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Finance Lease

A car finance lease is very similar to Contract Hire, however at the end of the contract the business may be liable for a further payment. This happens when upon completion the vehicle sells for less than the anticipated amount and the business has to pay the difference.

Mileage over the limit set in a contract hire arrangement will incur additional costs and if the business expects a very high mileage then accepting some risk in the eventual value of the vehicle may be preferable to accepting  the automatic additional mileage costs in a contract hire arrangement.

Advantages of a Finance Lease

A vehicle finance lease has the same basic advantages as contract hire:

  1. It frees up cash instead of investing it in a non-core depreciating asset since there is  a smaller initial payment required (the equivalent of only 3 months payments upfront) than a business loan
  2. The business spends significantly less each month (as much as 60%) than it would need to spend on a loan or ‘hire purchase’ (it gets a ‘bigger bang for its buck’) and there is more room in a finance lease to tailor the lease to specific cash flow requirements
  3. The business can select the exact requirements online and have them delivered
  4. Road Tax is often included in the price for the length of the contract
  5. Maintenance and services can be included in the monthly payment as an add-on

And unlike contract purchase:

  1. The cost of the vehicle can be stated directly against income to decrease taxes, and there is no need to place the vehicle on the balance sheet and use capital allowances for tax relief
  2. The VAT is fully recoverable

Disadvantages of a Finance Lease

  1. The business is responsible for selling the vehicle at the end of the contract period
  2. The purchaser is financially exposed to the eventual sales price of the vehicle and so the total cost can not be predicted – if the eventual sales proceeds don’t cover the outstanding balance, the purchaser has to pay the difference

HINT: This is most suitable for businesses who incur a high annual mileage or a high degree of wear and tear. The accounting and VAT implications can vary depending on your company’s circumstances (partnership, sole trader…)  and you should clarify how your accountant would treat the vehicle. (on/off balance sheet etc.)