Business Car Leasing Explained

Business car leasing or business contract hire (also known as BCH) is a useful way for a business to get access to a car without legally owning it. This type of car finance lets you lease a car for your business for a particular number of months (according to the agreement) and eventually return it to the finance company at the end of the contract.

So, how does a business contract hire work? Here is our ultimate guide with everything you have ever wondered about leasing a car for a business.

What is business car leasing?

Business car leasing or BCH is essentially the business version of personal contract hire (also known as PCH).

The company has sole use of the car for the duration of their contract but will always have to keep in mind that the car is the property of the leasing company.

BCH deals are useful because they reduce the financial risks that come with owning a car (like depreciation costs, maintenance and servicing). BCH also gives access to the latest, high spec car models at the start of their lifespan for only a small extra cost on the monthly rentals, when compared against to lower trim levels.

Cars have an unfortunate downside of losing their value. In its first year, a car can lose around 25% - 30% of its overall value. If you intend to sell the car in the future, this depreciation can reflect a great loss, whereas with a business lease this risk is taken out of the business hands.

There are obviously limits to who can take out a business contract hire agreement as it is not like finance companies hand out car leasing agreements like sweets. You will need to be running a business of some kind and registered as either a limited, public limited company, partnership, sole trader or charity to benefit from this type of car finance.

When applying for BCH, you will have to be able to provide proof by the means of several different documents, like bank statements, proof of address and ID for the main director(s).

Business car leasing is growing massively (as an industry) and The British Vehicle Renting & Leasing Association (BVRLA) for instance, recently reported that the leasing market in the UK has grown to a huge 1,350,000 customers – an average annual increase of 7.6%.

Financial expert Martin Lewis, who runs the ever-helpful Money Saving Expert website, has a good article exploring the car leasing, which is worth checking out if you want to learn more.

How does business car leasing work?

At CVC we like clarity, so we break down how business car leasing works using a straightforward example:

John runs a musical instruments store and wants to lease the latest BMW 5 series to use as a company car for his visits to suppliers and stockists around the country. He finds an affordable deal on an online car leasing comparison tool and then reaches out to the broker.

The broker agrees a rental plan with John based on a three year contract. He also stipulates the initial rental and the annual mileage allowance. The broker asks John to go through some identity checks to prove he is a genuine business owner and that he is actually the person he is purporting to be. He has to undergo a credit check too so the broker can rest assured that John's business will be able to keep up with the rentals.

Once these checks are all complete and John is given the approval, the broker orders the vehicle and on  delivery to John, he enters the payment plan stage.

These payments go towards paying off the depreciation costs of the car. The initial rental is subtracted from the guaranteed minimum future value of the car, and the remainder is divided evenly amongst the number of months in the contract. John’s road tax, and optional maintenance package is included in the costs too (for extra peace of mind).

For now and during the contrat agreement, John and the company use the car as their own but they won’t ever become the registered keeper or owner. If John’s company doesn’t keep up to date on the monthly rentals, he risks having the car repossessed and the company's credit rating tarnished. Read more about credit score in our blog.

Fast forward three years and John receives a reminder from the broker than his contract is drawing to a close, where he arranges to return the car. He has not exceeded his annual mileage allowance or damaged the vehicle beyond the confines of the fair wear and tear guidelines, so he will not be requested to pay out any extra costs. He is free to look for a new car lease, and to keep his custom, the broker might throw in a good offer for him.

Claiming back the cost of BCH with tax

One of the big advantages of business car leasing is that you can claim back certain elements of tax.

The cost of the monthly rentals can be claimed back as a business expense, along with the road tax (that my need to be paid by the company from the year two onwards) and fuel, but the full claimable amount will depend on CO2 emissions of the car.

If the emissions of your car are higher than 130g/km, you will only be able to claim around 80% of the total back. On the other hand if emissions are lower you will be able to claim back the full amount.

Similarly if the car is used solely for business purposes, you should be able to claim back 100% of the VAT against the finance rental, but if it gets used in a personal capacity – even for just the odd trip or errand – expect to only be able to claim 50% of the VAT back for this element.

It is also worth bearing in mind that you will be able to claim 100% of the VAT back due against any maintenance package added onto your lease agreement.

What are the benefits of leasing a business car?

Why are so many people signing up for a business car lease? The simple answer is that there are just so many benefits:

• Fixed monthly payments - leasing offers fixed motoring costs, which improves cash flow and offers peace of mind for the business owner
• Minimal capital expenditure - with low initial and monthly rentals, leasing offers minimal capital expenditure for businesses looking to drive new vehicles and expand their growth
• No depreciation risk - most cars lose between 50-60% of their value during the first three years, however, by leasing the risk is taken on by the funder
• Brand new cars - when leasing you get a factory fresh model and as most leases only last a few years, you can drive a new car regularly, benefiting from an ever improving standard spec and safety
• VAT recoverable - 100% of VAT is recoverable if the vehicle is solely for business use, or 50% if the car has some private usage too
• Full warranty - all vehicles come with a full manufacturers' warranty and will normally cover the full period of your lease, for extra peace of mind

What are the drawbacks of business car leasing?

As much as we would like to say that business car leasing is all rainbows and lollipops, there are a few points that might put off some people:

• Modification - the vehicle can be modified for particular business purposes but only to certain extent, only minimal things that can be reverted to the original state
• You cannot sell the car - your business will never actually own the car, so you will not be able to sell it on for profit
• Cancelling fees - cancelling your contract early will often result in a large fee
• Mileage limits - you will have to pay extra mileage charges if you exceed the agreed mileage in your contract
• Liability for any damage - you need to return the car in the expected condition stipulated at the start of the agreement or you will have to spend extra on repairs

Is business car leasing suitable for my business?

Deciding if a business car lease is right for your business will obviously depend on your unique circumstances and what you need in a car.

If your business needs a fleet of vehicles, business car leasing can be very useful. You can potentially get your hands on £100,000s worth of cars in an instant for low monthly rentals. If you only need one car and you really want to sell it on down the line, leasing probably is not the best option for you.

We recommend going through the above list of benefits and checking if anything stands out as being a 'must-have' feature. If you find more than one, probably leasing is the right route for you to take.

Where can I sign up?

Thanks to the Internet, taking a business car lease is now easier than ever before.

If you are well organised and have in mind exactly the car and lease options that you want, you can contact individual brokers and get quotes to compare. Most other people will probably rely on the good, old-fashioned car leasing comparison websites.

If you are looking for getting a business car leasing quote check out our website. With millions of deals updated regularly, Commercial Vehicle Contracts has a revolutionising way to help you lease a car.