you can do, or the condition of vehicle.

SRC-Time are one of the South East’s leading accountancy firms in advising individuals and businesses in all aspects of their accounting and tax affairs and we are able to assist in any issue raised above.

Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at info@src-time.co.uk  or speak with an account manager to get any process started.


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