Which car finance option is best for my company car fleet? Options explained

Financing your company’s fleet of business vehicles is a veritable minefield, so it pays to do your research beforehand, and to consult an expert.

Your options depend on your firm's tax position and cash flow, plus some other factors. Here, we list the options available to you.

If you’re the finance director of a business, you’re wise to have a handle on how your employees get around in the course of their work.

There are certainly lots of options for you to get your head around, some of which are all-encompassing when it comes to maintenance, breakdowns and even VED, while others give you a vehicle but you’re liable for its upkeep.

Or you can allow your employee to own their fleet car. And, just like with a mortgage, you can have a fixed or a variable-rate deal. Here, we clarify your options...

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Will a car lease suit my business?

For a start, leasing payments are tax-allowable expenses. That means a business that’s VAT-registered can reclaim 100% of the VAT if the car is used exclusively for business, and 50% on the finance element of the rental if the car is also used privately.

In addition to that, the car never appears on the company balance sheet, and the money a company might have spent on buying a fleet of cars can be invested elsewhere.

However, as with everything, there are a few factors to consider, most notably the fact that you’ll be responsible for the maintenance and repair of the vehicle during your tenure.

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What about business contract hire?

Business contract hire – BCH – is similar to leasing, but the monthly fee can include service and maintenance costs as well as VED, so you’ll have no unexpected expenses.

That gives you an accurate picture of your company’s fleet car outgoings each month, which helps to slash your administration costs. At the end of the agreement, all you need to do is hand back the vehicle.

The depreciation of the vehicle (the difference between the purchase price and the resale value at the end of the agreement) is what dictates the size of your monthly payments.

Better still, VAT-registered companies can reclaim up to 50% of the VAT on finance payments and 100% on the maintenance agreement costs.

But contract hire isn’t for everyone. For a start, you need to have an accurate idea of how many miles your staff member is going to do over the course of the contract, because you can face stiff penalties for exceeding the agreed mileage limits.

On top of that, the hire company will insist that the car is insured under a fully comprehensive policy. For help with that, see our company car insurance guide

Such a contract hire package is ideal for companies that want to update their fleet regularly but without the hassle of actually buying them.

Read more: Business contract hire explained

What is business contract purchase?

Business contract purchase is a pretty similar package to the contract hire one above, but the difference is that at the end of the agreement, your business has the option to buy the vehicle from the finance company at a previously agreed value.

Your company’s monthly payments are based on not only the difference between the car's initial cost and expected depreciation, but also what its minimum guaranteed future value (MGFV) will be.

The agreement can also be structured to include service and maintenance costs. The MGFV is the amount your company will need to pay at the end of the agreement to own the car, and is also known as the balloon payment.

There’s another option, however. If your company wants to hang on to the vehicle, but without the financial shock of paying the balloon payment in one hit, then it has the option to refinance the balloon payment, spreading the costs over a longer period.

However, bear in mind that unless the car is used for business purposes alone, VAT cannot be reclaimed on the rental payments.

Read more: Company cars glossary

What is sale and leaseback?

This is a possible option if your company needs to release funds. To do so, the firm can sell its fleet of vehicles to a leasing company, then rent the cars back again, potentially including a service and maintenance plan.

The benefits of this are the suddenly released capital, plus the fact that fixed monthly leasing costs allow for both more accurate budget planning and minimal administration costs.

There are downsides, however. For a start, leasing contracts are fixed-term affairs, so once you’re in one, you’re stuck there – or you can face stiff financial penalties for trying to get out of it early. You also remove an asset from your balance sheet, albeit a depreciating one.

Read more: The cheapest company cars for BIK tax

Is it time to go ECOS?

An ECOS is not indicative of a company suddenly gaining a green conscience. No, ECOS stands for Employee Car Ownership Scheme, which is a set-up that offers tax benefits to employees as well as lower operating costs for your company.

Under an ECOS, both the company and employee contribute to the fixed monthly payments, but it’s the employee who takes ownership of the car. This has the double benefit of the employee not having to pay benefit-in-kind (BIK) tax on it, while the employer doesn't have to pay National Insurance on the car benefit.

For the business, it means there’s no depreciating asset on the balance sheet, but the business still has control over the quality of cars its employees are driving.

However, administration costs will rise, because the set-up and running of such a scheme can be complex and time consuming.

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