Finance Lease

Very similar to an operating lease except that the disposal of the car at the end of the contract is the responsibility of the customer with any loss or profit  in relation to the final payment or residual value also being the customer’s responsibility.

Monthly payments are subject to VAT. If the vehicle is used for 100% business use then 100% of the VAT is reclaimable however if the car is subject to any personal use , this may just be travel to and from work, only 50% of the VAT is reclaimable  - this being the norm the balance of the VAT being accepted as a business expense within the profit and loss account.

Taxation Law Changed For Cars Leased After 1st April 2009  

Cars being leased after 1st April are treated in one of two ways;

  • Cars with a CO2 emissions of 160g/km or less face no lease rental restriction, meaning that the cost of the lease is fully deductable against taxable corporate profits.
  • Cars with a CO2 emissions of 161g/km or more face a 15% lease rental restriction, meaning that they can only deduct 85% of any rental payments against taxable profits.  If there is a chain of leases, this disallowance will apply only to the rental payments made by one lessee in a chain of leases. 

For cars leased prior to 1st April the restrictions on how much of the rental cost may be claimable against tax relates to the value or cost of the car with cars costing more than £12,000 being subject to a calculation called the “half the excess rule”, this prevents the whole rental being deductable.  An example being a £24,000 car where 0.25 of the rental would not be allowable, if the payments were £400 a month only £300 would be allowable.

Advantages

  • Tax efficient and probably the most economical way of running a company car
  • VAT advantage if registered
  • More flexibility with mileages if required
  • Maintenance can be included if required
  • Provides for simple monthly budgeting
  • No surprise end of contract costs

Disadvantages

Disposal of vehicle the responsibility of the customer with any potential loss being their responsibility if sale proceeds do not match balloon payment.

Good for

VAT registered companies needing some flexibility on contract mileages who have the time and ability to dispose of the vehicle at the end of contract, either through private sale, auction or part exchange