Lease Purchase/Hire Purchase
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About Lease Purchase/Hire Purchase
If you wish to keep vehicles as a
business asset and discount the cost over a longer period
of time, this can be a good option. Vehicles purchased
by this method appear as an asset on the Balance Sheet
of your accounts and not directly in the Profit and Loss
Account (as with Contract Hire for example). Because
the value and utility of the vehicle depreciates over
time, the Inland Revenue allow a percentage of the cost
of any capital equipment necessary to operate the business
to be 'written down' by an annual percentage (the capital
allowance) in order that equipment will be replaced and
the productivity of the business maintained. So for example,
if a vehicle costs £15,000 and the capital allowance
is 25% per annum (subject to a maximum claim of £3000
per annum on cars costing £12,000 or over), then
after one year the vehicle will stand on the balance
sheet at £12,000 (Written down value - £3000
limit included). In the next year it will be written
down by 25% of £12,000 to £9,000 (Written
down value - write down matches £3000 limit). In
the third year the full allowance is achieved without
the £3000 limitation and the Written down value
will be £6,750. In this example, assuming no private
use of the vehicle, in the first and second years £3000
per annum would have been allowable against taxable profits
and in the third year, £2250. If there is some
private use of the vehicle, the percentage of the capital
allowance shown in the Profit and Loss accounts will
be a matter to be discussed with your accountant. These
amounts would appear in your Profit and Loss Accounts
in a similar way to other expenses, although shown separately.
They have the same proportional effect on the business's
tax liability as any other expense item. (For example,
for a sole trader with a standard rate of income tax
of 22%, the tax saving over 3 years would be £1815.)
The interest element of the repayments can also usually
be offset against taxable profit. The vehicle never actually
reaches zero value and the benefit to your accounts diminishes
over time. Nevertheless, if the maths are done carefully
in consultation with your accountant and then compared
with other options, this method can be of benefit in
certain circumstances. This can be a matter of fine judgement
where more consideration is given to the ongoing utility
of the vehicle, how many years service you feel it will
yield before it must be replaced and how far you regard
it as important to reflect the status of the business
with up to date models every three or four years. If
you judge that the vehicle can be utilised without increasingly
costly maintenance bills for say, eight to ten years
because of its track record (more often the case with
higher priced vehicles) and that mileage will be modest,
there are savings to be made in the longer run. Everyone
has heard of cars that have barely shown strain at 100,000
miles and which are a pleasure in themselves to own,
so why change them every three years?
After an initial deposit is paid, the balance of the
purchase price is repaid monthly, usually over a period
of one to four years. Ownership passes to the business
when all the payments have been made. It is often possible
to have a larger deposit or final payment in order
to lower monthly costs and sometimes fixed or variable
interest rates. In the same way as outright purchase,
the price you will pay for the vehicle will include
VAT which, in general terms, is not recoverable for
cars (there are some exceptions, for example, dual
control driving school vehicles). However, in the case
of vehicles deemed to be a van or light van and for
100% business use only, all the VAT is paid with the
deposit and is reclaimable in full in the current VAT
period (applies to VAT registered businesses only).
It is essential that you check with your accountant
what the current rulings are, as definitions of what
is and what is not a van or commercial vehicle can
be complex. This is where Contract Hire often seems
cheaper because in that case the finance company, as
the hirer, is able to recover all the VAT on the vehicle
and pass the saving on to the end user. The VAT payable
on Contract Hire is not on the vehicle but on the rental.
Also all the risks of ownership are born by the purchaser.
Personal Lease Purchase/ Hire Purchase
This type of agreement is available to private individuals
The same general terms apply as described in the section
on Lease Purchase/Hire Purchase but without any of
the implications for taxation and VAT.
Follow the links below to see explanations
of different vehicle contracts:
- Suitable for most businesses, almost half of
the UK fleet market uses this option....
- Personal Contract Hire is popular
with individuals and employers who want to substitute
a cash allowance for the traditional benefit of a company
car....
- Contract Purchase is mostly suitable
for businesses where reclaiming VAT is not required....
Lease Purchase/Hire Purchase - If you wish to keep vehicles
as a business asset
- This type of agreement
is available to private individuals....
- An alternative to Contract Hire where the
hirer has the option of paying back the capital cost
of the vehicle over a longer period....
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