Paying for your new car
There are a lot of different choices when it comes to actually funding your new car. For most private owners it will be a finance agreement, essentially a loan arranged through the dealer and repaid at a fixed monthly rate for a fixed term. Some people are fortunate enough to pay for their brand new car outright, but most people in this position would be advised not to for tax purposes.
But the fact is that more new cars are sold to businesses each year than to individual private owners. In fact, it would be more accurate to say that these cars are sold to leasing companies. Leasing is a far more attractive option for businesses, large and small. Purchasing company cars can be an expensive proposition, especially when considering the loss made through depreciation.
The fixed, regular cost of a leased car is far more cost effective for a business, especially if it covers maintenance costs as well. There are three principle options for leasing a car:
1. Business Contract Hire
The leasing company uses current data to calculate what the value of the car at the end of the leasing agreement. For a new car this would be based on the time frame the agreement is set for and the estimated mileage the car will travel. Please bear in mind that it is the customer’s job to estimate what the mileage travelled will be. The customer is then charged a monthly rental by the leasing company. This is to cover the costs of depreciation of the car over the period of the agreement. The charge will also include a funding charge to cover the expenses and profit for the leasing company. Many leasing agreement either include additional services (such as maintenance) as standard or these will be offered as options. Either way, these will increase the leasing charge, but they may still be far less than might pay should you have any issues with the car.
There is the absolutely no risk for the customer essentially just pays just for the use of the vehicle. This makes Business Contract Hire most popular with companies who are VAT registered.
Advantages of Business Contract Hire
- Minimal initial cost
- Predictable, steady costs.
- The customer holds no risk of depreciation of the car’s value or disposal at the end of the contract.
- Expenses in administration and management of the vehicle is dealt with by a third party, this is of greater benefit for companies who wish to lease multiple cars or even an entire fleet.
This saving can be extended to include all costs and admin costs of arranging maintenance for the vehicle. - Car rental is a more sensible option when it comes to tax. The costs of leasing the car can be offset against the taxable profit.
- The vehicle doesn’t constitute a taxable asset and remains off balance sheet
- VAT registered companies can claim back VAT on the finance and maintenance elements of the leasing cost. For cars used solely for business purposes all of the VAT can be claimed back. Cars which are used both for business and pleasure can claim back half of the VAT on the finance element all of the VAT on the maintenance element.
- The leasing company will generally cover the cost of the road fund licence as part of the agreement.
Disadvantages of Business Contract Hire
- It can be quite costly to end the contact early.
- Accurately estimating the annual mileage the car will cover can be very important. An excess mileage charge will be applied when the agreement ends. You may be able to adjust the mileage estimate during the contract, this is especially useful if you have incorrectly estimated it originally, or if the use of the vehicle changes.
2. Personal Contract Hire
A Personal Contract Hire (PCH) agreement is essentially an ongoing rental agreement. The customer pays a fixed monthly rental charge under the agreement which runs for a fixed contract term. Prior to the agreement you will be asked to define the estimated mileage travelled (either per month or per annum). When the contract comes to an end, the customer simply hands the car back to the leasing company.
Personal Contract Hire agreements are especially popular with drivers of company car who aren’t given an actual car, but instead are given an allowance. It gives the customer the choice of car and specific arrangements without the risk of ownership. This has the added upside of avoiding benefit-in-kind taxation.
Advantages of Personal Contract Hire
- Minimal initial outlay
- More cost efficient, especially in tax terms, than a personal finance or leasing agreements if the vehicle is to be used for business use at least some of the time.
- The contract will not be subject to a ‘balloon’ payment at the end of the agreement.
- Like with a Business Contract Hire agreement, the leasing company will generally cover the cost of the road fund licence as part of the agreement.
- Costs and arrangement of maintenance for the car can be included in the agreement as an option.
Disadvantages of Personal Contract Hire
- Early termination of the agreement can be very expensive.
- Correctly estimating the annual mileage the vehicle will travel is important. Excess mileage charges will be applied when the agreement reaches an end. Your mileage may be amended during the contract with some leasing companies. This is useful if you have estimated incorrectly originally or if your circumstances change before the contract ends.
3. Personal Contract Purchase
A Personal Contract Purchase (PCP) is essentially an HP agreement with a balloon. The difference lies in the options available to the customer at the end of the agreement. The customer has the choice of returning the vehicle to the leasing company or paying the balloon payment. Once the balloon payment is settled, the customer is legal owner of the vehicle and can choose to keep or sell it. This balloon payment will be based on the expected value of the car when the contract ends, calculated using the estimated mileage.
This is an ideal option if you like to have a new car on a regular basis. In the current unsettled market this option gives you a guaranteed value at the end of the agreement.
Advantages of Private Contract Purchase
- Minimal initial outlay.
- A Private Contract Purchase gives the customer options when the contract ends. Of either returning or purchasing the car.
- The contract can be ended at any time by the customer by paying of the settlement amount.
- Arranging maintenance for the vehicle is available as an option with the agreement.
Disadvantages of Private Contract Purchase
- Private Contract Purchase will not be as tax-effective as a Personal Contract Hire if it is for a car used for business.
- Like all leasing agreements it is important to correctly estimate your annual mileage. The mileage excess charged when the agreement end of the agreement. Some contracts will allow you to change the estimated mileage during he agreement.
