Lease and Lease Purchase

Lease and Lease Purchase are the most common form of commercial car financing for VAT registered businesses or companies. The monthly rental cost is calculated using five parameters or considerations
 1) The initial cost of the van, for example, an VW Caddy, RRP £20K + VAT
 2) Deposit paid
 3) Period of lease or rental, say 24 months
 4) Proposed annual mileage, say 10,000 milesM
 5) Future value of the car after the 24 month period and 20,000 miles on the clock.

This value can have several names, including Residual Value (RV) or Guaranteed Future Value (GFV)

So in our simple example above, assuming a £1,000 deposit paid and an RV of £12000, the costs of the car to the lease over two years would be (20 minus 1 [deposit]minus 13 [RV]) plus a finance and interest charge (say 1K) divided by 24 months

This would be therefore £8,000 divided by 24 months or £333.33 per month

With straight lease after 24 months of payments, you still do not own the car and would simply hand the car back and swap it for a new model. With Lease Purchase, you would pay the RV to actually own the car outright. Lease Purchase is a cheaper monthly alternative to Hire Purchase, the traditional method of financing, and is written on a hire purchase agreement with the protections afforded by the consumer credit act.

What are the main advantages of using Lease Purchase?
 1. Lease and Lease Purchase normally requires only a small initial deposit
 2. Relatively low monthly payments, so helps company cash flow
 3. The costs can be offset against Corporation Tax and the VAT on the monthly payments recovered from HMRC (Her Majesty’s Revenue and Customs Department), assuming your company is VAT registered.

What are the main disadvantages?
 1. With lease purchase, a balloon payment will need to be paid at the end of the agreed lease period. In some cases this may exceed the residual value of the car and companies need to be certain that they have finances available to make these balloon payments when they are due.
 2. VAT is only reclaimable if the vehicles are used only for business use.
 3. Due to loss of residual value and maintenance costs, the task of managing a fleet of lease-purchase vehicles requires expert handling.