4. Finance Lease

Available to business users, normally only on new cars*. Leasing is popular with VAT registered businesses since it uses VAT legislation to its advantage. On new vehicles and certain used vehicles there is a VAT proportion.
With leasing the vehicle effectively gets sold to the finance company who then 'rent' it back to you the customer.
Legislation says that since the finance companies involvement is 100% for commercial reasons they can recover the VAT when they buy the vehicle. This means that 17.5% less needs funding - with obvious benefits to interest and repayment charges. The 'rentals' you pay do attract VAT though of which normally 50% ** can be reclaimed. The essential point to remember is that this is a non ownership product so you are not buying the vehicle but renting it allthough you carry the risk of the vehicles future residual value.

There are 2 types of Finance Lease, 'Full Payout Lease' and 'Balloon Lease'.

Full payout Lease

With a full payout lease you place a deposit of your choice (as low as 1 payment in advance) and then pay monthly rentals over an agreed term (up to 5 years), there is no final payment.
At the end of the term you can act as an 'agent' for the finance company and sell the vehicle to a third party, if you do this you typically get 95 % of the proceeds of the sale. You are not supposed to sell the vehicle to yourself due to the VAT advantage gained initially as a result of this being a rental product !
Alternatively, you may continue to use the car and enter into a secondary rental period. This is sometimes reffered to as a 'peppercorn' rental as it is so small, often 1% of the original purchase price or less.

Example :

Balloon Lease

This enables you to reduce the monthly rentals significantly by agreeing a large final payment or 'balloon', normally up to 45% of the vehicles original cost. At the end of the term it is anticipated that the sale proceeds will pay for this, if the proceeds are greater than the balloon 95% of this 'profit' will be yours.

Example :

Benefits

• Extremely VAT efficient since the finance company reclaims the VAT on the car purchase passing this benefit onto you
• The monthly rental can be offset to tax ***
• Low capital outlay allows funds to be kept in the business
• Possible to achieve very low monthly rentals with a balloon
• It may make sense to fund the money this way regardless of your need to 'borrow'

Whats the Tax situation for businesses?

• ***100 % of the monthly rentals are allowable against tax for vehicles up to £12000, then 50% thereafter - under the 'half the excess rule'
• **Normally 50% of the VAT on rentals is reclaimable, if the vehicle is used solely for business up to 100% is reclaimable
• Whilst a finance lease is non-ownership like an operating lease(contract hire), there is a peculiarity in that the vehicle does appear on the balance sheet- unlike contract hire, however the vehicle is not written down.

*NB. Leasing is normally only available on new cars due to their VAT status. However some used cars remain VAT qualifying or 'Q cars' because they themselves have only been used for business purposes, typically ex-lease cars or sometimes demonstrators.