A finance lease is a popular agreement for businesses needing cars, vans and commercial assets where contract hire is unsuitable. It offers flexibility and tax advantages to eligible companies who require one or more assets but don’t have the accessible funds to pay for them upfront.
As part of a finance lease agreement, you can choose to pay the entire cost of the vehicle, including interest charges, over an agreed period. Alternatively, you can opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle (otherwise known as the ‘balloon payment’). Throughout the agreement, the vehicle remains the property of the leasing company.
The VAT element of your purchase is paid monthly , rather than up-front meaning you as a customer have lower costs from the outset as the VAT is spread across the life of the agreement. If you’re non – VAT registered this could be beneficial for you.
At the end of the lease, the vehicle can be sold to a third party, allowing your company to benefit from any available equity if it is sold for profit. If the sale price is below the agreed residual value, you will be liable to make a further payment to the finance company.
If your company chooses to take out a finance lease on a brand-new vehicle, you will be hiring it for a specified period of time (two or three years, for example) and make regular monthly payments to rent it.
Your business will be able to use the asset without facing the high upfront cost of a new vehicle, handle the administration of the vehicle, and have the assets shown on your company’s balance sheet.
At the beginning of the lease, usage parameters for the vehicle are agreed. Providing these restrictions are met, monthly payments and interest rates are fixed for the duration of the contract.
If yours is a VAT registered company, you can reclaim between 50% and 100% of the VAT payments depending on whether you rent the asset. If your company is not VAT registered, you can choose to spread the VAT costs across the lease term by incorporating it into your monthly rental.
Your payments can usually be offset against taxable profits (special rules apply to vehicles).
At the end of the contract, the asset can either be sold by the user to an unrelated third party (some funders may handle the disposal in return for a small commission) or the user can pay the outstanding “balloon payment” and operate the vehicle under a peppercorn agreement.