Fleet Finance

The best fleet finance choice depends on the type of asset, asset life, cost, attitude to risk and the business tax position.

We advise our clients on the best fleet finance alternatives for their circumstances.

Our market knowledge can guide you to suitable providers saving you time and effort during tender processes.

Fleet Vendor Management Services

Contract Hire

Contract Hire is the most common form of fleet finance. It is a form of operating lease that can include an optional fixed-price maintenance package. At the contract’s start, the vehicle price is for a set term and mileage. Contracts usually run for anywhere between 24 and 60 months. After that, the lessee pays a fixed monthly sum throughout the contract. At the end of the agreement, the driver must return the vehicle to the lessor. Thus, the risks and rewards belong to the lessor throughout the contract. Moreover, the lessee does not own the vehicle at any point.

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 the 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 according to BVRLA fair wear and tear standards. Otherwise, the lessor can apply charges to return the vehicle to a suitable condition.

Finance Lease

Finance lease is fleet finance that allows the company to lease a vehicle for a fixed monthly fee. The arrangement means that all risks and rewards of ownership transfer to the lessee.

There are two main types of finance lease products on offer. Usually, selection depends on the company’s cash flow needs. These are known as a “fully amortised finance lease” or a “finance lease with a balloon payment”.

Finance lease (fully amortised)

The basis of lease rentals is the full cost of the car, spread over the contract term. They do not take into account any anticipated residual value for the vehicle. At the end of the agreement, the lessor sells the car to a third party. Finally, the lessee will receive an element of the sale proceeds 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 the company requires this. Within the primary period, there is generally cover for capital cost and interest. Next, there is a nominal “peppercorn rental” charge for the second period, much less than the previous payments.

Finance lease (with balloon)

The basis of the lease rentals is part of the cost of the car. The lessee pays a balance (the balloon) towards the end of the agreement, usually to reduce the lease rental costs. At the end of the contract, the lessor sells the car to a third party. The company may retain proceeds that are more than the balloon payment. 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 the 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. The company makes fixed monthly payments for a predetermined period and mileage. At the end of the agreement, the company can purchase the car or hand it back to the leasing provider. However, the leasing provider retains the ownership of the car and some of the associated risks, rewards, and responsibilities until the final balloon payment.

The leasing provider fixes the monthly payments at the outset of the agreement. Usually, they consider all costs associated with the car and then forecast the balloon payment. As with contract hire, it is possible to include an optional maintenance agreement if required.

The company will pay the contract payments. At the end of the agreed term, the company can meet the balloon payment and own the car or sell it back to the leasing provider at a price agreed at the outset. If the company choose the latter option, 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 the supply of goods, not services.  VAT is 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 apply to return the vehicle to a suitable condition.

Employee Car Ownership Scheme (ECOS)

An alternative fleet finance option for a company wishing to provide company cars 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 framework and from a single fleet provider. The arrangement offers similar benefits to a company car from the employee’s perspective. The policy includes issues like car selection, support and servicing and reallocation.

It is essential to be aware that the term “Employee Car Ownership Scheme” is only one of many providers use to describe arrangements of this type. In addition, there is a range of different car ownership arrangements available. Although they broadly offer the same benefit, the arrangements can also differ in implementation and operation details.

Considerations for using an ECOS

The most common reason for a company to consider using an ECOS is the level of potential savings it could offer in contrast to providing cars through a traditional company car scheme. If the correct fleet profile is present, potential employer savings could be significant. A ‘correct fleet profile’ has a low cost of car provision and high business mileage. However, it is critical to be aware that when operating an ECOS, if 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 implementing and operating an ECOS, it is likely to be much more complex than a traditional company car scheme for several reasons. This may include:

  1. The employee will sign a contract to take ownership of the car, involving potential 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. Therefore, it is essential to calculate all PAYE and NIC to ensure HMRC compliance correctly.
  4. Due to the complexity of ECOS arrangements, they can be challenging to explain to employees. So, administration requires more resources.

If the implementation and operation of an ECOS is solid, it can offer a cost-effective alternative to providing company cars. However, implementing and operating an ECOS can be a complex process. Therefore, it is crucial for any company considering an ECOS to carefully consider the benefits and risks of the arrangement in detail before committing to any changes.

Changes to OpRA legislation and impact on ECOS

Due to its structure, the introduction of the OpRA legislation impacted most ECOS arrangements in place. At the time, the design of arrangements would allow the use of a variable cash top-up. However, 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 tax efficiency, this type of ECOS was no longer effective. However, it is worth noting that if the ECOS 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.

Outright Purchase

Outright purchase is where the company directly buys the vehicle. Funding for the acquisition is usually through borrowing or the company’s cash resources. The ownership of the vehicle and all the risks, rewards and responsibilities rest with the company.

Outright purchase involves a large upfront payment when the company purchases the vehicle. When the company sell the vehicle, they receive the full amount of the sale proceeds. A company can source fleet management services to support vehicle ownership 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 the supply of goods, not services. VAT is ordinarily fully blocked.
  2. Risk – Exposure to residual value risk.
  3. Budgeting – Uncertain costs make budgeting more complex.
  4. Cash Flow – Implication of the considerable upfront purchase cost.
  5. Administration – Management of the vehicles (purchase, disposal and maintenance) can be time-consuming.

Salary Sacrifice

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. This is because the overall cost of no longer receiving the salary, plus paying tax on the company car BIK, was often lower than privately leasing the same brand new car. However, recent changes to legislation have impacted car salary sacrifice.

Changes to OpRA legislation and impact on Salary Sacrifice for Cars

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. As a result, salary sacrifice arrangements for the most popular cars lost much of their financial efficiency. Therefore, the number of vehicles taken via salary sacrifice arrangements began to fall. However, the government did 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. A ULEV vehicle emits 75g/km of C02 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

Low rates of company car tax

The introduction of low rates of CCT for zero-emission EVs and some PHEVs can result in very low BIK values for these cars. 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.

National insurance efficiency

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, so there may be a minimal NI cost associated with providing a ULEV company car. In contrast, an employer would pay Class 1 NI regarding the value of the salary sacrificed. This amount would likely be higher than the BIK for the company car. As a result, salary sacrifice for a ULEV can generate an NI efficiency for the business. Money can be kept as savings or passed on to employees at a reduced cost.

Purchasing power

When 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 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.

Employee benefits

As these cars are environmentally considerate, salary sacrifice schemes could appeal to corporate social responsibility agendas. There is also a growing public desire to drive ‘greener’ cars.

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 vehicles. In addition, such an arrangement could reduce the number of “grey fleet” drivers. In grey fleet, management and tracking of health and safety obligations can prove problematic.

Environmental benefits

For employees, it is desirable to access these ‘greener’ cars at a much lower cost than in the retail environment. Salary sacrifice also provides fixed corporate insurance and no requirements for personal credit assessments. As these cars are company cars, maintenance will be in accordance with manufacturer guidelines, managed by the car lessor. Employees who have never experienced a company car before would undoubtedly appreciate the reduced hassle of car ‘usership’.

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, the full cost of the car and interest is paid. Then, the ownership of the car transfers to the company. The leasing company retains the ownership of the car until the company make the final payment. However, the associated risks, rewards and responsibilities rest with the company.

The company will typically pay a deposit, 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 the supply of goods, not services.  VAT is ordinarily fully blocked.
  2. Risk – Exposure to residual value risk. Uncertain costs make 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 contact us.

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