Once you have decided which car (or other vehicle type) to acquire and whether to own the vehicle within the company or personally, the next consideration relates to how to finance this transaction.
The main factors of relevance should be taxation (corporation tax and VAT), cashflow, control and the accounting affect. Within business, conventional wisdom is that the term of the finance should match the life of the asset. However, business owners often wish to factor in other issues:
Contract Hire (Operating Lease and Rental)
Under this method the car is never owned. The leasing company owns and manages the running of the car, paying all running expenses except fuel. The lease contract will run for a fixed period, after which the car is simply returned or the lease extended.
The cost of contract hire is treated as a deduction in the profit and loss account. This is used as the starting point for the tax computations. Adjustment may be necessary for the statutory restriction where the CO2 emissions of the vehicle exceed 160g/km. This amounts to a disallowance of 15% of the hire costs. It should be noted that VAT scale charges apply where fuel is provided by the business but is available for both business and private use. Input VAT can be reclaimed on 50% of the hire element of the monthly instalments. Recovery of input VAT on fuel is restricted by scale charges where there is both business and private use of the vehicle.
Advantages: Ability to reclaim 1/2 of VAT, easy (low maintenance) and convenient if you regularly want a new car.
Disadvantages: Can work out expensive.
Finance Lease Purchase
Like contract hire above, under a finance lease, ownership of the asset remains with the lease company. Ongoing rentals are paid over the fixed primary lease term. All operating responsibilities and costs rest with the company. At the end of the primary term, the company will usually have the option to purchase the car, return it to the lease company or extend the lease to a secondary period.
The tax treatment is broadly the same as contract hire, with the total cost of the lease spread over the expected term of the agreement. This is by way of capitalising the asset and allowing the notional depreciation and finance charges as tax deductions. The same CO2 disallowance considerations apply as for contract hire. Once again, half of the monthly input VAT cost can be reclaimed.
Advantages: Readily understood and available through main dealers.
Disadvantages: Lease liability (and asset) shown on balance sheet.
This is the simplest and most common acquisition method, whereby spare cash resources are used to make an upfront purchase of the vehicle. All running responsibilities and costs rest with the company.
Normal running costs pass through the profit and loss account and are allowed for tax. Recovery of input VAT on the cost of the car is not permitted unless the car is used for 100% business use. Capital allowances are available based upon the cost of the car. The cost of the car does not qualify for the Annual Investment Allowance. A writing down allowance (restricted to £3,000 where the car cost over £12,000) of 20% (where CO2 emissions are less than 160g/km) or 10% (where emissions exceed 160g/km) is given each year, on a reducing balance basis. No balancing allowance is available on disposal. Low emission cars (below 110g/km) qualify for 100% first year allowance.
Advantages: Simple and popular, with maximum control.
Disadvantages: Responsible for all ownership, running and sale issues. Large upfront cash outflow.
This form of purchase spreads the cashflow affects of the transaction over the life of the asset. Ownership passes when the final instalment has been paid.
The tax treatment is as per the aforementioned Cash Purchase.
Advantages: Most common/understood form of borrowing for vehicle purchase.
Disadvantages: Risk of repossession if company defaults on payment plan.
Purchase on Bank Loan or Other Borrowings
This method is the same as Hire Purchase above, other than that the vehicle ownership rests with the company immediately. The tax treatment is as per the aforementioned Cash Purchase.
Advantages: Probably cheaper than aforementioned finance types.
Disadvantages: May have already fully used credit limit from company bankers.
Purchase on Overdraft
This financing option is the same as Cash Purchase above, other than that unstructured bank overdraft funds are used for the purchase. The tax treatment is as per the aforementioned Cash Purchase.
Advantages: Debt can be cleared as quickly as business cashflow permits.
Disadvantages: May never repay debt if cashflow management is undisciplined.
For purchasing of cars within a sole trader or partnership, although most of the aforementioned will be relevant, it is noted that some of the tax rules will be different. Similarly, not all of the above tax factors will be correct if the vehicle is a van or classic car