As with any financial decision, the choice to buy outright in cash, on finance, or on leasing can affect your balance books more than you might think. Finding the right deal for your situation can be the difference between operating at a loss, and enjoying the benefits of your business vehicle.
For many businesses, leasing a vehicle on contract hire could be a financially attractive option compared to buying outright, so we’ve put together a guide below to help make the decision easier.
Is it cheaper to lease a business vehicle than buy?
It’s a common question to wonder whether contract hire will be cheaper than buying over the usable lifetime of a working vehicle. Indeed, the fact that you’ll not own the vehicle and have to hand it back at the end of the contract period can be a deterrent to many, but it’s actually incredibly beneficial for your accounts.
Just to be clear here, we’re only looking at a general rule on the following information, so you should always enquire with your accountant to find out if there’s a contract option to suit your circumstances.
It generally comes down to the issue of initial financial deposits, depreciation, resale value, mileage and maintenance – which we will explore below.
Factors affecting the financial cost of contract hire vs. buying a business vehicle
Depreciation is the main factor that will affect hire or buying decisions. Typically, vehicles depreciate at a high rate over a short period of time, often losing up to 40% of their purchase value in the first year alone. It’s important to remember that different models and makes of vehicle depreciate at different rates depending on demand, your accumulated annual mileage, usage and condition.
If a vehicle has a good resale value, you may be in a slightly better financial position buying it, but again, this depends on a variety of factors. Calculating the final resale value of a vehicle is difficult and incorporates all of the factors mentioned above.
Added to the hassle of negotiation with sellers, trader fees and balancing your books on the estimated value, you’ll quickly wear down the margins you had on paper. That’s why many businesses look at contract hire, especially when they require vehicles to be the latest models for efficiency and warranty guarantees.
A good rule of thumb is to look at the intended business vehicle you’ll purchase and an approximate resale value. Take this away from the cost price and you’ve got your (very rough) depreciation amount. Spread this amount over the period you intend to use the vehicle and compare it to see which will be the better option.
Unfortunately, more often than not, you’re only better off if the vehicle will be used for an extended period of time, (3+ years) and exceed 10,000 miles per annum. Added to this is the uncertainty of repairs and maintenance outside of the manufacturer’s warranty period and you’re in the dark as to the true cost of the vehicle.
Having said this, you’ll need to factor in mileage and usage. Typically, mileage is expected to be between 5,000 and 10,000 miles per annum and exceeding the pre-agreed limit will incur additional fees.
New vehicles and value for money
Contracts generally last between two and four years, which coincidentally is the length of time most vehicles manufacturers extend their warranty to. This, added to the fact you’re in one of the newest vehicles on the market means that you’ll not need to schedule in an MOT test and there won’t be any unexpected costly repairs due.
You can actually add in extra cover for maintenance to your fee to help smooth the financing of the vehicle with fixed monthly fees, allowing you to budget accordingly and keep your business going with liquid capital.
Saving on VAT with your contract hire car
If you’re using the car for business-only purposes, you’ll be able to deduce any costs incurred as business expenses. It’s best to speak with your tax advisor for the fine details, but generally, the following are able to be put down as costs to the business and therefore some VAT can be claimed back if you are a VAT registered business.
Various expenses that can be for business are as follows in this (non-exhaustive) list:
- Monthly costs (typically the largest outset)
- Vehicle registration fees
- Repair costs (includes the repair plan with the contract)
When the contract ends
If you’re in the boat where a new vehicle is needed every few years due to your industry or usage, then the end of contract stage of a hire agreement will be an advantage over buying. Vehicles at the end of their term can simply be handed back to the finance company when the contract is up, depending on the mileage limits and if any wear and tear deemed excessive. You’ll then be able start a new contract with the latest vehicle model, depending on your business needs, and the contract hire process can begin again.