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Guide
Business Contract Hire (BCH)
Business car and van leasing (or business contract hire/BCH, as it used to be called) offers distinct business benefits and is by far the most popular form of lease financing today.
Business Lease Purchase Explained
Business lease purchase is a rental purchase agreement whereby the business makes an initial payment followed by fixed, monthly payments. At the end of the contract term, the business must purchase the vehicle.
What is Business Lease Purchase?
Monthly payments for the vehicle are largely based on the initial retail value of the car or van, along with the vehicle’s end-of-contract ‘estimated future value’ (i.e. the likely depreciation value of the vehicle based on factors such as the length of contract, estimated mileage, etc.). Together, these two factors establish the vehicle’s ‘residual value’.
As most cars significantly depreciate over time, business lease purchase tends to be more suitable for vehicles less likely to lose value over time (i.e. those either set to appreciate in value or else retain their value).
In summary, an upfront payment (usually 10-50% of the residual value of the vehicle) along with the total amount of VAT is paid. This is followed by monthly payments to pay off the gap between the retail value and the residual value. The final outstanding payment represents the ‘balloon’ payment and corresponds with the estimated future value of the vehicle (as set at the beginning of the contract). A typical contract is between 2-4 years.
Business Lease Purchase could suit your business...
Business lease purchase could suit you if your business wants to own (not rent) a vehicle that is set to retain or increase in value over time, but either a) can’t afford to purchase such a vehicle or b) wants to defer payment of a large up-front sum.
Benefits of Business Lease Purchase
- A smaller deposit/initial payment is required, and monthly payments are often also lower (compared with purchasing via some other finance methods)
- May suit businesses who wish to hold high-value vehicles as business assets (e.g. luxury or well-sought-after cars) as business assets
- Vehicles can be bought without having to invest large amounts of capital upfront, leaving capital free for other business ventures
- The vehicle must appear on business accounts as a liability so can be used to reduce taxable profits
Things to consider
- The total amount of VAT on the lease must be paid up-front (which can be difficult for smaller businesses), but can be off-set against the company’s quarterly VAT return
- Road Tax is included but only for the first year of the contract (unlike business car leasing where Road tax is provided for the entire length of contract)
- The vehicle must appear on business accounts as a liability, which can potentially limit your business’s ability to borrow funds for other projects
- The VAT is not reclaimable unless the vehicle is used exclusively for business purposes (unlike with business car leasing)
- There is no option but to buy the vehicle at the end of the contract
- The business must have the available finance to settle the outstanding final or ‘balloon’ payment due at the end of the contract
- The final or ‘balloon’ payment due is non-negotiable and may be higher than what the vehicle is worth
Information is provided as a guide only. Select Car Leasing cannot be held responsible for any personal or business decisions made as a result of information provided in the guides. As with all aspects of taxation, it is the responsibility of individuals and businesses to understand the rules and regulations and act accordingly. As personal and business circumstances can vary, it is also advised that you take professional accounting advice before making a final decision.
If you'd like to speak with our friendly team about business vehicle leasing, simply call 0118 920 5130 or email us at: enquiries@selectcarleasing.co.uk
We've got business car leasing covered from every angle
If you're thinking about business car leasing, we have a collection of informative guides on all aspects of business leasing to make the process as simple as possible.
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Guide
Business Contract Purchase
Business Contract Purchase is a long-term rental agreement. Suitable for businesses seeking a low initial outlay and the option to buy at the end of the contract.
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Guide
Business Finance Lease
A Business Finance Lease is similar in some respects to car or van leasing in that it’s a long-term rental arrangement where your business leases a vehicle(s) of its choice for an agreed length of time, at a set fee. With finance lease however, when the contract ends your business has two options.
