Outright purchase is you buying the vehicle yourself using your funds or securing other forms of finance to purchase the vehicle on day one.
Questions you may have :
- Is it always best to purchase if I have the funds available?
- Is taking residual risk on a vehicle an opportunity or a risk?
- Does it help my balance sheet?
How does it work?
As its name suggest this is a vehicle acquisition method whereby your company purchases a vehicle outright. The vehicle may be purchased out of available cash reserves or from your company funds or funds borrowed independently.
Vehicles are accounted for as a fixed asset and sit on your balance sheet. As the vehicle is owned there are no restrictions with regards usage period. Arrangements will need to be put in place to sell the vehicle at the end of its useful life.
All risks and rewards for the vehicle lie with owner and the actual condition of the vehicle and mileage at sale date will directly impact its sales value. Companies that choose to purchase vehicles outright often engage the services of a specialist fleet provider to assist with the vehicle purchase, disposal and in-life services.
THe full value of the vehicle is financed day one by using available internal cash reserves or via third party finance provisions.
Cost Of Finance
Cost of Finance - If you have internal funds available to purchase vehicles outright and your internal rate of return is lower than finance rates charged by a third party finance company it may prove cost effective to purchase vehicles, however tax and VAT considerations will also need to be taken into account to ensure your acquision method is optimal.
Budgeting is focused on your initial cash outlay to purchase the vehicle, this gives certainty re the capital outlay for your vehicle but requires large amounts of internal finance. As residual value risk is retained by you , this form of financing offers less certainty then contract hire.
Full flexibility re period of ownership - no contractual restrictions re period of time / mileage for which the vehicle can be used.
VAT Recovery - If your cars are used for any element of private use however small that may be NO Input VAT will be recoverable on the purchase price. Where the vehicle is used solely for business purposes with no private use whatsoever then up to 100% of the input VAT on the purchase price is recoverable. For vans 100% of the input VAT can be recovered on the purchase price. For all vehicles 100% of the input VAT relating to ancillary services / maintenance charges will be recoverable as this does not vary by acquisition method . The actual VAT recovery position will also be dependant on the VAT status of your organisation.
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, as a result you are not protected from any adverse movements in the used vehicle market.
Tax Deductible Expense
Corporation Tax - Capital Allowances claimed by you.
Vehicle Management and Administration
Vehicle Management and Administration - it is typical that the management and administration ( in full or part) associated with this acquisition method is provided by a specialist Fleet management company, allowing you to free up internal resources to focus on core business activities.
Early Termination Costs
Early Termination Costs - These will be equal to the actual costs incurred by disposing of the vehicle prior to its originally anticipated holding period. If the vehicle was acquired via a 3rd party loan some additional costs may be incurred to settle the loan early.
Excess Mileage and Damage Charges
Excess Mileage and damage - These will be equal to the actual costs incurred via an adjustment to sales proceeds.
Option To Own The Vehicle
Title and ownership is yours from day one