What should you do about your company car?

Anyone running a company car will be painfully aware of their vehicle’s emissions. It has been this way since 2002, when the government switched the way it taxes this particular ‘benefit in kind’ (BIK) from a mileage-based system to a complicated calculation that takes into account the car’s CO2 emissions (essentially their fuel economy) and the list price.

It’s all part of the plan to get us running around in more eco-friendly cars. The amount of CO2 your car emits – expressed in grams per kilometre (g/km) – determines, in part, how much tax you must pay for running it.

This is how the sum works. The car’s official CO2 figure determines the tax banding, which is expressed as a percentage of the car’s list price. So a Mini Cooper emitting 127g/km sits in percentage band 16 (bands currently run from 5 to 35%). That 16% of the Cooper’s £14,900 list price is further modified by your own income- tax band, whether that’s 20, 40 or 50%. You now have your annual company car bill.

However, thanks to a tax escalator that adjusts the bandings yearly, that bill can go up every year. And a new escalator – whereby the tax due on higher-emitting cars will rise by 1 percentage point in 2013/14 and then again in 2014/15 – means many company car drivers will see a steady increase to their costs and lead more of them to ask, is it worth it?

Increasingly, companies are offering cash alternatives. Companies realise car leases are still an important tool in recruiting and retaining the best employees but they also don’t want the hassle of running a car fleet.

Let’s look at a typical wavering company car driver, we’ll probe their monthly finances to ask a broader question applicable to all employees given the option: is it worth taking the cash to source my own car?

As an example, let’s say you are entitled to a BMW 318d saloon, which is worth around £27,000. Many firms offer a fairly wide choice of manufacturers, but drivers are restricted to lower-powered diesel models because they’re the best on CO2, despite a surcharge imposed by the government that penalises diesel cars over petrol-fuelled models.

Car manufacturers have responded to the regulations by offering special business-specific models with very good CO2 figures, but the choice can be restrictive.

Until April, let’s say you paid £100 a month in tax for your Vauxhall Insignia diesel. It’s very good on CO2 at 112g/km but, following the introduction of the new tougher tax bandings, your tax bill has since climbed to £125 a month.

One way to save money is to choose a car that really cuts CO2 and take advantage of the new, very low-emission tax bandings. These bandings are expressed as a percentage of list price. For example cars emitting under 50g/km of CO2 are taxed at just 5% of list price, compared with 17% for the Vauxhall.

So if you went for a more eco-friendly Toyota Prius plug-in hybrid, you would pay just £55 a month, despite this high-tech car being tagged with a £33,190 list price.

Your company could boost the amount it’ll offer so employees can afford more expensive eco-tech cars, something that is happening more often as companies get tax breaks if they attract more low-emissions cars to their fleets.

So what about taking the cash allowance instead? The first thing to be aware of is this will be taxed – let’s say, for example, at 40%, so your £6,422 allowance becomes £3,854.

However, one big perk for company car drivers who take the allowance is the mileage rates. If a company offers the full 45p and the employee drives significant business miles in a car that uses very little fuel, this can really help the sums add up on a private car. The only drawback is mileage limits on personal finance schemes that require you to hand the car back, such as leasing.

Doing the sums on the £3,854 extra a year means you would get £321 a month to play with. Adding another £40 a month claimed back from the comparatively low 200 business miles you might do a month, that’s £361. With that figure in mind, let’s go car shopping!

Winning Over Drivers When Rightsizing

Rightsizing a fleet, whether it means reducing the number of vehicles or transitioning to smaller, more fuel-efficient models, can create resentment and frustration among drivers, causing them to resist the initiative.

Take, for example, how technicians might respond when tasked with switching from a full-size to a compact van. They may be thinking, “I need to carry a certain amount of inventory and tools with me, and now I need to fit all that into a smaller vehicle? This is really going to change how I do my job. It’s going to inhibit my productivity, my efficiency, my comfort. How is this going to work better?” Without effective communication, there can be a lot of scepticism.

And, it’s not just service technicians. Sales reps, too, may take offence when asked to downsize to mid-size saloons.

While the vehicle is a required tool to perform the job, it’s also perceived as a perk by many sales reps. If the reason for the change is not effectively communicated, the driver may feel slighted, thinking you’re taking something away.

These driver concerns with rightsizing, if not adequately addressed by management, could fester and negatively impact employee morale and productivity. But, with effective communication, fleet managers can help ease the pain and get drivers on board.

One way to combat resistance to rightsizing is by explaining the rationale to drivers and other stakeholders impacted by the initiative. You can expect drivers to resist and resent any initiative that takes away their vehicles without a good reason; one that’s not based on clear and sound goals and determined by a systematic and logical decision-making process.

The best way to communicate these goals depends on how the rightsizing is being implemented. For instance, if frontline sales or service drivers are losing their company vehicles, an in-person meeting would be the best way to communicate the change. Explaining the reason for changes thoroughly, as well as the future plan, will be understood better in person, and that type of format allows for questions to try preempting incorrect assumptions from circulating in the field.

For example, if the plan is to reduce spare vehicles, a webcast may be sufficient to explain the plan and how fleet will respond when an immediate need for a vehicle arises. No matter the details of the plan, it needs to have support from senior management and provide the benefits the drivers and branch managers will see from the change.

Before executing any rightsizing campaign, first solicit recommendations from drivers during the planning process. Drivers should be involved in the process when developing information on how vehicles are used to support the operation of the enterprise.

Drivers are the most knowledgeable individuals in an organisation about such matters and should have input to the information-gathering and decision-making process. If fleet users feel that they had no say in the development of rightsizing recommendations, they may try to repudiate those recommendations when it comes time for management to implement them.

There are a few practical ways to get input from fleet drivers. Surveys serve as an effective communication tool for fleet managers to talk about rightsizing with drivers. The survey results give you the opportunity to say, “We’ve heard you.” And, then incorporate into the discussion: “Here’s what we’re considering.”

However, not only must the fleet manager get a survey to drivers, he or she may need to motivate them to actually fill it out. Your response rate will rise as drivers see that you’re acting upon their feedback. As with any survey, the more the respondents see that you’re taking action, or at least communicating results, the more likely they will be to participate in future surveys.

Another way to solicit input is through a council. The council should include members of operations management (such as sales, service, and human resources) and a couple of drivers to provide the perspective from the field. These drivers can be management as well, but they need to be close enough to the field to have a solid sense of the impact of the change as well as a voice to help sell the concept to those it will impact.

Some clients conduct onsite test drives to help drivers feel a sense of ownership in the rightsizing process. If the company is looking to move sales reps from full-size 4x4s to smaller crossover vehicles, for example, a test-drive programme would allow reps to drive those vehicles, see how their gear fits inside, and ensure there are no substantial issues with the spec if they make the switch.

Some large fleets also tap ‘ambassadors’, employees who are highly respected and vocal among their peers, to test drive the new ‘rightsized’ vehicles and share their experiences with other drivers.

Ambassadors can provide effective testimonials to say, “This is working for me, I love it, and here’s why.” They can also prove whether the vehicle can actually do the job before it’s introduced to the wider fleet.

Despite what the hard data says about the merits of a rightsizing initiative, it takes the ‘soft’ skills of effective communication to make the rollout successful. Communicate in a way that seeks input, garners trust, and eliminates unpleasant surprises.

What is Contract Purchase?

Structurally similar to Contract Hire, Contract Purchase enables an organisation to make fixed monthly payments. However, with Contract Purchase you have the option of retaining the vehicle at the end of the contract.

A guaranteed residual value, resulting in lower monthly payments, is set by us at the start of the contract, which gives you two options at the end of the contract:

• Hand the vehicle back to the Leasing Company
• Keep the vehicle by paying the outstanding residual value and using any equity as a deposit for the next vehicle.

Key customer benefits:

• The option to retain the vehicle at the end of the contract – without any depreciation risks
• Choosing vehicles with low CO2 emissions will result in higher capital allowances
• Road Fund Licence is provided for the full term of the contract
• The convenience of a full maintenance service, at a fixed monthly cost, is available.

Contract Purchase is ideal for companies who utilise high value cars and prefer funding flexibility along with the opportunity of owning the vehicle without the residual risk.

Contract Purchase is a hire purchase agreement provided by the Leasing Company and if applicable may be regulated by the Consumer Credit Act 1974.

As an alternative to Contract Hire, this product is ideal for companies who would like a high value vehicle and have the option to purchase the vehicle at the end of the contract but do not want any depreciation risks.

Contract Purchase offers you many of the ‘no risk’ advantages of Contract Hire. This is also coupled with an optional service and maintenance package. It also allows you, the customer, to purchase the vehicle at the end of the agreement for a guaranteed price if you wish.

You will have a number of options at the end of the contract:

• Hand the vehicle back to us – contact us to arrange collection of the vehicle. You will receive a copy of the handover appraisal form with the end mileage. Any damage on the vehicle or missing service history, keys, etc will be charged as detailed in our ‘Fair Wear & Tear Guides’ which can be forwarded on request.
• You may choose to pay the option to purchase fee and the final rental – we will transfer ownership of the vehicle to you. You may then either keep the vehicle or sell it for use as a deposit for your new vehicle.

The financial benefits are:

(a) VAT Recoverability: The payments for depreciation and interest are NOT subject to VAT, whereas payments for services bear VAT in the usual way.
(b) Tax Allowances: Contract Purchase arrangements are treated for tax purposes as a purchase by the customer when the vehicle is brought into use. As a result the writing down allowance can be claimed claimed in accordance with current legislation.

Should I buy or lease a van for my business?

Self employment has continued to rise according to the 2014 budget announced by George Osbourne, with 211,000 more individuals in self-employment than the last quarter. According to the Guardian, three of the four most common occupations for self employment were carpenters, plumbers and other construction trades.

Work in these roles normally requires a van in order to transport tools and goods, resulting in a higher demand of vans and in return an increase in van prices. Therefore a question for every new business in the trade industry is whether it is best for them to buy or lease a van.

Buying a van is often the most popular option as it means that by spending a set sum of money you own a van which is thereby yours and yours only. Leasing a van is a contract by which you pay a monthly fee in order to use the van of your choice – you do not own the van and you will be required to return it when the contract comes to an end. However some leasing deals will offer you the opportunity to pay a sum of money at the end of the contract in order to keep the van for good.

According to a report published by online car and van rental site Autorola, prices to buy a van were at a record high of £9,605 on average during March 2014, increasing by £1585 from January 2014. These vans on average were 2-3 years old with 31,927 miles on the clock.

There has been an increasing demand for LCV’s (light commercial vehicles) with a lower mileage recently but they have been in short supply resulting in an increase in price. The average price of £9,605 does not necessarily mean that that is what you have to spend as there is always the option of buying a van slightly older with an increased mileage for a lower price, or a newer more valuable van for a higher price.

So which option is best for you? In theory, it comes down to how financially independent you are. If you can afford to buy a reasonably new van, then that will be the most reliable and secure option. This is due to having full ownership and the initial payment is soon bound to be payed off with the work you complete. It also means that you can always resell the van if you no longer need it or need a quick cash injection, which you can’t do with a lease.

Alternatively if you do not have a lump sum to be able to purchase your own van, leasing can be a better option opposed to buying a very old van or getting a loan in order to cover the payment. This option allows you to pay as you go, so as long as you’re in business there will be no problems. There are also benefits to leasing, such as having a brand new van with full cover and assistance from your vehicle provider.

The final decision should be well thought out – a vital part of the decision making process is to ensure that your business is in a healthy enough position to support either a lump sum or contractual payments for several years. We hope this guide helps you to make the best decision for your business!

What is Hire Purchase and how does it work?

One of the most common forms of financing a vehicle is through a process known as ‘hire purchase’, which allows you to take ownership of a car once all payments are made. However, how does hire purchase(HP) work and how does it compare to other methods of car finance?

Hire purchase combines elements of both a loan and a lease. You reach an agreement with the dealer to pay an initial deposit, typically anything between 10% and 50%, and then pay off the balance in monthly installments over an agreed period of time. At the end of this period, the car is yours.

Unlike a lease or a personal contract purchase agreement, the residual value of the vehicle is not taken into account. Instead your monthly payments on a hire purchase agreement are determined by the retail price of the vehicle, the size of the deposit and the length of the contract.

In effect, the contract is between you and the lender (usually a bank or broker) but is normally arranged by the dealer. The lender effectively buys the vehicle and allows you to use it while you make payments. Only when all payments are complete is the car officially yours.

The main advantage of a hire purchase agreement is that you can buy something you couldn’t otherwise afford.

Your monthly payments are effectively secured against your car – and this has both pros and cons. Positively, this means you’re more likely to secure finance than you would be by shopping around for an unsecured loan as the lender has some ‘security’ in the form of your car – this is often reflected in better interest rates.

On the downside however, you must be sure you can keep up with payments or the lender will have the right to repossess the vehicle. Normally this will apply if you’ve paid less than a third of the agreement – if you’ve paid more than that it is usually necessary for the bank to take you to court to either reclaim the vehicle or the remaining cash. For most however, this is a safer form of finance than a regular secured loan – which puts your house at jeopardy if you can’t meet repayments.

Interest rates are usually determined by your credit rating. If you have a lot of money to put down on the vehicle you could secure a 0% finance deal. This will be a huge money saver – it could even save you as much as £1,000 for every £1,000 borrowed.

Reselling the vehicle during the hire purchase term can be complicated. You will still need to pay off the money you owe in full.

Hire purchase is the traditional form of car finance and is a good way of paying for a car – a sizeable deposit followed by 12 to 48 monthly payments to pay of the rest of the retail price plus any interest.

Company Car vs Car Allowance

Years ago, a company car was seen as a massive incentive towards taking a new job. However, recently many employers have preferred to offer a car allowance which could prove more financially beneficial to both you and the firm. So when presented with the two options – a company car or a car allowance – which should you choose? This week we will examine the pros and cons of both.

The company car system is long established in the UK. When you join a company, your new employer may offer you a company car as a perk – this means that you will drive a vehicle that the company owns.

Let’s look at the advantages of taking a company car:

• For the most part, the firm will cover the vast majority of your driving costs – many companies even offer a private fuel benefit.
• Repairs will usually be covered.
• You do not have to take out an expensive loan and pay high amounts of interest.
• Depreciation is no longer your concern. It’s well-known that the value of vehicles drop quickly from their original list price – even a car that holds its value well will lose around 50% of its worth within three years. As you don’t own the car you don’t have to worry about this loss of re-sale value. Most company car owners have car leasing agreements which allow them to return the car to the leasing company at the end of a contractual period (normally two-three years) and then take out leases on new vehicles. This means that the company car owners can avoid expensive maintenance costs as the car shows more wear and tear.

The main disadvantage to company cars is that car owners can now be heavily taxed based on the type of vehicle they drive.

Prior to April 2002, company car owners paid tax based on the number of business miles they drove each year. Now however, the system is calculated based on the quantity of carbon dioxide emissions from each vehicle – fewer emissions mean less tax.

As larger vehicles are typically used by firms to carry goods, they are subject to high taxation as traditionally larger vehicles pollute more.

To work out the level at which you will be taxed you must take into consideration a number of factors:

• Your highest rate of income tax – your tax rate is based on your earnings.
• The retail price of your car and additional extras worth more than £100. The upper tax limit for a vehicle and accessories is £80,000 – anything above that is for tax purposes priced at £80,000. If you have contributed your own cash to buying the company car, the list price should be reduced accordingly.
• The CO2 rate of the vehicle – this can be found in the car’s V5 document.
• Fuel type and rate – though diesel cars generally give out lower levels of CO2 and are usually favoured by company car owners bear in mind that a diesel car with the same CO2 level as a petrol car will pay a higher level of tax than its petroleum equivalent because of higher toxic emissions. This is unless it meets the Euro IV emission standards introduced in 2005.
• Fuel benefits – If you are given free fuel by your employer, you will still face a tax charge and the employer could be liable for NI contributions.

To help reduce the tax level of your company car, the solution is to get a more environmentally friendly vehicle. Smaller cars and particularly hybrid cars and electric vehicles are featured in lower tax bands – with the most environmentally friendly cars facing no tax charges as well as being exempt from congestion charges. HMRC publishes a table listing the tax bands for vehicles – bear in mind these can change after each budget.

An alternative is to use an LPG converter on your vehicle to reduce emissions – of course this can only be carried out if your company owns the vehicle, and not if they are leasing a car.

Many people now prefer a car cash allowance rather than a company car – this means driving your own vehicle and receiving a mileage based cash incentive from your employer. This is known as the HMRC Authorised Mileage Rate.

The good news is that these allowances are tax-free. There are two rates based on the fact that some driving costs are variable (such as fuel) and others are fixed (insurance, tax, etc). The payments are 40p/mile for the first 10,000 miles and 25p/mile thereafter. There is no size restriction – these benefits apply whether you drive a small car or a van.

As with most aspects of driving this choice depends on your personal circumstances.
The key to calculating the most cost-effective route is to think about the monthly car allowance being offered to you. Once you have done this deduct any National Insurance contributions and tax, and add in the tax saving of not driving a company car.

Compare this to driving a company car and think about whether the money you have left will allow you to cover your remaining motoring costs including insurance, repairs, depreciation. Also factor in any fuel benefit offered on your company car.

The option that saves you the most money will usually be the preferred route for most. However, look beyond cash too and consider whether you want to have the security of owning your own vehicle or whether you prefer to drive a company car to avoid the expense of depreciation, etc.

It’s all about personal choice and which factors matter the most to you – hopefully you now feel well-equipped to make an informed choice.

Car leasing v car purchase

How’s your company’s finances?

Running an SME business really isn’t easy at the moment. And all those government initiatives to help finance small businesses via the banks. Well. Have you been successful in securing any?

Quite. Anyway, back to my original question – how’s your company’s finances? Tick one of the following:

• Healthy
• OK
• Requiring finance to expand
• Requiring finance to exist

If your company’s finances are healthy and your business is cash rich, and if you purchase your own car for business as well as your staff’s company cars, then you might want to stop reading now. Especially if you are securing good discounts from a dealer – or you have manufacturer terms if you buy a lot of company cars –  and you feel confident about getting a good price when you sell them.

If that’s not the position of your small business, then read more.

One – funding readily available
Here’s the first good reason to consider business car leasing (which is also known as contract hire, by the way). It’s an additional funding line. There’s no drag on your overdraft or other lending facilities.  Given how difficult it is to attract finance for an SME, this has to be a GOOD THING.

Two – smoothed monthly cash flow
Second, car leasing vs purchase is less capital intensive than choosing HP (hire purchase) or contract purchase (CP). With HP or CP you are paying for the full cost of the car, so your monthly outgoings are higher. It may also require a higher deposit.

That’s not the case with contract hire, where monthly car lease payments are lower because you are only paying for the depreciation of the car over the time and period that it’s leased, and the finance that has been supplied. And that usually means you can afford a much better car with a business car lease because the monthly outgoing is reduced.

Three – get on with life and your business
What do you do? Run your business or run a car purchase operation? If you buy cars you have to negotiate terms with a dealer, arrange the finance, and then later on sell the car.

I’m not suggesting you don’t have to negotiate terms to get the right business car lease, although there are plenty of offers in the market: choose your car, choose your spec, and then choose the supplier that suits your business. But once in place, you pay the monthly lease and hand the car back at the end of the term. No selling or managing cars ‘in life’.
You business requires 100% concentration: business car leasing can help you do that.

Four – get some VAT back
Try getting VAT back on an HP or CP agreement. Well you can’t in most situations. But you can with a contract hire business car lease. OK, it’s not the total amount (unless your business car is used exclusively for business purposes – and very few are, so let’s dimiss that one). But 50% of the VAT levied on the monthly finance can be reclaimed.

Five – not only VAT, get some tax back
You can get capital allowances for your company car purchases. Which is really handy. What’s not so good is the amount of time it takes to reclaim that. If you buy a company car below certain CO2 emissions, then you can claim 18% capital allowances on a reducing balance basis. Ask yourself how long that will take. With a business car lease you get 100% of the lease as taxable allowance on your profit and loss account – as long as the CO2 emissions are below a certain amount. That’s immediate.

In healthier economic times, before the banks pulled the plug on a very large slice of SME company car financing, the tail risks of outright purchase were, if not necessarily financially justifiable, at least affordable. But today, the lower-risk method of acquiring company cars through lease financing is the sensible and correct way to fund business vehicles.

If your SME business could do with some additional financial  muscle, then business car leasing is certainly worth exploring – it’s additional finance without affecting our existing credit lines.

‘Talking cars’ going from pipedream to reality

The future is with us now. Talking cars have been a pipedream for decades but now they are a reality. At least in as much that the technology has been developed and is proving to work. Widespread implementation is an all-together different thing.

A consortium comprising vehicle manufacturers Audi, BMW, Ford, Mercedes, Vauxhall/Opel and Volkswagen, and ably supported by diverse component suppliers, has been running a fleet of 120 cars that are quietly chatting to one another as they cover thousands of miles during the testing stage.

It all sounds like automotive Utopia. From improved fuel performance to increasing safety, the possibilities created by the new technology being developed are endless. Car-to-infrastructure technology could see traffic lights phasing optimally to traffic flows and advising drivers to slow down to ensure they arrive at the lights as they turn to green, saving fuel from start/stop driving and wasteful idling at lights.

It could also see more timely alerts sent to drivers about hazards ahead, placing less reliance on overhead gantries that invariably display out of date or irrelevant messages. Car-to-car technology could see regular message alerts to the car behind to drop back to a safe distance.

However, for the technology to be of any use, it would have to be fitted to every car on the road. It would also have to be embedded by the roadside across the road network. Maybe within the realms of possibility for the country’s motorway network but not on ‘A’ and ‘B’ roads.

The cost of developing such technology is undoubtedly high and the cost of implementing such technology roadside and in-car is unknown at this stage. However, one thing’s for sure – it cannot be cheap. The fact remains, in the current economic climate, it is beyond the scope of any UK government and vehicle manufacturers to make viable so that local authorities, fleets and drivers are prepared to fork out the necessary cash to make this automotive technology Utopia a reality.

Perhaps some lessons learned from this interesting but, at this stage, pipedream may filter down into the standard modern day car. After all, we have already seen major strides forward in active safety in the form of electronic stability programmes (ESP), predictive emergency braking systems (PEBS) and predictive collision warning (PCW) to highlight just three things.

Reality will see technology lessons learned but while local authorities struggle to fill the myriad potholes dotting our tarmac strips and families struggling to make ends meet, car-to-car and car-to-infrastructure technology is probably furthest away from their minds at present.

Over the water, the thinking is different. California, it seems, is set to go down the driverless road as its Governor has just signed legislation covering safety and performance regulations for “autonomous” vehicles.

Fleet management made simple

Provision of case or company cars for business purposes is typically the second or third most expensive payroll item after salary and pensions for employers. Management of the cash or car policy touches many functions of a business.

Finance, tax, HR, procurement and fleet all have a crucial role to play in ensuring that their fleet policy remains cost-effective whilst being attractive to employees and manageable for the business.

The design and ongoing maintenance of the fleet policy is a virtuous circle which must be carefully considered as the needs of the business evolve. In designing the policy there may be a number of strategic aims set by different parts of the business.

Unfortunately, these aims may pull in different directions and may enhance some elements whilst negatively impacting others. Fleet policy involves constant monitoring of the balance of these aims to ensure that the best result is achieved for evolving business needs.

In addition, whilst the underlying business commodity remains the same, the fleet management industry continues to develop new service offerings, with innovative ways of providing company cars becoming increasingly common as competition for provision of the vehicle intensifies.

In designing a fleet policy, whilst it is important to consider the tax and financial implications of the range of procurement methods available, it is also critical that the commercial requirements lead these decisions.

Consideration must be given to overall business model and strategy – for example, is the ethos of the business to lease assets, or outsource to third parties where possible? It is only when these macro decisions have been taken that the more detailed design work should begin.

It is at this point that tax and finance become a critical (but not isolated) part of the design process – both from the employer and employee perspectives. This will include vehicle funding options, fleet management considerations, car allowance provision, etc.

Sinclair Finance and Leasing team has extensive experience as advisors, working with employers in the design, communication and technological support of cost-effective fleet policies. Our solutions are underpinned by tax-based technology for both the design and operation of fleet policies on a true “whole life cost” basis.

What is a finance lease and how does it work?

Flexibility is one of the keys to success for any business, large or small. If your business requires one or more vehicles but does not have the finance to pay for the asset, then a car finance lease could be the solution. It’s an alternative to hire purchase with more freedom but just how does a finance lease work and is it right for your business?

A finance lease is a method of financing a vehicle that is usually accessed by VAT-registered businesses and companies, however sole traders and partnerships can also take advantage of finance lease. It is a form of car finance where the vehicle remains the property of the finance company, with the vehicle effectively hired out to a business. The business can then use this asset while paying an effective rental rather than a repayment.

The monthly rental is determined by the initial cost of the vehicle, the period of the finance lease, the residual value, and the end balloon payment (not necessarily the vehicle’s residual value). As a residual value is used to calculate your monthly rental, most finance lease companies will insist that you stick to a strict mileage limit as this mileage restriction is used to determine the future value.

You have full use of the vehicle during the finance lease period. At the end of the finance lease agreement the vehicle is sold to a third party by the finance company, if the sold price is above the predetermined balloon payment then the finance company will refund a percentage of the proceeds back to the hirer, if the sale price is below the balloon payment then the hirer will be liable to make a further payment to the finance company.

Finance lease agreements are also available to businesses looking to pay the entire cost of the vehicle, including any interest, over an agreed lease period.

There are numerous benefits to acquiring a finance lease. These include:

• Low monthly costs and initial outlay – One of the main reasons why companies take on finance leases is to avoid the initial hefty outlay.
• Flexibility – Most finance lease companies will offer a number of payment options to suit your cash flow. You can make deferred payments, lowering the monthly rental with a balloon payment at the end of the contract, or you can pay the entire cost in monthly instalments.
• Latest vehicles – You can gain access to the latest vehicles that would otherwise be unaffordable.
• VAT payments – Up to 50% of the VAT payments can be reclaimed.
• Balance sheet – Taking out a finance lease allows you to feature the vehicle on your balance sheet, and outstanding rentals are represented as a liability. Hire rental tax allowances can be applied for.
• Sales proceeds – You can boost your equity by receiving a proportion of the sale at the end of the finance lease term.

There are disadvantages to finance leases too. Primarily these are that you will never take ownership of the vehicle as the car or van must be sold to a third party. A further disadvantage is that the hirer also takes on the administration and operating risk associated with the vehicle, including the road fund licence.

But finance lease removes the pressures of heavy initial outlays. It is a proven method of giving your business access to the latest vehicles without actually having to take ownership and buy them outright. There are also tax benefits too, which make this an ideal car finance method for many businesses.