Let DSG Auto Contracts Help You Decide
Once you have decided on the type of car or van you want, the next big decision is how best to fund it. The various different finance packages can seem confusing and even when you have chosen the package that best suits your needs, finding the best deal can be time consuming.
At DSG Auto Contracts we are committed to helping you do both, whether you are a private individual, sole trader or a fleet operator. Our team can offer you advice on the most tax efficient ways to finance your vehicle, we will provide you with the correct information so that you can make an informed decision. We always recommend that after discussing our offer you talk to your accounts they will know you and your business better and will assist you in your final decision.
The following is a summary of each of the finance package we offer, this will help you decide which is the best method for you, however, we believe a conversation about you and your situation is better than a page of text, so call us on 0844 880 9270 or email sales@dsgauto.com.
To help you work out which package is the best for you, HM Customs and Excise recognise only two types of funding;
- A Purchase agreement is where the customer has the right to obtain legal title to the vehicle. (Supply of Goods)
- A Hire agreement is where the customer has no option to gain legal title to the goods. (Supply of Services)
The following will give you a brief explanation of the different funding options we offer. We recommend that before you make your final selection that you discuss the matter with your accountant to ensure that you are selecting the correct package for your individual needs. At the end of this section we have prepared a quick reference matrix to allow to the different compare funding options.
- Contract Hire (Hire Agreement)
- Finance Lease (Hire agreement)
- Business Contract Purchase (Purchase agreement)
- Hire and Lease Purchase (Purchase agreement)
- Personal Contract Hire
- Personal Contract Purchase (Purchase agreement)
- Summary Table -Finance Options
Contract Hire (Hire Agreement)
Contract Hire is simply a method of hiring motor vehicles for use over an agreed time and mileage without ownership, the monthly rental is fixed (often referred to as an Operating Lease). This can include a range of additional services such as servicing, maintenance, tyres and road fund licence. This method of funding is a popular choice for VAT Registered companies, with more than 40% choosing this method. The term of the contract can range from 24to 60 months and usually up to 120,000 miles.
What are the Benefits?
- Off balance sheet funding
- Consistent and accurate budgeting
- Improved cash flow
- Fixed interest rates
- Fixed cost maintenance available
- Low initial outlay
- Minimum capital expenditure
- VAT Recoverable on monthly rentals (1)
- No depreciation risk - underwritten by finance company
- No disposal risk
- Reduced administration costs
- Rentals allowable against taxable income (2)
(1) You can only claim 50% of the VAT on the Finance element if you are using the car for private use, 100% if it is business use only (e.g. Pool car). All the VAT is recoverable on the Maintenance element as this is a business expense.
(2) If the List price of your vehicle is more than £12,000.00 the amount that can be allowed against tax is reduced, if it is less 100% can be allowed, this is called the half excess rule, see example below:
Invoice Price + £12,000.00 / 2 x Invoice Price / 100 = % tax allowable
Finance Lease (Hire agreement)
A Finance Lease is a product for VAT registered companies who prefer a flexible rental agreement, the ownership stays with the finance company but you bear at least 90% of the residual risk or reward at the end of the agreement.
For your tax purposes, a finance lease is a contract where the car is hired, and there is no pre-planned opportunity to purchase the car. The title of the goods, like contract hire, can never be passed onto your company. The agreement shows on the balance sheet as a leased asset with a corresponding liability.
There are two types of Finance Lease generally available to you. The first is a Residual Value Lease, this provides fixed monthly payments over the period of the contract followed by a 'balloon payment'. The second is a 'fully Amortised Lease', on this type of lease the monthly payments account for the entire value of the vehicle over the contract period.
What are the benefits?
- Improved cash flow
- Consistent and accurate budgeting
- Fixed interest rates
- Low initial outlay
- Minimum capital expenditure
- VAT Recoverable on monthly rentals (1 - As above)
- Reduced administration costs
- Rentals allowable against taxable income (2 - As above)
- Vehicles shown on the balance sheet
- Opportunity for a third party to buy the vehicle at the end of contract
Business Contract Purchase (Purchase agreement)
This funding method combines the fixed prices and operational benefits of contract hire, however it allows you to own the vehicle at the end of the term at a pre-determined payment (balloon payment). The balloon payment is set to represent the residual value of the vehicle based on the mileage and term length stated. If you do not want to purchase the vehicle at the end of most contracts you can hand it back to finance company and have no further cost as long as it is within the mileage and condition terms.
The vehicle will appear on your balance sheet as an asset and is suitable for high value vehicles over £12,000 as it avoids the whole question of restricted tax recovery that are found on Hire agreements.
- Improved cash flow
- Consistent and accurate budgeting
- Capital allowances available
- Fixed interest rates
- Low initial outlay
- Minimum capital expenditure
- No VAT on finance repayment
- Reduced administration costs
- No risk for depreciation
- No vehicle disposal issues at end of contract
- Vehicles shown on the balance sheet
- Opportunity to buy the vehicle at the end of contract
Hire and Lease Purchase (Purchase agreement)
This is the traditional method of funding a new vehicle, it is a straight forward finance agreement where title passes to you when all payments have been made. The purchase VAT can not be reclaimed unless your vehicle is being used for 100% business use. After you have paid an initial payment (deposit), the balance of the purchase price, plus charges are repaid over a fixed period by fixed monthly payments. Unlike Hire Purchase, Lease Purchase has a balloon payment that is set to represent the anticipated value of the vehicle at the end of the term. With both of these agreements, the risk of resale value, repairs and maintenance lies with you.
What are the benefits?
- You gain ownership of the vehicle
- The vehicle appears on your balance sheet as an asset
- You claim the write down allowance
- No VAT on monthly payments
- Minimum capital expenditure
- VAT Can be recovered on purchase price if vehicle is used for business purposes only
- VAT Can be recovered on the running costs
Personal Contract Hire (Hire agreement)
Personal contract hire is a new product that has been designed for you if you are opting out of a company car scheme and have a company car allowance or just want fixed cost motoring. PCH is a budget friendly alternative to traditional funding methods such as a personal loan or hire purchase. You can get your vehicle without the need for a large deposit, you simply hire the car for a fixed period and at the end, hand it back to the finance company.
To help you plan your budget further you can include a full maintenance package, this can include servicing, general repairs, tyres and road fund license. This only leaves you to sort out your insurance and fuel costs. Please note that if you are using the car for business use you will need to notify your insurance company.
What are the benefits?
- Consistent and accurate budgeting
- Low initial outlay
- Fixed interest rates
- Fixed cost maintenance available
- No depreciation risk - underwritten by finance company
- No disposal risk
- No final payment
- Road fund license is often included
Personal Contract Purchase (Purchase agreement)
Personal Contract Purchase or PCP is another flexible way to finance the vehicle of your choice, offering motoring at a fixed cost - so you know, each month, exactly what you are paying. You can choose the car and the contract that suits your needs. You decide the type of vehicle you want, how long you want to keep it for and your anticipated mileage. After this period, you can either pay the pre-agreed 'balloon' payment - which is based on the expected value of the vehicle - and keep the car, or simply hand it back.
What are the benefits?
- Consistent and accurate budgeting
- Low initial outlay
- Fixed interest rates
- Fixed cost maintenance available
- No depreciation risk - underwritten by finance company
- No disposal risk - option to hand car back at end of term
- Ownership at end of contract if required
- Road fund license is often included
- Used vehicles are available on this scheme
The information provided is for guidance only. We recommend that you seek professional advice from your accountant and tax office before making a decision based on the information given.
Inland Revenue has a guide to personal and company taxation which will be helpful to you.
DSG Auto Contracts accepts no legal liability for the information given as it has been provided for illustration only as is your responsibility to check the validity of this with the relevant authorities.
