In Brief – If your business is looking for a flexible way to finance a vehicle that combines a minimum initial outlay with maximum tax efficiency then this could be your best option.
How it works - Although the business will never actually own the vehicle, finance leasing allows many of the benefits associated with ownership available to the business while at the same time offering significant tax advantages.
You choose the term and the deposit and your monthly payments are then calculated based on the VAT exclusive price of the vehicle you want. During the agreement period 100% of the VAT payable on the finance element of the monthly payments may be recovered (assuming the business is registered for VAT) where the vehicle is either a van or a car used solely for business purposes. Where the vehicle is a car used for business and private mileage only 50% of the VAT payable on the finance may be recovered.
For the duration of the agreement the vehicle will be shown as a 'leased asset' within your balance sheet. The monthly payments are treated as a revenue expense and so can be offset against any taxable profits. Furthermore, the monthly payments can be tailored to match the cash flow of the business, with a “balloon” rental being used to defer part of the vehicles initial cost.
At the end of the agreement period, the vehicle is normally sold and the proceeds used to pay off the “balloon” payment that was agreed at the outset. If, following the sale there is a shortfall, then the leasee must make up the shortfall. If, however the amount raised from the sale of the vehicle exceeds the "balloon" amount then the excess will be refunded as rebate of rentals. Alternatively, in some circumstances you can choose to extend the rental of the vehicle – this is commonly referred to as a 'peppercorn' rental.
Features and Benefits
- You choose the vehicle you wish to drive and the lease period, normally between 12 and 60 months.
- Payments are lower as they are calculated on the VAT exclusive price of the vehicle
- VAT registered businesses can reclaim a portion of the VAT paid on rentals, and all of the VAT paid on optional maintenance rentals
- The monthly payments can be offset against taxable profits, improving cash flow.
- The vehicle can be shown as an asset on the balance sheet.
- Where the sale of the vehicle at the end of the agreement exceeds the ‘balloon’ amount, the difference is returned as a rebate.
- By adding an optional maintenance package you can combine all your running costs together in a single monthly payment.
If you have any questions about any of our financial services please contact your local dealership where a business funding specialist will be happy to explore the best options for your circumstances.