Business car leasing explained

What does business car leasing mean?

Business car leasing, (or Business Contract Hire - BCH), allows your business car access without the responsibilities of outright ownership. This type of car finance is a contract deal. It allows your VAT-registered business to pay agreed monthly fees to lease a car for a set period, before eventually returning it.

How does business car leasing work?

When you sign a business car leasing contract, you agree to pay the amount of money that the lease car is expected to depreciate by during the contract term. In order to arrange a lease, you will need to:

• Find a lease deal that fits your budget

• Contact the broker to discuss your requirements

• Provide relevant documentation and pass the credit checks

• Agree to the terms of your lease

• Make a down payment

• Commit to paying the monthly instalments outlined in the lease contract

How to get a business car lease

• You’ve decided that you need a company car, for example for visits to stockists, suppliers, and customers around the country.

• You check out some brokers and see some models which will perfectly fit the bill.

• The broker will fulfil some identity checks on both businesses and individuals, and complete a credit check too to ensure you can manage the repayments.

• Once these checks have been completed, you can negotiate your payment plan. How many years contract, the monthly cost, and how much initial rental will be decided on between you and the broker.

• Similarly, with a personal lease, you need to pay a down payment before the lease begins. The contract length varies from one to five years.

• You will be allowed an annual mileage limit too, which is usually higher than the figure set for personal leasing, as company cars often need to undertake plenty of motorway miles. The maximum is often 40,000 miles per year, but this can vary across different deals. If you go over your maximum mileage, the business will have to pay an excess mileage charge and any damage charges.

• Your monthly payments cover the depreciation costs of the car. The ‘initial rental’ deposit you paid is taken off the guaranteed minimum future value of the vehicle, and then the rest of the sum is divided equally over the number of contracted months.

• The payments will cover your insurance, road tax and a maintenance package too.

• A failure to keep up with payments can lead to car repossession and have repercussions for your credit rating.

• When you keep up your repayments, don't exceed recommended mileage and don’t damage the vehicle beyond the agreed limits of fair wear and tear, you won’t pay a penny more. When your contract draws to a close, you return the vehicle and are welcome to look for a new car lease.

Is business leasing cheaper than personal?

This depends on your personal circumstances. One of the draws for many when opting for Business Contract Hire is that you can claim back sums of tax. The monthly repayments can be claimed back as a business expense, as well as the sums you spend on road tax and fuel. The amount you can claim is dependent on the CO2 emissions levels the car produces. Higher than 130g/km and you’ll only be able to claim back 80% of the total, where cars with lower emissions enable you to claim back the full amount.

You will have to pay Company Car Tax if you opt for business leasing, but Personal Contract Hire can result in higher monthly repayments. However, the VAT on these payments can be claimed back if you’re a VAT registered business. If you use the car solely for business, you can claim back 100% of the VAT (this applies for the maintenance package you’ll add to your lease, too). If you use the vehicle more for personal journeys, you’ll only be allowed to claim back 50% of the VAT. If you’re not VAT registered, you can claim the cost of the lease against your company profits. If you don’t often use the car for business, you can also claim back business mileage.

Benefits of business leasing

• The car may be used by employees for personal as well as business use.

• Minimal one-off payment. Low monthly rentals and low initial rental outlay allow businesses to drive smart new vehicles without a massive capital outlay.

• No risk from depreciation. Most cars lose 50-60% of their value over the first three years, but this risk is taken on by the broker.

• Predictable monthly payments. BCH allows fixed-cost motoring, improving your business’ cash flow and offering peace of mind for business owners.

• Drive a new car. Leasing cars enable you to drive factory-fresh cars and refresh them usually every three years, so you benefit from upgrades in safety, tech and general spec.

• 100% of the VAT is recoverable (or 50% if you drive the car for personal as well as business usage).

• All vehicles come with a full manufacturer’s warranty, usually for the whole period of your lease.

Disadvantages of business leasing

There are a few drawbacks to BCH for business owners, which you should be aware of. You can’t modify the car - so you cannot slap decals on your car to advertise your business or display your logo. You are obliged to fulfil your agreed contract too; if you go over your mileage limits, or return the car in a condition not covered by expected wear and tear, you will have to pay for the repairs. You also cannot sell the car (as the business never actually owns it but leases it), and you will be penalised with a large fee if you need to cancel your contract early.

Can my business lease a car?

Obviously, not everyone can take advantage of a BCH deal. Your business will need to be registered either as a limited or a public limited company, and you’ll have to provide certain proofs too, including proof of address, some bank statements and ID for the company director. Learn more about qualifying for a business lease in our eligibility guide.

I’m self-employed, can I still lease?

As long as you qualify as a sole trader, a self-employed business should be able to benefit from BCH, although there are other criteria you may have to fulfil too. You may qualify for a BCH deal if you have a limited company, are in a partnership, are VAT registered, are an LLP or PLC, a charity, a local authority, central government or embassy. In short, it is worth exploring this avenue as you may well qualify.

I have a new business, can I still lease?

You can apply for a new business car lease under lots of criteria (such as being in PLC, LLP or in Partnership) - whether you’re VAT-registered or a sole-trader. Find out everything you need to know about leasing for startup businesses.

What about fleet leasing?

Fleet leasing can be the perfect way for your business to have access to many thousands of pounds worth of cars for affordable monthly payments. Find out more on our Fleet Leasing page.