Finance Lease Explained

As part of a finance lease agreement you can choose to pay either the entire cost of the vehicle, including interest charges, over an agreed period. Alternatively, you can opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle (otherwise known as the ‘balloon payment’). Throughout the agreement, the vehicle remains the property of the leasing company.

This type of agreement is only available to business customers – including limited companies, self-employed people and sole traders; it is not available to private individuals. It is a particularly popular option for businesses because of the significant tax advantages (continue reading for more information on this).

How could it work for your business?

If your company chooses to take out a finance lease on a brand new vehicle, you will be hiring it for a specified period of time (two or three years, for example) and make regular monthly payments to rent it.

Your business will be able to use the car or van without facing the high upfront cost of a new vehicle, handle the administration of the vehicle, and have the assets show on your company’s balance sheet.

At the beginning of the lease, usage parameters for the vehicle are agreed. Providing these restrictions are met, monthly payments and interest rates are fixed for the duration of the contract.

If yours is a VAT registered company, you can reclaim between 50% and 100% of the VAT payments depending on whether you are renting a car or commercial vehicle. If your company is not VAT registered, you can choose to spread the VAT costs across the term of the lease by incorporating it into your monthly rental.

Your payments can normally be offset against taxable profits (special rules apply to cars)

At the end of the contract the vehicle can either be sold by the user to an unrelated third party (some funders may handle the disposal in return for a small commission) or alternatively, the user can pay the outstanding “balloon payment” and operate the vehicle under a peppercorn agreement.

The key features of finance lease

• Popular for business and commercial customers when contract hire is not suitable
• Allows your company to handle the administration of your vehicles, and have the assets show on your balance sheet
• Choose to pay the entire cost of the vehicle, including any interest charges, on a monthly basis or
• Pay lower monthly instalments with a final payment based on the resale value of the vehicle at the end
• At the end of the agreement, the vehicle is either sold to a third party or
• Pay the outstanding balloon payment and operate the vehicle under a peppercorn agreement

The key benefits of finance leasing

• Fixed payments for the whole agreement
• Low up-front costs – for just a small outlay, you can use the assets immediately
• Claim up to 50% of the VAT on cars and 100% on commercial vehicles (subject to being VAT registered)
• Flexible repayment structure tailored to match your company’s cash flow
• Fixed or variable interest options – you decide which suits you best
• Tax advantages – VAT is payable on the rentals, not the purchase price, while payments can normally be offset against taxable profit (special rules apply to cars)
• No penalty charges for additional mileage or damage at the end of the agreement
• Although you will not own the vehicle, you will receive 98% of the sale proceeds if the vehicle is sold to a third party at the end of the agreement

Please note: case studies created for illustrative purposes only.

Alternatively, you can choose to pay the outstanding balloon payment and operate the vehicle under a ‘peppercorn agreement’ – otherwise known as a secondary rental agreement.