Understanding Your Options for Company Car Finance

Choosing how to fund company cars is an important decision for any business. Picking the right option can help to improve cash flow and make planning easier while reducing administrative burden.  

Many businesses choose contract hire - more commonly referred to as leasing - to rent cars over a fixed term while paying a regular monthly fee. Others opt for purchasing outright or using hire purchase as a way to get full ownership of a vehicle.  

In this article, we’re going to be taking a closer look at these approaches to find out which could work best for your business.  

Business car leasing: pros and cons 

There are several positives to business car leasing. With this option, your business can improve cash flow by avoiding the need to put a large lump sum into a vehicle. Leasing also brings predictable monthly costs to help make budgeting and financial planning easier.  

Leasing also brings simpler motoring costs. A monthly payment will cover the use of the vehicle and its road tax, which makes ongoing expenses easier to plan for. Since employees will be driving new cars via a leasing agreement, there’s less chance of mechanical issues. Some leasing providers also offer optional maintenance packages. These can help to manage any repair or servicing costs if they should crop up.  

Leasing does bring some limitations for businesses. For one, businesses will not own the vehicle at the end of the agreement. Leasing agreements will also include a mileage agreement and these could restrict businesses with employees who cover long distances. Going over mileage agreements could see a business hit with additional fees.  

Buying a company car: pros and cons 

Businesses have the option to buy a company car, either via a full payment or with hire purchase. A positive of buying a company car is that it gives a business full asset ownership and this can make future financial planning easier.  

Buying a vehicle also gives a business the ability to claim capital allowances to write off some or all of the cost of a vehicle against taxable profits. However, the level of relief depends on a number of factors, including the car’s CO2 emissions and whether it is new or used.  

When a business purchases a vehicle outright, there won’t be any mileage or usage restrictions to contend with, either. If a vehicle is kept for a longer period, then there’s a chance of a potential long-term value increase, too.  

There are some negatives associated with a business buying a company car. It’ll require a higher upfront capital outlay and this will see more of a company’s funds locked into a vehicle, affecting cash flow. Unlike leasing, a business will also have to consider depreciation on a car which is purchased outright, while future servicing and the replacement of consumables such as tyres, brakes and filters will also have to be factored in. Once a car passes three years old, it’ll also need a yearly MOT.  

The tax implications comparison 

The tax implications will often be a deciding factor when choosing a way to fund a company car. There are differences in tax treatment to consider.  

If your company leases a vehicle, then the monthly lease vehicles could count as an allowable business expense under corporation tax guidelines. Lease costs are deducted from your taxable profits and that means if a company’s profits are lower, then there’s less corporation tax to pay. Tax relief is based on a vehicle’s emissions, which is why electric vehicles and hybrids - which both have low CO2 emissions - have become so popular with businesses over the last few years. If a car emits less than 50g/km CO2, then 100 per cent of the lease can be offset, though cars emitting over that only get an 85 per cent offset rate.  

If a lease includes maintenance packages, then this element is deductible - even on higher-emitting cars.  

However, because a company doesn’t own a leased vehicle, it won’t get any capital allowances. This is different to buying a company car outright or via hire purchase, where capital allowances apply.  

VAT, meanwhile, is different. Corporation tax is based on profit, while VAT has separate rules. In the UK, if there is any private use of a leased car, you are restricted to a flat 50 per cent reclaim on the finance element. This applies to commuting use too.  

Claiming 100 per cent VAT on a car purchase or lease in the UK is tricky with strict guidelines. To qualify, a vehicle must be classed as a ‘pool car’, kept at a company’s premises and insured with a policy which excludes private use. HMRC is strict on these guidelines and you’ll need to meet them in order to claim 100 per cent VAT. For many businesses, speaking to a dedicated financial advisor in this instance would be the best course of action.  

Which option is the right one for your business, though? Consider the following.  

Leasing is good for businesses that want predictable costs and an easier-to-manage cash flow. Leasing gives access to newer vehicles more regularly, too, so maintenance costs should be lower. Choosing leasing can also improve tax efficiency and reduce administration requirements.  

Purchasing a vehicle gives businesses long-term ownership of a vehicle and more control over assets. If you plan to use a vehicle for a long period and don’t want any restrictions, such as mileage, then buying a car outright could be a good choice.  

Conclusion  

Whether you choose to lease or purchase a business vehicle depends on several factors, including the company’s financial situation and its tax position. How a company purchases a vehicle also depends on the business’s long-term strategy for its car fleet, so it does have an impact on how things will run in the future.   

Here at AA Lease, we’ve got the right leasing deal for you. Check out our current range of cars today.   

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