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:

Contract Hire - Suitable for most businesses, almost half of the UK fleet market uses this option....

Personal Contract Hire - 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 - 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

Personal Lease Purchase/ Hire Purchase - This type of agreement is available to private individuals....

Finance Lease - 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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Car Leasing & Contract Hire prices for business are quoted net of VAT. Personal Car Leasing & Personal Contract Hire prices are inclusive of VAT. Lease rentals shown are based on 10,000 miles per annum, with an initital payment of 3 monthly rentals, without maintenance, inclusive of GVED (Road Tax) throughout the contract. Pictures shown may differ slightly from offer models. Please make sure you check all quotations carefully and ensure you have clearly written terms before entering into any vehicle contract. Our staff will always give you impartial advice.

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