If you like the idea of owning your vehicles, don’t mind putting them on your balance sheet, like to be flexible about when you sell them and don’t mind tying up working capital, then buying your own cars might be right for you.
The downside is that you will be fully exposed to movements in the used vehicle market when selling them. In other words, you take the residual value (RV) risk.
But bear in mind you won’t get the same levels of dealer discounts and manufacturer bonuses that leasing companies can attract.
Hire purchase (HP) allows you to become the owner at the end of the agreement, normally by paying a nominal amount.
It gives you the risks and rewards of ownership from the date of delivery (including RV risk) so the vehicle and the balance due to the funder must be shown on your balance sheet.
Lease purchase is similar to HP but a lump sum (‘balloon’) instalment is payable at the end of the contract. If it has been estimated accurately, the sale proceeds will cover the balloon payment.
Contract purchase combines a lease purchase or conditional sale agreement (containing a balloon payment), a repurchase undertaking and a maintenance agreement.
You buy the vehicle and the supplier buys it back for a pre-agreed fixed price at your option.
The supplier is at risk; they don’t know if you will sell the vehicle to them.
Contract purchase represents less than 5% of the fleet finance market but as personal contract purchase (PCP) it is a very popular method.
Under a credit sale agreement, title to the vehicle passes to you at the start of the agreement, rather than the end.
Benefit-in- kind tax does not apply if title in the vehicle transfers to the employee, so Employee Car Ownership schemes use credit sale agreements to avoid BIK tax.
Contract hire is the most popular UK fleet funding product.
The supplier leases a vehicle to you for a fixed period and mileage, for a fixed rental.
So long as the vehicle has not exceeded the agreed mileage and is in fair condition, you simply return it without further cost.
The supplier takes the RV risk.
In a ‘maintenance-inclusive’ deal you will be charged a fixed amount and they will pay for all standard servicing and maintenance work, and replacement tyres.
If you exceed the agreed mileage you will be charged an excess.
The agreement will say the vehicle has to be returned in good condition.
The dividing line between fair and unfair condition is set out in the British Vehicle Rental and Leasing Association (BVRLA) Fair Wear and Tear Guide.
Contract hire offers you: vehicle sourcing; the benefit of big fleet purchasing power; payment of all routine maintenance bills (no need to scrutinise maintenance bills or negotiate with garages); automatic annual VED renewal (no need to renew at the Post Office); an off-balance sheet finance product; no RV risk and no maintenance cost risk.
There are some VAT benefits too.
No wonder it’s so popular.
A finance lease transfers substantially all the risks and rewards of ownership of the asset to the lessee, putting them in the same position as if they had bought the asset.
So it is similar to using one of the ‘purchase’ methods (but the tax and accounting treatments are different).
After the initial non-cancellable period of the lease the lessor charges a nominal rental until you decide to end the lease.
The lessor will charge you rentals that fully repay its investment during the initial period of the lease.
Thereafter you will either sell the vehicle as their agent or opt to enter into a secondary lease period.
On sale the lessor will allow you to keep most of the sale proceeds, which are normally paid as a rebate of rentals.
Most lessees consider finance leases have few advantages over contract hire.
Hence, finance leasing represents only 1% of fleet funding.
To choose the right option for your business you should consider: the overall cost of each method to your business; the balance sheet effect; the corporation tax effect; any relevant VAT issues; the employee benefit-in-kind tax issues; the flexibility you need; relevant human resource issues; risk management issues and internal administrative issues.
Most of these are discussed in this book.
- The article is an abridged version from Managing Your Company Cars in Nine Easy Steps, published by Eyelevel Books in association with Daimler Fleet Management.
- Fleet News readers can buy the book for a special price of £12 (retail price £15) by logging on to www.tourick.com and entering promotional code 1598.