Staff vehicles are often one of the largest expenses faced by firms. However, with more car sourcing options on offer than ever before, help is at hand for businesses keen to launch or improve their fleets. Mike Lloyd, managing director of car leasing firm CentralContracts.com, explains the pros and cons of the different options available to businesses.
There are a variety of different leasing methods available to businesses, all of which have several common benefits.
Through leasing rather than buying, firms are able to take advantage of low initial payments and the certainty that comes with pre-determined, fixed payment terms. This certainty affords businesses greater control with regards to both cash flow and budgeting, while at the same time giving their employees the flexibility to choose and change vehicles depending on their individual requirements.
Each of the four methods listed below come with slightly different conditions, benefits and limitations, so the most important thing is to choose a scheme which is the most suitable for your business, both now and in the future.
This method allows firms to lease a vehicle with the view to owning it at the end of the contract. By doing so firms can gain special allowances and offset interest charges against tax, without having to fund the full cost of the vehicle immediately.
This is a popular option as because there is only a small initial outlay, businesses are able to improve their vehicles immediately while minimising the drain on their capital.
There is also the option to pay less each month and at the end of the lease make a larger 'balloon payment' which is set at a level to reflect the use and anticipated mileage undertaken during the agreement.
At the end of the deal firms can choose whether to pay the lump sum and keep the vehicle, or part exchanging it, using any remaining amount towards a deposit on a replacement vehicle.
With a finance lease you choose to pay either the entire cost of the vehicle, including interest charges, over an agreed lease period or opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle.
The user is able to determine a fixed cost for the vehicle but also takes on the administration and operating risks including unexpected maintenance, repairs and losses in residual value.
At the conclusion of the contract firms can continue to operate the vehicle for a nominal fee, but will at no time take ownership of the asset.
Ownership of the vehicle remains with the leasing company for the duration of the contract, but the car does appear on your balance sheet with the capital element of the outstanding rentals representing a liability.
Some or all of the rental charge can be offset against taxable profits.
Contract hire is the most popular way of hiring a business vehicle with more than half of all new company cars registered each year funded this way. A vehicle is leased to a company for a set time and specified mileage, in return for an initial fee (usually three months rental) and a subsequent monthly charge. At the end of the contractual period, it is returned to the leasing company.
This type of hire removes many of the risks of vehicle ownership, including depreciation, servicing costs and eventual sale.
However, they could also miss out on any potential benefits of car ownership, for example, lower than anticipated maintenance costs or an unexpected upturn in the residual value of a particular vehicle.
As the vehicle is owned by the leasing company, a contract hire vehicle does not have to be shown as an asset on the balance sheet. Some or all of the rental charge can be offset against taxable profits.
In this type of arrangement the company agrees to buy the vehicle via a series of monthly instalments, covering the cost of the vehicle and an added interest element. The monthly fee usually includes a charge for any additional services, such as maintenance. There is usually a final balloon payment, equal to the vehicle's residual value, after which legal ownership passes to the user.
Having gained legal ownership, the new owner can keep the vehicle, sell it on directly, or sell the car back to the finance company for a price agreed at the start of the contract.
Ownership of the vehicle for tax purposes passes to the user on the day the contract is signed, meaning that its cost can be written down on the balance sheet (by claiming capital allowances).
This method gives the users totally predictable motoring costs and cash flow, while keeping administration to a minimum. Also, because the vehicles are then owner by the business at the end of the contract they're able to increase the company's asset valuation.
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