To Lease or to Buy?
If you’re a business who requires a commercial vehicle one of the biggest questions you might have is “should I lease one or just buy it?”
February 16, 2018
In a nutshell, leasing is getting a vehicle for a fixed period at an agreed amount of money for the lease.
One of the main things to consider is cash flow as when it comes to getting a commercial vehicle, it’s likely to be your biggest expense behind personnel.
When buying Commercial Vehicles whether outright or using a funding method, the Company is expected to pay all the VAT element in one go which can be claimed back at the end of the VAT quarter. This will then tend to dictate the timing of any Commercial Vehicle purchase as a business will want the least amount of time between paying out VAT and being able to reclaim.
With an increase in VAT from 15% to 20% which is a substantial amount of VAT on any vehicle purchased. Now a day’s Commercial Vehicles can cost anywhere from £18,000 to £25,000+. Factor in the 20% rate, the VAT element could be anywhere from £3,500 to £5,000 in one lump sum.
Traditionally businesses liked to own the Commercial Vehicles but with image, driver safety and comfort they tend to be changed vehicle more often to keep their business looking fresh, perhaps every three to four years instead of them being used until they can no longer run.
Should you wish to change on a regular basis and have a disciplined fleet policy. You may question paying for the whole vehicle in case it goes down in value over time. This is one of the reasons business are starting to look at leasing, as they are only paying for the part of vehicle used.
Lease comes in two forms, Contract Hire (Operators Lease) and Finance Lease. Both lease contracts will estimate the residual value of the unit in years to come based on mileage and in some cases usage.
Based on the above the business will only be repaying for the £14,000 and perhaps a little interest on the £6000. Against paying off the full £20,000 which will, of course, reduce the amounts paid per month.
In addition, the payments are classed as rentals allowing a business to state 100% of the payment against profits and therefore reducing the tax liability.
Finally, the payments are liable to VAT, but the VAT you pay each month is only for the rental. So, a rental of £250 per month, the VAT element is only £50. This could be a considerable saving in comparison to paying up to £500 up front when purchasing a Commercial Vehicle.
So, the benefits to CASH FLOW are:
1. Low deposit (Normally 3 payments in advance)
2. 100% expense against profits (Reducing tax liability)
3. VAT paid over the contract, No lump sum
4. No risk on residual Value (Operators Lease)