Structured Contract Purchase
So what is the difference between contract purchase and structured contract purchase? You may have internal funds available and so may prefer to increase the initial rental payable, this is where structured contract purchase can accelerate repayment of the lease, reducing the use of external third party financing.
Questions you may ask:
How does it work?
These vehicles are shown ‘on balance sheet’ since the risk and reward of ownership lies with you and your company. It is usual for capital to be repaid over the period down to the anticipated residual value of the vehicle, with this value being payable at the end of the contract.
Agreements can be structured whereby the leasing provider sells the car as agent for you, with the sales proceeds being used to meet the final payment obligation. Alternatively the leasing provider may guarantee to purchase the vehicle from yourself for a predetermined value, usually equal to the final payment with the two items being set against each other. In this case your company may be able to show the assets ‘off balance sheet’ as the risks and reward of ownership are passed to the lease company.
The cost of financing the vehicle is spread over the contract period, however with Structured Contract Purchase a greater initial rental is paid making the cashflow profile a point between a normal monthly contract purchase rental cashflow and that of a vehicle purchased outright. Ideal for companies with internal funds available.
Cost Of Finance
Cost of finance - Improved as you are financing a lower value through external funders, as a result of using internal funds to finance a greater initial rental.
Budgeting - Monthly rentals are fixed for the duration of the contract, helping to manage costs over a long period, however a larger initial rental payment is made to reduce 3rd party financing costs. If ownership is taken at the end of the contract then a balancing charge or credit may be made if the vehicle sales value does not equal the balloon charge.
Setting a fixed duration and mileage at the start of a long rental period can be difficult. Typically Contract Purchase arrangements will allow you to re-evaluate your contracted mileage and / or duration to align more accurately to the parameters your business requires, contract terms can then be adjusted accordingly. This will result in an amended rental charge to take account of your revised contract terms. The ability to rewrite the contract and the methodology used will be dependent on the lessor.
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. No input VAT is chargeable on the finance rental. 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 period of ownership is retained by yourself, your company is not protected from any adverse movements in the used vehicle market. However in certain circumstances a Contract Purchase agreement can be structured in a way that all vehicles are are sold back to the leasing company at a pre determined balloon value (Residual Value) thus transferring the residual value risk back to the leasing company.
Tax Deductible Expense
Corporation Tax - Capital Allowances claimed by you
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 / finance company, allowing you to free up internal resources to focus core business activities
Early Termination Costs
Early Termination Costs - there are varying formats for calculating charges in the event that a vehicle is returned prior to the agreed contract end date. In a simple form early termination charges may be expressed as a percentage of outstanding rentals (Typically 40 or 50%). In some circumstances these costs may reflect the actual market adjustment required to cover costs associated with the early return of the vehicle and may include additional costs levied by the lessor to recover their fixed service costs.
Excess Mileage and Damage Charges
Excess Mileage and Damage charges - when a fixed monthly rental is calculated upfront the services charged for and depreciation recovered in the finance rental is based on the contracted mileage and assumed return condition at the end of the contract. If your return mileage is greater than the contracted mileage or the return condition is below the industry standard for a vehicle of similar age and mileage than additional charges will be levied to compensate the financing company. (these charges should reflect market conditions and therefore would be in line with other acquisition methods, however depending on the finance company may include some form of incremental administrational charge or penalty)
Option To Own The Vehicle
Payment of the final balloon charge at the end of the contract would transfer full ownership, however agreements can be structured whereby the leasing provider sells the car as agent for you, with the sales proceeds being used to meet the final payment obligation. Alternatively the leasing provider may guarantee to purchase the vehicle from yourself for a predetermined value, usually equal to the final payment with the two items being set against each other.
Off Customer Balance Sheet*
Transfers Risk and Reward to Lessor
Utilises 3rd Party Funding
VAT Recovery on Capital - Car 50% (unless exclusive business use), Van 100%
Full VAT Recovery on vehicle services
Capital Allowance Claimed by Customer
Lease Rental Restriction applies
Creates Employee Company Car Benefit in Kind (BIK)