Operating Lease

This is really just a long term rental with the car going back to the finance company at the end of the contract and the disposal of the vehicle being their responsibility,  you are responsible for insuring and maintaining the car unless this is built into the contract at an additional cost.

Contract Hire is one of the more commonly used terms when describing this type of lease and very often there will be some kind of additional service provided – be it just the supply of annual road fund licence.  Normal contracts vary between one and four years but virtually any period over 3 months is available.

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 with the balance of the VAT being accepted as a business expense within the profit and loss account.

There are also some restrictions on how much of the rental cost may be claimable against tax 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 a very clean and hassle free way of running a company car.
• VAT advantage if registered.
• Residual value risk with finance company.
• Maintenance can be included if required.
• Provides for simple budgeting with fixed cost motoring.

Disadvantages

• Early termination charges can be expensive.
• Monthly payments on the longer terms can be higher than finance lease with the finance companies being overly cautious with end values.
• Vehicle servicing must be kept up to date and end of contract charges can seem high if vehicle is returned without spare key, service books or registration document.
• Contracts carry a damage clause which penalises the customer if the vehicle is returned with damage not considered to be normal wear and tear.
• Excess mileage charges also apply and a contact can be expensive if circumstances change and a lower than expected mileage is covered. (if you pay for 10,000 miles per annum  and only cover 5,000 you still pay for 10,000)

Good for

VAT registered companies that want no hassle from disposal of used vehicles and can accurately anticipate the vehicles annual mileage.

Exceptions to the rule

On occasions Manufacturers will provide an addition discount for vehicles bought on operating leases this helps increase sales without the media identifying discounting of list prices.

In doing this the Manufacturer prevents obvious list price discounts from effecting used values and avoids any accusations of panic discounting.  Used car values or residual values are massively important to manufacturers as these not only dictate how competitive their products are on operating leases but also have a huge impact on “whole life costs”.

Whole life costs are used by major fleets to assist with their buying decisions, with many factors being taken into account included the initial cost, service and maintenance costs, fuel and depreciation.  High new car discounts increase used car depreciation so in order to increase new car sales volumes Manufacturers will hide discounts through reducing the cost of operating leases where the selling price of the car is not obvious to the customer. This is done by either discounting the car or inflating the residual value and hence lowering the monthly payment.

Best advice in these cases is to take advantage when you can.