How Cars Leasing make sense for any business
Any business does invest the funds in an organized way. One of the most preferred methods in trends in the UK is car leasing which is better known as a lease-based financial product. Leasing is of course, cheaper and convenient than buying a personal car. After the changes in the UK’s tax legislation (circa 1995), it has become the best choices for the businesses. Financial institutes can reclaim VAT on new a vehicle which works in the favor of customers and they get competitive rates of the cars due to the economics of scale and purchasing capacity. Fixed cost monitoring and avoidable depreciation risks make the car leasing the first choice for any business.
Let’s discuss how car leasing is beneficial
If a business buys a new car, the 20% VAT is irreclaimable but at the same time if a car is leased then 50% VAT back on the monthly payments and most importantly 100% of the VAT of the maintenance agreement.
For example, if a company leases a car, Skoda Octavia Hatchback at Personal lease, the length of the lease is 4 years, annual mileage 8000 miles, Initial rental 6 Months and maintenance is included then the initial rental of £1367.93 and the lease amount will £227.99 per month including VAT. Surprisingly, it will not appear on the balance sheet of the company. It will be treated as expenses and will only appear in the profit and loss statement and will be deducted from the total profit of the company. This car can be used for personal and business use.
In another way, a new model of the car consumes fewer diesels in caparison to older models. At £1.32 per liter of diesel, 10 mpg better economy can make the company to earn profit out of it. Initially, for the first three years of the car’s life is more reliable and required few maintenances. In car leasing, maintenance is included too from the manufactures warranty. That even makes the car leasing cheaper than investing in a personal car. It becomes super easy to own any car of your choices for a particular period and after that can easily switch to another new model.
Being an entrepreneur, it is advisable to cut down the initial costs to increase the profit margins of the business. There is no down payment hence business leasing vehicles helps in business converse cash flows.
How contract hire is calculated:
(Retail price – estimated residual value)/months on contract + admin fees = monthly payments
Factors need to be considered-
- GAP insurance
- Company car tax
Difference between business contract hire and personal contract hire
Minimum advance payment starts for the contract from 3 payments and can go up to maximum 9 payments in advance and it can be as low as £90 and maximum completely depend upon the deal. They are generally calculated over 2 years and the desired period of time and for 3 advanced payments, the lease advertisement will be as-
For 2 years- 3+23 payments
For 3 years- 3+35 payments
For 3 years- 3+47 payments and it will go on. For 9 advance payment the advertisement will be the same but instead of 3, it will be 9.
For 2 years- 9+23 payments
For 3 years- 9+35 payments
For 3 years- 9+47 payments
If discuss mileage, it starts will minimum 10,000 miles per annum and maximum can go up to 40,000 miles per annum and above that, there will be extra cost will be charged, that amount will be included in the final bill.
There is no such difference in business contract hire and personal contract hire except VAT. In business leasing, 50% of the VAT can be reclaimed but in personal lease, there is no such provision. This is the main reason why business contract hiring is cheaper than personal hire.
Company car tax
One most important thing about the business lease that you will be getting benefit-in-kind taxes. It occurs when a car is completely used for the business purpose including company car tax, personal fuel, and fuel benefit. If the vehicle is used for personal purpose including drive to and from work, still need to pay company tax but if car is left at your place at weekends or overnight than you are exempted to pay company car tax and the employer will inform the HMRC about it as refer as a pool car and save you from paying extra tax.
For example, if the car is used privately, then it must be treated differently from the other company-owned assets. A proper record needs to be kept which represents the actual usage of mileage for business and personal. If a car is used for personal use then you can claim easily the monthly lease cost against the company profit. Claim percentage varies hence if vehicle emits more than 160 g/km, you may claim for 85% back but if it less, then you are eligible to get the 1000% back. It is actually a way to encourage the manufactures to design the vehicle which creates less pollution.
Here is the list of few top models of cars that are doing well in the market since last year and calculated leasing amount to understand the leasing concept better-
- Lease Type – Personal
- Length of the lease- 4 Years
- Annual mileage- 8000 miles
- Initial rental- 6 Months
- Add maintenance- Included
Car Model name
Lease amount inc.VAT per Month
|Ford Kuga Estate 1.5 EcoBoost ST-Line 5dr 2WD||£254.39||£1526.33|
|Mercedes-Benz GLA Class Hatchback GLA 180 Urban Edition 5dr||£239.99||£1439.93|
|Mercedes-Benz A Class Diesel Hatchback A180d Sport 5dr Auto-new model||£297.59||£1785.53|
|Vauxhall Corsa Hatchback 1.4 SRi Vx-line 5dr||£170.39||£1022.33|
|Mini Convertible 1.5 Cooper II 2dr [Chili Pack]||£250.79||£1504.73|
|Mercedes-Benz C Class Diesel Saloon C220d AMG Line 4dr 9G-Tronic||£428.37||£2570.25|
|Nissan Leaf Hatchback Tekna 5dr Auto||£377.99||£2267.93|
|Fiat 500 Hatchback 1.2 Pop 3dr Dualogic||£182.39||£1094.33|
|Volkswagen Golf Hatchback 2.0 TSI GTI 5dr DSG( bASED OM 10000miles)||£355.89||£2135.37|