One questions we often get asked is – What are the different benefits between my business leasing a car or getting it through hire purchase?
If it is important for you to own your car at the end of the agreement then using a HP agreement is a cost effective way of achieving this. However, you won’t actually own the vehicle until the final payment has been made. In terms of your accounts, the vehicle will be recognised as an asset and tax relief will be available in the form of capital allowances. Relief is also available on the interest charged. This is charged at a fixed rate so you will know exactly what your payments are for the full term. However, if you fall behind with the payments the vehicle may be repossessed.
If ownership is not important to you, the typically lower payments of leasing may be more attractive. These monthly payments can be offset against your taxable profits meaning less tax payable. Assuming the vehicle has some private use 50% of VAT on payments is reclaimable. The vehicle is treated as an ‘off balance sheet item’ meaning a more positive effect on financial ratios. However, most agreements have restrictions on mileage, with extra charges if you breach these. You will also not be allowed to modify your car e.g. fit a tow bar without permission and may have to notify the finance company if going abroad. At the end of the agreement you will be expected to return the car in ‘good repair and condition.’
Your choice, therefore, will be dependent on what your long term intentions are with regards to ownership and use of the car.