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Finance Lease

We are often asked about the issue of "vehicle title" at the end of a Finance Lease...here's how it works: 

All finance methods fall within two categories: Owning (On Balance Sheet) or Hiring (Off Balance Sheet), Finance Lease is an OWNING method.

Finance Lease looks and feels like Hire Purchase.  The agreement is structured so that you pay off the whole value of the asset.  If you lease a vehicle worth £10,000, you will pay the whole £10,000 plus interest during the lease.

Finance Lease is ideal for customers who want to have all the benefits normally associated with owning a vehicle whilst maximising tax efficiencies and minimising the initial outlay (ie. Low deposit). Importantly, you should note that for tax purposes finance lease is still classed as a hire agreement, which means that you get 100% tax relief on your payments to offset against your taxable profits.

With Finance Lease, you pay VAT monthly and claim it back during your normal VAT cycle.

You simply have to agree a monthly payment and contract period, which can include an acceptable final payment, often called a “Balloon” or “Terminal Rental”  Payments are made monthly by Direct Debit throughout the contract term. You can terminate the agreement early, although there are of course early settlement charges (as with any funding method) but they are not as harsh as they tend to be on contract hire.

Finance Lease is very flexible, and at the end of the contract you have several options:

You can sell the vehicle to a third party, and use the sale proceeds to make the final balloon payment, if one has been included.  Any sale proceeds over and above the balloon are profit, which is shown on your books, therefore taxable.  This profit/loss potential is the reason why a Finance Lease is ON the Balance Sheet.  Beware, if the vehicle sale price is less than the balloon, this is your liability and you must make up the difference.

Most of our customers, however, choose to part exchange or sell the vehicle, and replace it with a new one.  The leasing company will typically retain 2% of your sale proceeds; like a documentation fee (but less expensive). This allows you to use your sales proceeds, less any balloon (if applicable) as your deposit on the new vehicle.  Alternatively, you can use the cash for any other purpose.  It is, after all, yours.

Alternatively you can keep the vehicle for as long as you want as long as you pay an annual nominal sum called a peppercorn rental to the leasing company. Even this payment is 100% allowable against taxable profit.

In brief, you can do ANYTHING you like with it at the end EXCEPT treat is as an asset for tax purposes (as you would then be attempting to further offset the vehicles' depreciation against taxable profits......you will have already offset 100%, you can't offset any more than 100%).

Glen Newman

 

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