Guide to vehicle funding

More and more companies are choosing to acquire vehicles through some form of funding agreement rather than buying them upfront. They have a choice of either purchasing or leasing them. Both forms of funding usually involve paying a regular amount over a contracted period, typically three years or 60,000 miles in the case of company cars.

Purchase-based funding methods include hire purchase and contract purchase. Lease-based methods include contract hire and finance lease.

Before opting for a funding method, an organisation needs to consider the overall cost of each approach, the flexibility it provides, how it will affect the balance sheet and what the potential tax implications are.

Contract Hire

Contract hire is the most popular way of hiring a business vehicle – more than half of all new company cars registered each year are funded this way. A vehicle is leased to an organisation 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. The hirer benefits from the leasing company’s greater buying power and knowledge of the used car market. 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.

Because it is owned by the leasing company, a contract hire vehicle does not have to be shown as an asset on your balance sheet. Some or all of the rental charge can be offset against taxable profits.

Finance Lease

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 benefits with a fixed cost but does take on the administration and operating risks, for example unexpected maintenance, repairs and losses in residual value.

At the conclusion of the contract you can continue to operate the vehicle for a nominal fee, but you 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.

Hire Purchase

This is a method of financing a purchase with the vehicle becoming the property of the lessee at the end of the period. The monthly payment is determined by the amount of deposit paid, the period of the contract and the sale price of the vehicle.

The loan is secured against the vehicle, which can be repossessed if payments are not kept up. In the event of the vehicle being sold before the end of the agreement you would still be required to pay the loan back in full. The vehicle appears on the balance sheet and purchaser can claim a capital allowance for its depreciation as an asset.

The interest elements of the hire purchase fee can be offset against taxable profits.

Contract Purchase

The company agrees to buy the vehicle via a series of monthly instalments, covering the cost of the vehicle and an 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).

Employee Contract Purchase

These schemes are designed as a staff benefit for organisations seeking an alternative to the traditional company car. They can also enable employers to set up an employee car scheme for people who do not qualify for a company car or allowance and allow employees to enjoy the benefits of company car ownership without paying company car tax.

They fall into two categories:

Personal Car Plans

The employee finances a vehicle for a contract period of their choice, and can take an optional maintenance package and roadside assistance for peace of mind. At the end of the agreement the employee has three options; exchange the car for a new one, purchase the vehicle outright or return it without further cost.

PCP is ideal for employees that are opting out of a company car scheme. They can use their company car allowance to fund their monthly PCP payments without paying company car tax. It also allows them to benefit from fleet discounts and the suppliers’ bulk purchasing power, resulting in lower monthly payments and the ability to choose a higher specification vehicle.

Employee Car Ownership Schemes

This type of scheme is very similar to a personal car plan, except that the employer retains control of the fleet policy, including buying terms, vehicle choice, replacement cycle, maintenance and insurance.

The company is protected because it knows the vehicles will be "fit for purpose" and well maintained, its costs are fixed and it no longer has the administration burden of a fleet of vehicles.