It is important to note there is no single "Best way" or "Cheapest way" to fund
your Commercial vehicle. It used to be the case that whichever method you opt
for, over the life time of the vehicle with you (say 2,3 or 4 yrs) the Tax allowances
received or write allowances claimed, the benefit used to come out roughly the
same on all methods.
However, due to changes in writing down allowances announced
in the Budget of 2007, in which the allowances have been reduced to 20% in years
2, 3 and 4 thus disadvantaging Purchase over other forms of funding.
So it comes down to suitability, which method suits your business the best. There is no right or wrong way, which suits you may not suit your business next door neighbour.
In an attempt to keep things simple we will cover the main types of funding, that is Contact Hire (With or without maintenance) Hire purchase and Finance Lease. (There are subtle hybrids of each method, this is designed to be a general over view of your options.)
Contract Hire
This method suits the high mileage user who may not have the time to arrange his/her own servicing etc. Generally speaking it suits the larger company's with many people on the road in company owned vehicles and by opting for a maintained Contract removes the requirement for a Fleet manager to over see the vehicles.
It does come with one or two BEAR traps, however. All Finance arrangements HAVE to be able to be settled early if required. Contract Hire is the most rigid and financially punitive to get out of early because of the way the settlement figure is calculated. Broadly speaking, if one is say 18 months into a 36 month Contract and is paying £300 per month for the Contract, for reasons of change or growth etc one needs to get out of the Contract, the settlement figure is calculated thus: there is 18 months left @ £300 per month, giving a total of £5400.00, the settlement figure is normally circa 85% - 87% of that figure, in this case therefore £4590 to £4698,once paid of course the Contract Hire Company would simply take the vehicle away and the Contract is discharged. (In addition, charges for reconditioning work they may feel is required would be applied).
Hire Purchase
Most people know and understand Hire Purchase. With Commercial vehicles it is
Normal (although not essential) that the VAT element of the costs are paid in
advance plus any deposit one may wish to add to that figure.
The balance is then
funded over the period of the loan, always remembering of course the vehicle
is not owned by the customer until the final payment has been made. It is interesting
to note that because most people would be looking to change the vehicle as it
draws near its final payment, they never actually own it at all!
Finance Lease
A VAT efficient and low initial outlay method of acquiring your vehicle. A relatively
small initial outlay is paid and the vat is charged on the monthly costs, then
reclaimed 100% at the end of each VAT quarter. A residual Value (sometimes called
a balloon) is set at the end of the agreement which has the effect of reducing
the monthly payments. It is imperative to set the residual value at a Conservative
level to ensure equity is gained at the end of the agreement. i.e. if the residual
is set at say £3000.00 (for example) and the vehicle realises £4,000 on disposal,
the £1,000 equity is yours to use as a deposit for the replacement (if you wish)
or to keep.
However if the residual had been set at say £5,000 in order to achieve
lower monthly payments and the vehicle realises £4,000 you would have a £1,000
negative equity which would have to be dealt with BEFORE finding the deposit
for the replacement vehicle. Sometimes advertisements are taken out whereby you
can Lease a certain type of vehicle for only £XXXX pounds per month, which seems
an incredible deal, but often the devil is in the detail, the sting in the tail!!
It is always best to set residual value at as lower level as possible in order
to protect your future rather than mortgage it!
This is meant to be only a very simple, broad over view, for further detail please feel free to contact me on 0845 8800151 (local rate). We would always recommend you talk through your proposed acquisition with your Accountant, he knows your company better than we do and should be able to advise.
