Vehicle Finance

There are several methods of financing new business vehicles. These are:

• Contract Hire. A very simple method of essentially renting your vehicle fleet. Ownership of the vehicles remains with the finance company at all times, and the contract is based on a pre-agreed rental period, normally between 2 and 4 years, and a pre-agreed annual mileage per vehicle. Monthly rental payments are fully allowable against Corporation Tax, and VAT is paid (and recovered) on each payment. Note – 50% VAT recovery if non-business use of the vehicle is allowed. The monthly payments include the annual road tax, the new disc being provided annually by the finance company. The contract may include or exclude servicing costs, as decided by the hirer. At the end of the contract period the vehicles are simply returned.
• A Vehicle Hire Purchase Agreement conveys the benefits of ownership at the outset, although the finance company will have a lien over the vehicle until all payments have been made. Payments of capital and interest are made over a pre-agreed period with the interest element being fully allowable against Corporation Tax by the hirer. The equipment is capitalised in the hirers’ balance sheet on acquisition, and capital allowances for Corporation Tax purposes are available from point of acquisition. VAT is payable (and fully recoverable if the vehicle is 100% for business use) up front, so no VAT is payable on the monthly payments. At the end of the term payment of a small option to purchase fee transfers legal ownership to the hirer.
• A Finance Lease is a fixed term method of financing which will show the vehicles as assets on a company’s balance sheet (although the company never owns them). The VAT treatment is the same as for contract hire. Corporation Tax allowances are claimed by the finance company, thus reducing monthly payments. Two options are available when using this method – either the full price plus interest can be paid over the term or reduced monthly payments plus a larger (balloon) payment at the end can be made. The balloon payment is calculated based on the vehicle’s estimated residual value at the end of the term. At the end of the contract the vehicle is sold to a third party and the proceeds returned to the finance company – if the full payment option has been chosen the hiring company will receive these proceeds, if the balloon option has been chosen the hiring company will receive the excess of the proceeds over the balloon amount (if not paid at date of sale).

Owned vehicles can also be financed through the use of a sale and leaseback facility. The existing fleet is purchased by a finance company at agreed valuation, and then leased back through the funding method chosen by the user. Sale and leaseback is an excellent method of removing disposal risk from fleet management and can provide a large and welcome cash injection for the business to use for other purposes.