Leasing
Operating Lease
What is an Operating Lease?
An operating lease allows you to hire a vehicle over a fixed period. An estimate of the mileage you will need is taken so that the leasing company can determine the expected value which the car will be at the end of the agreed term - the rental is based on the planned economic use of the vehicle as opposed to its life span.
How Does An Operating Lease Work?
The car is leased for an agreed period of time, rather than being purchased. You have limited responsibility for the vehicle as the economical risks lie with the leasing company. Unlike other forms of leasing, an operating lease will appear on your profit and loss account rather than your balance sheet, helping you to free up your businesses. working capital.
What are the benefits of an Operating Lease?
· Off balance sheet funding.
· There is no large cash sum to be paid in the outset.
· Your cash flow is improved by relying on fixed monthly rentals.
· VAT can be reclaimable, but this is dependent on usage.
· Rentals are normally offset against taxable profits.
· No worry or risk at the end of the agreement as you just give it back.
· A maintenance agreement can usually be taken out in conjunction with the operating lease.
It's worth noting that if you wish to keep the vehicle at the end of the agreed term, you will need to provide the leasing company with a lump sum (often referred to as a "balloon payment") representing the current value of the vehicle.
Short-term Operating Lease
This type of operating lease has a shorter contact period than the life of the vehicle, and the leasing company pays all maintenance and servicing costs.
Finance Lease
What is a Finance Lease
Finance lease is a hiring agreement which is VAT free and the vehicle remains the property of the finance company - the agreement is aimed at VAT registered businesses or companies. A monthly rental for this type of leasing is determined by three key factors:
1. Cost of the vehicle
2. The estimated future value of the vehicle
3. The proposed annual mileage
Finance Lease: What Am I Responsible For?
If you Finance Lease a car, you become responsible for the remaining balance of the car. At the end of your contract, you.ll be expected to make a .balloon. payment. This is a lump sum of money which you must pay to the finance leasing company, and it is based on the estimated future value of the car at the start of your contract.
What are the benefits of Finance Lease?
· Low monthly costs - the hirer only pays for depreciation and finance lease charges during the term of the lease.
· 50% of VAT payments can be reclaimed.
· The finance lease is VAT exclusive.
· Equity when the vehicles sells - at the end of the fixed term, the finance lease company will sell the car and give you a share of the profit after deducting your balloon payment.
· Finance leasing enables businesses to add another asset to their balance sheets.
· Hire rental tax allowances can be applied for.
What are the disadvantages of Finance lease?
There are several disadvantages worth noting if your company or business intends to finance lease a car. Mainly, you can never take ownership of the vehicle. The terms are based on a balloon payment to the finance company, followed by a sale of the car to a third party. Other disadvantages include:
· Reduced equity might occur by the close of the finance lease contract - you therefore take a risk of making a loss on the sale of the car.
· You can only reclaim 50% VAT as opposed to contract hire where you can claim up to 100% VAT if the car is not used for personal use.
· Responsibility of maintenance for the vehicle which could include paying the road fund licence.
What options are available when purchasing a vehicle using finance lease?
1. You can pay the entire cost at the start of the leasing, which includes the cost of the vehicle and the monthly interest payments required.
You can make deferred payments, lowering the cost of your monthly instalments. This option includes a balloon payment at the end of the leasing.
