Contract hire is the UK’s number one fleet funding mechanism, but forthcoming changes to lease accounting rules mean that it will join all other financial options in being on-balance sheet.
A conservative estimate suggests that at least 60% of businesses fund their vehicles via contract hire – exact numbers are not available – with possibly no more than a third opting to outright purchase.
The remainder choose to finance lease, contract purchase, lease purchase, hire purchase or utilise overdraft facilities and loans.
With the exception of contract hire, all other vehicle funding routes require companies to report exposure on their balance sheets at the end of their financial year, thus effectively publishing a snapshot of their well-being.
Presently, publicly-listed companies must also reveal any operating lease (contract hire) outstanding liabilities in a note to accounts within their annual report.
That will change if the proposed accounting standards are adopted, which is expected to be in the second half of 2014.
The BVRLA has been consistently robust in its view that including leased items on companies’ balance sheets does not erode the ‘commercial benefits’ of leasing; it highlights protection from residual value volatility and business capital being freely available and not tied up in buying vehicles.
Below we highlight the main forms of current on balance sheet funding.
Historically, outright purchase was comfortably the most popular fleet funding method, but over the past 20 years it has been overtaken by contract hire.
Today, fleets that purchase vehicles outright are largely small privately-owned business, cash-rich organisations, or do so for a variety of reasons often due to their uniqueness as a business.
Reasons that organisations buy their vehicles include:
- Tradition. It has always been company policy and gives full control as to how vehicles are managed and when they are sold.
- A belief that paying a third party to provide vehicles is more costly than doing so independently.
- The ability to source funds at a lower interest rate than leasing companies.
- Being a cash-rich business.
Investing money in a depreciating asset can be viewed as a disadvantage when the capital could be used to fund other areas of the business.
A company that buys its own cars and vans is also subject to the volatility of the used market when it decides to sell.
Businesses cannot recover VAT on company cars they buy, assuming there is an element of private use, but capital allowances can be deducted when calculating corporation tax liability.