We all know that the moment you drive your brand-spanking new car off the car dealer forecourt, it loses value. According to the RMI, a new car drops in value anything between 15-30 per cent when you hit the road.
So, given that you’ve jumped through all the hoops of setting up your limited business, wouldn’t it make more sense to lease your motor car?
Leasing versus buying a company car is a vexed question for small business owners.
Most of us are pretty familiar with buying a new car outright, but leasing is still unfamiliar territory to some, despite its growth in Britain.
What is leasing?
Many businesses choose to lease equipment, vehicles and tools for their business, as it can be a more cost-effective alternative to buying outright, especially when you are starting up.
With leasing, you make fixed monthly payments. At the end of the lease period, you won’t own the vehicle but may have the opportunity to extend the lease agreement or start a new one.
Or you can swap your car after an average of three years for a brand-new one.
Leasing is popular among businesses of all sizes who rely on vehicles, whether that’s a single van or an entire fleet. For example, a start-up delivery company needing several vans may not have the capital to purchase the vehicles outright.
According to industry association the BVRLA, leasing accounts for one in ten cars, trucks and vans on Britain’s roads. Between January and August 2023, over 213,000 new commercial vehicles were registered, a 19.4% year-on-year increase compared to the same period in 2022 (MarkLines, 2023).
Leasing a vehicle might be better if you have limited cash or if you want to change your car every few years.
Leasing also lets you spread the payments over a longer period of time. It reduces your initial costs and helps your cash flow. And lease payments are usually classed as a business expense for tax purposes, reducing the net cost of your lease.
However, the car will end up costing you more than if you had bought it outright.
And you don’t end up owning it, so there is no resale value for you.
When you own a car, you can depreciate its usable value over its lifetime. This depreciation may be charged against your tax by claiming capital allowances.
However, if you borrow to buy your car, this can tie up lines of credit.
Whether you’re looking to lease or buy, work out the total cost for both options and how long you want to have the car.
Which is better – leasing or buying?
Advantages of leasing
- For a relatively low initial payment, followed by regular monthly payments, you get all of the benefits of running a brand-new vehicle. This includes full manufacturer’s warranty cover, which typically lasts for two to five years.
- For tax purposes, leasing can be an attractive option because many businesses are able to claim back part, or all, of the VAT. Exact figures depend on the VAT scheme that your company falls under but as a general rule companies can claim back 50 per cent of the VAT if a car is used for mixed private/business use and up to 100 per cent on a van. Also, worth considering is the Lease Rental Restriction. If you lease a low-emission car such as a Toyota Prius or a Nissan Leaf, you can claim 100 per cent of the finance element of the lease rental cost against your annual taxable profits. If your car emits over this amount, then you can only claim 85 per cent.
- Leasing agreements can have servicing and maintenance added to the monthly package. This allows you to better predict the cost of motoring and avoid the nasty surprise of unexpected repair bills.
- Most lease agreements now offer a degree of flexibility at the end of the lease, allowing you to choose between purchasing the vehicle outright, refinancing or simply handing the vehicle back.
Disadvantages of leasing
- You don’t own the vehicle and therefore it cannot be taken to cover any debts if the business has financial difficulties.
- Annual mileage is one of the main factors that determines cost of leasing a new vehicle – the more miles you do, the more expensive the monthly payment will be. If you do more than 30,000 miles per annum it may not be possible to lease a vehicle from certain providers.
- When purchasing a vehicle outright you only have one upfront payment to make (albeit for a large amount). With vehicle leasing you are committing to paying hundreds of pounds each month for the duration of the lease.
Related: Car leasing – what is fair wear and tear?
Advantages of buying
- You have a better chance of negotiating the list price down than you do with leasing.
- Because a vehicle is an asset, it can be taken to pay an outstanding debt.
- You own the asset and can decide to sell or trade it in any time. You are not tied into running the vehicle for a specific period as you are with leasing.
- There are no mileage restrictions when you own the vehicle.
Disadvantages of buying
- Depreciation begins as soon as a vehicle leaves the forecourt. According to the AA, a new car will have lost around 40 per cent of its value by the end of the first year alone. Half its value may be lost within the first three years.
- You need to have a large amount of capital available to purchase a vehicle outright, which you are then tying up in a depreciating asset.
Money
| Leasing | Buying |
|---|---|
| Fixed monthly payments. | No monthly payment. |
| Low upfront cost, freeing up money for elsewhere in business. | Large upfront cost, with money tied up in vehicle. If borrowing, monthly payments on a bank loan are normally higher than leasing. |
| Leasing companies buy thousands of vehicles each year, which means they have buying power. This can mean better value for money. | |
| Claim back 50% of VAT if car is used for both business and pleasure. And 100% if used solely for business. | Purchase price can be written off. |
| You keep the cash from any sale. |
Risks
| Leasing | Buying |
|---|---|
| The depreciating value of the car is the leasing company’s problem, not yours. | Vehicles lose value quickly. |
| Maintenance cover can be included in leasing payments, to cover servicing and unexpected repairs, helping cash flow when it comes to unexpected bills. | Maintenance costs increase as a vehicle ages. |
| Penalty fees if you want to exit lease early. | Freedom to sell the car when you want. |
Afterwards
| Leasing | Buying |
|---|---|
| At the end of the contract, you hand the vehicle back and the leasing company sells the car on. | Finding a buyer and negotiating the second-hand price is your responsibility. |
| You can be penalised if you exceed pre-agreed mileage allowance. | No rules about how many miles you can do, or the condition of vehicle. |
Is it better to lease a car through my company or personally?
Okay, let’s assume that you’ve decided to go down the leasing route. You still need to decide whether to lease your car through your limited company or personally. There were 1.8 million personally leased cars on UK roads in 2018, according to BVRLA.
Benefits of leasing through your business
- There tend to be better lease deals for business users
- You still have to pay company car tax, but it’s often cheaper than personal car tax
- If you use vans or pickups, you pay a fixed car-tax rate.
- Avoid paying VAT on leasing payments (if VAT registered).
Benefits of leasing your car personally
- You get a brand-new car every couple of years.
- Vehicle Excise Duty (road tax) usually included.
- You don’t have to pay company car tax.
