For many businesses, leasing is the preferred option when it comes to property, computers and office furniture because it buys the freedom to pick and choose, select the best deal and free up company cash – and it’s no different with motor vehicles.
At face value, the leasing of a motor vehicle can be a minefield as it seems the more flexibility you have in terms of leasing companies, lease packages and options within those packages – not to mention the process of actually choosing a vehicle – the greater the potential dilemma and therefore, risk.
However, armed with plenty of facts and even more figures, the result can be a painless and simple process, and if you’ve done it properly you will have successfully – and legitimately – minimised your tax and improved the worth of your company.
Sale and leaseback
The big question for many businesses looking to contract hire for the first time is they usually already have a fleet they own and would need to offload before committing to a funding agreement.
Sale and leaseback is ideal for this situation, where growing companies have accumulated a large amount of capital sitting in their car park.
For a business which needs access to more funds, sale and leaseback provides an opportunity to sell its entire fleet to a contract hire company and lease it back immediately without disruption to the daily running of its operations.
The obvious benefit is that the company keeps the use of its existing fleet, but at the same time receives immediate cash injection of funds allowing it to clear debt, expand or consolidate its security.
Lease types – contract hire
The process is seamless and the time-consuming management of the fleet is passed on to the contract hire company, which also takes on the risks of depreciation and maintenance. It also immediately removes the fleet from the balance sheet and simplifies accounting with one monthly invoice for all running costs and maintenance.
By far the most popular form of leasing is contract hire, where the driver chooses a car, leases it from one of the major fleet leasing companies and returns it at the end of the lease period.
Along the way, the leasing company issues monthly statements which itemise not only the repayments, but depending on the options, can also include fuel purchases, servicing, maintenance and even car washes.
Major leasing companies have the backing of large financial institutions to offer attractive incentives when it comes to contract hire. This form of leasing removes the financial risk to your business, improves your company’s cashflow, reduces the dependence on internal resources needed to run a fleet and provides the benefit of off balance sheet funding.
Keeping your fleet off the balance sheet reduces your company’s assets and tips the asset/profit ratio further in your favour. This makes your profit a larger percentage of the total asset value of your company, making it more attractive to investors, shareholders and financial institutions.
At the end of a typical lease period, customers on contract hire can either hand the vehicle back and replace it with a new one, extend the contract, or get a quote on the purchase price and buy it as a private sale.
Contract purchase
The other major type of lease is contract purchase which is similar to contract hire but keeps all expenses on the balance sheet – which is useful, for example, for those who are not able to fully reclaim VAT – and shows the fleet as a company asset.
After the final monthly invoice, the hirer pays a lump sum – usually the predicted residual value of the car to secure ownership, whereas contract hire customers return the car to the lease company without making a final balloon payment.
The major benefit of contract purchase is the ability to either hang on to the car at the end of the period or sell it privately, where you may get a better price than the residual value.
Residual value
The residual value is the estimate a leasing company believes a car will be worth at the end of its lease period. This is determined at the start of the lease agreement and can have obvious benefits for contract purchase customers, if the car sells for more than its estimated value.
Under contract hire, if the residual value at the end of the contract is worth less than the agreed estimate, the lease company is responsible for the loss, while the onus is on the hirer to maintain the car in a condition which will allow it to reflect an accurate value at the end of its lease.
Mileage is a major factor when determining residual values and it’s worth keeping an eye on the mileometer if you want to avoid being hit with an excess mileage charge at the end of the lease. Likewise, if your car is covering fewer miles than the contracted estimate, don’t be afraid to go back and amend the contract as it could gain you a higher residual value over the life of the lease.
VAT
When it comes to Value Added Tax, contract hire is the preferred option for those who are in a position to fully reclaim the tax on their motor vehicles.
Amendments to the VAT laws in August 1995 state that businesses can recover the VAT on the purchase price if their cars are used wholly for business. Any private use would subject the car to losing a portion of its VAT rebate.
With contract hire, the car is owned by the leasing company, which can recover the full amount on your behalf as it has purchased the car wholly for business use, regardless of the customer’s intention. Likewise, contract hire customers can offset 100 per cent of their monthly repayments against Corporation Tax for vehicles costing up to £12,000 and a proportion of the tax for vehicles over that amount.
Fuel Monitoring
Everyone is looking for an edge when it comes to cutting costs and fuel is one of the largest motor vehicle expenses. Correct fuel management is crucial when it comes to running an efficient fleet.
Most large fleet leasing companies have their own multi-brand fuel cards which are used nationwide. Unlike conventional fuel cards, they have the advantage of not restricting users to using just one fuel company; instead it allows them to shop around for the best prices.
In addition, fleet cards keep a close eye on over-the-counter purchases at service stations with optional bars restricting purchases to just fuel, oil or car washes. These can then be billed directly to the fleet manager as a single invoice each month and provides a complete record of every driver purchase.
Monthly reports can also be tailored to include fuel consumption results in miles per gallon or pence per mile, while fleet managers can advise their drivers on where to get the cheapest fuel as well as noting excessive fuel consumption which can lead to even further savings.
Maintenance Contracts
Like fuel monitoring, optional maintenance contracts can also ease the administrative burden as it gives the opportunity for a lease company to cover the whole-of-life operations including purchase and delivery, full maintenance and in the case of contract hire, replacement of the fleet at your premises.
A full maintenance contract passes the responsibility for all maintenance and servicing over to the fleet leasing company and includes all costs due to reasonable wear and tear with options such as RAC cover, roadside assistance, 24-hour freephone and relief vehicle cover avail-able at extra cost.
Full maintenance covers all routine servicing as well as any unexpected costs from a puncture to major mechanical repairs, without upsetting the company’s cashflow, whereas a non-maintenance contract keeps the responsibility with the customer.
With a bit of research and advice from the professionals, contract hire can be your best asset unleashing cashflow, minimising tax and reducing your running costs before a vehicle has even turned a wheel. But best of all, given the options available, it can also take full responsibility leaving you with more time to run your business.
For further information about Custom Fleet and the services it offers, visit: website www.customfleet.co.uk or email
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or phone: 01228 511 107
(This article was originally published in Director of Finance 2004 edition) |
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