Vehicle leasing offers an attractive way of cutting costs and benefiting from tax breaks, says Amanda Wilkinson
In this economic climate, populating a fleet with leased vehicles will be a more attractive option than buying them outright for many organisations.
For employers trying to control costs, leasing is relatively risk free because it does not tie up capital that may be needed to run the business in an asset that is falling in value. There are also savings to be had in relation to leasing costs that are not available in the case of outright purchase. John Mitchell, director of Jelf Commercial Finance, says: “One of the advantages of leasing over purchase is that the business can reclaim 50% of the value added tax (VAT) on the finance element of the contract [if the vehicle is used privately] and 100% on the maintenance element.”
Moreover, if the leased vehicle is a pool car and there is no private use, then 100% of the VAT on the finance element can be reclaimed. However, employers that purchase vehicles for their fleet outright can only reclaim VAT on maintenance costs.
Leasing cars through a provider enables employers to benefit from bulk discounts. The most popular form of leasing is known as contract hire, whereby the vehicle is hired for a specified period and mileage, with or without maintenance. An initial fee of approximately three months’ rental is paid along with a monthly charge. There is no risk in relation to residual values because the vehicle is handed back to the leasing company at the end of the contract.
Robin Mackonochie, head of communications at the British Vehicle Rental and Leasing Association, says: “The average contract is for three years and 60,000 miles. If you exceed the [agreed] mileage, there is normally a penalty in terms of additional costs per mile.”
Because a contract-hire vehicle is owned by the leasing company it does not appear as an asset on the balance sheet of a business and the leasing company pays the vehicle excise duty (VED). This is an important consideration for businesses in the current economic climate where borrowing is limited, says Claudia Rose, corporate sales director for Lloyds TSB Autolease. “[Contract hire] creates the opportunity to make a difference in the funding of an organisation and the lending ratios that it has.”
As an alternative to contract hire, employers can also lease a vehicle through a finance lease arrangement. This is a basic financing arrangement with the user making monthly payments and a “balloon” lump sum payment at the end of the lease which represents the residual value. The liability appears on the balance sheet and there is a risk around the residual value. At the end of the finance lease, the user normally acts as the agent for the lease company by selling the vehicle and passing on a percentage of the net sale proceeds back to the leasing firm so that ownership does not change hands. The user takes on responsibility for VED and can arrange for maintenance and breakdown cover to be included.
The cost of leasing vehicles is deductible against taxable corporate profits, subject to restrictions for cars costing more than £12,000. From 1 April 2009, the disallowance will no longer be linked to the cost of a vehicle delivered or leased on, or after, this date. Instead, it will be 15% of the rental cost for vehicles emitting more than 160g of carbon dioxide per kilometre. Vehicles that emit 160g/km or less will face no lease rental restriction.
It is expected that these tax changes, along with an increase in the availability of vehicles with low CO2 emissions will result in more employers leasing greener cars, says Mitchell. “Manufacturers have been striving to reduce CO2 emissions and if you look at cars below the 160g/km threshold you get prestige brands in there, as well as run of the mill stuff, so there is a lot of choice,” he adds†
Product file: vehicle leasing†
What is vehicle leasing?
This entails payment of a regular sum over a contracted period for the use of a vehicle. Contract hire is an operating lease, with or without maintenance. The vehicle is handed back at the end of the lease period and there is no residual risk. The other method is a finance lease where the liability appears on the balance sheet and the user takes on a risk in relation to the residual value. At the end of the lease, the user has the ability to sell the vehicle as the agent of the lease company.
Where can employers find more information?
The British Vehicle Rental and Leasing Association (www.bvrla.co.uk).
Who are the main providers?
Grosvenor Contract Leasing, ING Car Lease, Leaseplan, Lex Vehicle Leasing, Lloyds TSB Autolease, Lombard Vehicle Management and Masterlease.