How do businesses decide between leasing or buying a company car or a fleet of cars? There are plenty of advantages for both options, as well as some disadvantages too, so your decision will be specific to your business needs and its financial position.
In this blog post we look at some of the pros and cons for both options, but before we do, make a quick note to do a cost benefit analysis also known as BCA (benefits cost analysis). The process of a BCA, allows you to fully appreciate the risk and reward of your choices.
Cost Benefit Analysis Process
Here is a quick overview of how to evaluate big financial decisions for your business, including company cars:
- Goals – why do you need a company car or fleet of cars?
- Alternatives – Uber, public transport
- Pros & Cons – leasing or buying, fully understand the financial implications
- Terms – understand contract hire versus leasing terms, as well as the terms for purchase. Can you a discount, or negotiate more favourable terms?
There really is no right or wrong answer however you could make the wrong choice if you’re an impulsive decision maker and you’ve skipped the BCA process.
How Much You Intend To Use The Vehicle
One of the reasons businesses like to lease vehicles rather than buy them outright, comes down to the number of miles or kilometres they do in a year.
Leasing is good because no matter how many miles you do, the car gets handed back to the dealership at the end of the term, and you avoid depreciation costs.
If, however, you don’t use a company car that much – say just for travelling to and from work – then you may want to buy outright. The lower mileage will reduce depreciation, making leasing less attractive.
It Depends If You Could Put The Money To Better Use
The great thing about leasing a car is that you don’t have to cough up money upfront to pay for it. Instead, you pay for your use of the vehicle in monthly instalments, getting the transportation services you need, but without the loss of capital.
Many business owners can make better use of capital than ploughing it into a vehicle. If you think you could, then leasing is a better option.
It Depends On The Maintenance Costs
As cars get older, they need more maintenance. If you put a lot of miles on your business vehicle, it may require costly servicing at the three- and five-year marks, making the overall prospect of buying outright less appealing. Leasing avoids this problem by ensuring that companies always have fresh vehicles in their fleet.
Are There Tax Advantages To Leasing A Business Vehicle In The UK?
If you buy a vehicle on lease for business purposes, then the cost of the contract can be offset against profits, reducing overall corporation tax bills.
You need to be careful though. The vehicle can only be wholly offset against profits if it emits less than 110 g/km of CO2 and the company does not own the car at the end of the lease period.
What about VAT?
The rules since 1985 in the UK say that businesses which use cars for business purposes can fully reclaim the VAT they pay at the dealership. Companies don’t have to pay all the VAT, pushing the overall cost of leasing down.
VAT, however, can only be fully reclaimed if you only use the vehicle for business purposes only. If there is a degree of private use, then you can redeem 50 per cent of the VAT.
Which Is Better: Leasing Or Buying?
Overall, on the face of it, it appears that leasing a business vehicle may be more favourable than buying. There’s less initial outlay and usually no maintenance costs. Businesses can get a new model every year, ensuring that they remain up to date with the latest automotive tech. However it may not be the right option for your business so do your research, get professional input from your accountant, and legal team before signing a contract.
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