Fleet Finance

Fleet finance comes in many different forms to meet a range of different requirements.  Which is best will depend on a number of variables such as the type of asset, asset life, cost, attitude to risk and the business tax position.

Contract Hire

Contract hire is the most common form of vehicle finance.   Contact hire is a form of operating lease which can include an optional fixed price maintenance package.  At the start of the contract the vehicle is priced for a set term (usually between 24 and 60 months) and mileage.  The lessee pays a fixed monthly sum over over the course of the contract.  At the end of the contract the vehicle is handed back to the lessor.  The lessee does not own the vehicle at any time and the risks and rewards associated remain with the lessor at all times.

Advantages of Contract Hire

  1. Fixed Price – fixed contract prices mean it is easier to budget and forecast your costs
  2. Small Deposit – low initial rentals are available helping with cash flow requirements
  3. Low Risk – the lessor takes the residual value and maintenance risk
  4. VAT – recovery on the lease rentals (50% block on finance element for cars)
  5. Corporation Tax – relief available against the lease rental charges
  6. Administration – the lessor takes on the majority of the vehicle administration tasks

Disadvantages of Contract Hire

  1. Fixed Contract – the lease is for a fixed term with penalties for early termination
  2. Excess Mileage – vehicles exceeding their contracted mileage will be liable for excess mileage payments
  3. Return Condition – the vehicle needs to be returned in a suitable condition and according to BVRLA fair wear and tear standards, otherwise charges can be applied to return the vehicle to a suitable condition.

Finance Lease

Finance lease is a fleet finance that allows the company to lease a vehicle for a fixed monthly fee. The structure of the arrangement also means that it transfers substantially all the risks and rewards of ownership of the vehicle to the company.

There are two main types of finance lease product that are offered, usually selected depending on the cash flow needs of the company, and these are known as a “fully amortised finance lease”, or a “finance lease with a balloon payment”.

Finance lease (fully amortised)

The lease rentals are based on the full cost of the car spread over the term of the contract and take no account of any anticipated residual value for the car. At the end of the agreement the car must be sold to a third party and the company will receive an element of the sale proceeds as agreed with the leasing provider at the outset.

It is also possible with a fully amortised finance lease to take up the option of a secondary rental agreement for continued use of the car if this is required by the company. Generally, the capital cost and interest has been covered within the primary period and then a nominal “peppercorn rental” is charged for the secondary period which will be much less than the previous payments.

Finance lease is a lease funding option that allows the company to lease a vehicle for a fixed monthly fee. The structure of the arrangement also means that it transfers substantially all the risks and rewards of ownership of the vehicle to the company.

There are two main types of finance lease product that are offered, usually selected depending on the cash flow needs of the company, and these are known as a “fully amortised finance lease”, or a “finance lease with a balloon payment”.

Finance lease (fully amortised)

The lease rentals are based on the full cost of the car spread over the term of the contract and take no account of any anticipated residual value for the car. At the end of the agreement the car must be sold to a third party and the company will receive an element of the sale proceeds as agreed with the leasing provider at the outset.

It is also possible with a fully amortised finance lease to take up the option of a secondary rental agreement for continued use of the car if this is required by the company. Generally, the capital cost and interest has been covered within the primary period and then a nominal “peppercorn rental” is charged for the secondary period which will be much less than the previous payments.

Finance lease (with balloon)

The lease rentals are based on part of the cost of the car, with a balance (the balloon) being offset towards the end of the agreement, usually to reduce the lease rentals paid. At the end of the agreement the car must be sold to a third party and sale proceeds that are in excess of the balloon payment can be retained by the company. If the sale proceeds fall short of the balloon payment the company will be responsible for any shortfall.

The lease rentals are based on part of the cost of the car, with a balance (the balloon) being offset towards the end of the agreement, usually to reduce the lease rentals paid. At the end of the agreement the car must be sold to a third party and sale proceeds that are in excess of the balloon payment can be retained by the company. If the sale proceeds fall short of the balloon payment the company will be responsible for any shortfall.

Advantages of Finance Lease

  1. Flexible – flexible contract to suit business cash flow needs.  Limited costs for ending contracts early and option to enter a secondary lease period.
  2. VAT – Usually, provided acquisition of title is optional rather than obligatory, VAT should be payable on each lease rental.  VAT recovery on the lease rentals (50% block on finance element for cars)
  3. Corporation Tax – Corporation tax relief available against the lease rental charges
  4. Return Conditions – no additional costs for mileage or vehicle condition (although these factors will impact the residual value of the asset)

Disadvantages of Finance Lease

  1. Residual value – risk and reward for the vehicle is with the lessee
  2. Early Termination – “interest equalisation” penalties for early termination of the vehicle

Contract Purchase

Contract purchase is a deferred purchase fleet finance option that is structured so the company makes fixed monthly payments for a predetermined period and mileage. At the end of the agreement the company has the option to purchase the car or hand it back to the leasing provider. The ownership of the car and some of the associated risks, rewards and responsibilities are retained by the leasing provider until the final balloon payment is made.

The monthly payments are fixed by the leasing provider at the outset of the agreement and usually take into account all costs associated with the car and the forecast balloon payment. As with contract hire, it is possible to include an optional maintenance agreement if required.

The company will pay the contracted payments and then at the end of the agreed term the company will have the option of meeting the balloon payment and owning the car or selling it back to the leasing provider at the price agreed at the outset. If the latter option is chosen there may be end of contract charges due based on the mileage and condition of the car.

Advantages of Contract Purchase

  1. Fixed Price – fixed contract prices mean it is easier to budget and forecast your costs
  2. Small Deposit – low initial rentals are available helping with cash flow requirements
  3. Low Risk – the lessor takes the residual value and maintenance risk
  4. Tax – tax relief in the form of capital allowances
  5. Administration – the lessor takes on the majority of the vehicle administration tasks

Disadvantages of Contract Purchase

  1. VAT – upfront VAT cost, as supply of goods, not services.  VAT ordinarily fully blocked.
  2. Excess Mileage – vehicles exceeding their contracted mileage will be liable for excess mileage payments.
  3. Return Condition – the vehicle needs to be returned in a suitable condition and according to BVRLA fair wear and tear standards, otherwise charges can be applied to return the vehicle to a suitable condition.

Employee Car Ownership Scheme

An alternative fleet finance option for a company wishing to provide company cars to employees is an Employee Car Ownership Scheme (ECOS).  An ECOS is an arrangement put in place by a company that allows its employees to acquire a car, usually within a specified framework and from a single fleet provider. The arrangement is usually designed to offer similar benefits to a company car from the employee’s perspective with the policy often remaining comparable in terms of how issues like car selection, support and servicing and reallocation are dealt with.

It is important to be aware that the term “Employee Car Ownership Scheme” is only one of many used by providers to describe arrangements of this type. There are a range of different car ownership arrangements available and although they broadly offer the same benefit, the arrangements can also differ in terms of some of the detail of implementation and operation.

Considerations for using an ECOS

The most common reason for a company to consider the use of an ECOS is the level of potential saving it could offer when compared to providing cars through a traditional company car scheme. If the correct fleet profile is present, which can broadly be defined as high levels of business mileage and a low cost of car provision, potential employer savings could be significant. However, it is critical to be aware that where an ECOS is operated and the correct fleet profile is not present, it can potentially cost significantly more than a traditional, well designed, company car scheme.

When it comes to the implementation and operation of an ECOS it is likely to be much more complex than a traditional company car scheme for a number of reasons. This may include:

  1. The employee will sign a contract to take ownership of the car which can involve complications such as credit checks on employees
  2. Whether the employee wants to own the car their company provides
  3. The fleet finance within an ECOS tends to be a mix of AMAP and gross salary and it is important to correctly calculate all of the PAYE and NIC due to ensure HMRC compliance
  4. Due to the complexity of ECOS arrangements they can be difficult to explain to employees, so that greater resources are needed for administration.

If an ECOS arrangement is correctly implemented and operated in a compliant manner, then it can offer a cost effective alternative to providing company cars. However, implementing and operating an ECOS can be a complex process. It is important for any company considering an ECOS to ensure that it carefully considers the benefits and risks of the arrangement in detail before committing to any changes.

Changes to OpRA legislation and impact on ECOS

Due to the way it was structured, the introduction of the OpRA legislation impacted most ECOS arrangements in place at the time because they were usually designed to make use of a variable cash top-up. Under the OpRA rules, the Approved Mileage Allowance payments (‘AMAP’) meant that an ECOS with a variable cash top-up were no longer exempt from income tax. With this loss of the tax efficiency, this type of ECOS ceased to be effective. However, it is worth noting that if an ECOS is structured so that it does not rely on a variable cash top-up, it can fall outside the scope of the OpRA legislation, and offer a viable alternative to providing company cars.

Salary Sacrifice for Cars

The provision of a fully maintained and insured company car as part of a salary sacrifice arrangement became increasingly popular in the decade leading up to 2017. The overall cost to an employee of no longer receiving the salary, plus paying tax on the company car BIK was often lower than leasing the same brand new car privately. However, recent changes to legislation have impacted car salary sacrifice.

Changes to OpRA legislation and impact on Salary Sacrifice for Cars

The introduction of the OpRA legislation had a dramatic impact on the popularity of salary sacrifice for company car arrangements. The government’s stated objectives for OpRA was to remove the income tax and employer’s NIC advantages of salary sacrifice arrangements for most benefits, including cars. Salary sacrifice arrangements for the most popular cars lost much of their financial efficiency and the numbers of cars taken via salary sacrifice arrangements began to fall. The government did, however, agree with industry lobbying to exempt Ultra Low Emission Vehicles (“ULEVs”) from these rules. Importantly, this exemption maintains the financial attractiveness of salary sacrifice for ULEVs, which are vehicles that emit 75g/km of CO2 or less. ULEVs are typically plug-in hybrid petrol/electric and pure electric cars. This exemption mirrors the overall government strategy to focus on low carbon.

Benefits of car salary sacrifice for low emitting cars (75g/km or less)

  1. Low rates of company car tax – With the introduction of low rates of CCT for zero emission EVs, as well as some PHEVs, this can result in very low BIK values for these cars. When compared to the income tax and NI that would have otherwise been due on the sacrificed salary, these arrangements can offer employees a financial advantage.
  2. National insurance efficiency – The employers Class 1A NI liability for a company car is calculated based on the BIK value for the car in question. As noted above, the BIK value for a ULEV can be very low and so there may be a minimal NI cost associated providing a ULEV company car. In contrast, an employer would pay Class 1 NI in respect of the value of the salary sacrificed which is likely to be much higher than the BIK for the company car. As a result, salary sacrifice for a ULEV can generate an NI efficiency for the business that can be kept as a saving, or passed on to employees in the form of a reduced cost.
  3. Purchasing Power – Where an employer provides company cars to employees it can usually negotiate discounts based on the number of cars it will order from a particular provider or vehicle manufacturer. In general, the bulk buying power of an employer will result in greater discounts and lower prices for cars when compared to an individual employee on the high-street. Therefore, salary sacrifice arrangements can allow employees not typically entitled to a company car to access the bulk buying discounts of employers.
  4. Employee Benefits –  As these cars are publicly perceived as environmentally considerate, salary sacrifice schemes could appeal to corporate social responsibility agendas, as well as the growing public desire to drive ‘greener’ cars.
  5. Risk Management –  Many business operators might also consider it more convenient, visible and controlled to manage individuals driving occasional business mileage in these brand new and fully managed company cars, rather than in private cars. Such an arrangement could reduce the number of “grey fleet” drivers, where management and tracking of health and safety obligations can prove problematic.
  6. Environmental benefits –  For employees, it is incredibly attractive to be able to access these ‘greener’ cars at much lower cost than in the retail environment, with fixed corporate insurance and no requirements for personal credit assessments. As these cars are company cars, they will be maintained in accordance with manufacturer guidelines, managed by the car lessor. For employees who have never experienced a company car before, they would no doubt appreciate the reduced hassle of car ‘usership’.

Outright Purchase

Outright purchase describes the straightforward situation where the company directly buys the vehicle. The purchase is usually either funded through borrowings or use of the company’s own cash resources. The ownership of the vehicle and all of the associated risks, rewards and responsibilities rest with the company.

Outright purchase involves a large upfront payment when the company purchases the vehicle and, when it is sold, the company will receive the full amount of the sale proceeds. A company can source fleet management services to support ownership of a vehicle in areas like servicing, roadside assistance and vehicle sale from a fleet provider if required.

Benefits of Outright Purchase

  1. Flexibility – Full ownership of the car and no fixed contract
  2. End of Contract – No end of contract charges.

Drawbacks of Outright Purchase

  1. VAT – The upfront VAT cost, as supply of goods, not services.  VAT is ordinarily fully blocked
  2. Risk – Exposure to residual value risk
  3. Budgeting – Uncertain costs making budgeting more complex
  4. Cash Flow – Implication of the large upfront purchase cost
  5. Administration – Management of the vehicles (purchase, disposal and maintenance) can be time consuming

Hire Purchase

Hire purchase is a deferred purchase fleet finance option that is structured so the company makes fixed monthly payments for a predetermined period and mileage. At the end of the agreement it has typically paid the full cost of the car and interest and ownership of the car transfers to the company. The ownership of the car is retained by the leasing company until the final payment is made, however, the associated risks, rewards and responsibilities rest with the company.

The company will typically pay a deposit and then the balance of the cost of the car and any interest charges are spread evenly over an agreed term. As with other funding options, it is possible to include an optional maintenance agreement if required.

Hire Purchase Benefits

  1. Flexibility – Greater degree of flexibility within the agreement
  2. End of Contract – No end of contract charges
  3. Risk & Reward – Potential residual value profit (compared to funding option with fixed residual value/balloon).

Drawbacks of Hire Purchase

  1. VAT – Upfront VAT cost, as supply of goods, not services.  VAT is ordinarily fully blocked
  2. Risk – Exposure to residual value risk. Uncertain costs making budgeting more complex
  3. Administration – Management of the vehicles (purchase, disposal and maintenance) can be time consuming.

Fleet finance can be a complex area to understand with a number of options available.  If you would like some help selecting the optimal solution for your circumstances then please feel free to

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