The cost of financing the vehicle is spread over the contract period, cashflow is improved as no large capital outlay (as with outright purchase) is required.
Cost Of Finance
Due to the fact that the leasing provider is not carrying the Residual Value risk, Finance Lease generally attracts a lower cost of financing premium than Contract Hire.
Monthly rentals are typically fixed for the duration of the contract, however a balancing charge or credit is made at the end of the lease when the actual sale of the vehicle has taken place. This end of lease adjustment will mean that budgeting is less predictable than contract hire for you.
Greater flexibility re period of ownership - no contractual restrictions re period of time / mileage for which the vehicle can be used.
VAT Recovery - Up to 50% of the input VAT on the finance charge and 100% of the input VAT on any associated services or maintenance costs can be recovered. For vehicles that are used solely for business purposes with no private use whatsoever then up to 100% of the input VAT on the finance charge is recoverable. For vans 100% of the input VAT can be recovered on both the finance charge and services / maintenance charges and this will not vary by financing method. The actual VAT recovery position will also be dependant on the VAT status of your organisation.
Leasing cars can offer a method of car provision that is more cost effective than direct purchase arrangements. No input VAT is recoverable on cars purchased outright or via a form of purchase lease/ hire arrangement where the organisation takes ownership or has an option to take ownership of the car.
Residual Value Risk
Residual Value Risk - Risk and reward associated with the value of the vehicle at the end of the contract is retained by you, note you are not protected from any adverse movements in the used vehicle market.
Tax Deductible Expense
If your organisation is in a tax paying position you are allowed to deduct finance rentals against profits in order to gain corporation tax relief.Under the corporation tax rules introduced in April 2013, you can deduct the full cost of finance rentals from taxable profits if the car emits 130g/km of CO2 or less; or 85% of the finance rental on vehicles with higher CO2 emissions. For all vehicle acquisition methods vehicle ancillary services and maintenance expenditures are fully allowable for corporation tax relief.
Vehicle Management and Administration
These are not typically included in the finance lease rental but can be added as additional services to give you the peace of mind that all services are covered.
Early Termination Costs
Not applicable with finance lease agreements, however as under these contracts the risk and reward is retained by the lessee, any changes to the original forecast contract duration will be reflected in the balancing rental charge between the written down value of the vehicle and the sale proceeds.
Excess Mileage and Damage Charges
Not applicable with finance lease agreements, however as under these contracts the risk and reward is retained by the lessee, the actual sale proceeds will reflect changes to the original budgeted mileage and if the actual condition of the vehicle is below market standard. Therefore the balancing rental charge between the written down value of the vehicle and the sale proceeds will be impacted.
Option To Own The Vehicle
No option to take ownership, however the lease can be extended indefinitely, which dependent on whether you have a balloon at the end of the lease or not will affect the payments you will need to make. Extending the lease could give rise to a continuation of the same rental or a lower secondary rental.