We’re often asked this question, but the truth is there is no perfect solution. Here is what you need to know in simple terms to make your own educated decision.
All Funding methods are 100% Tax Deductible.
When you choose Finance/Business Lease or Contract Hire, you’re basically renting a van. After your initial rental, the following monthly rentals are fixed, and vat is paid as you go. These rental payments can be offset against taxable profits in the year they’re paid. If you’re registered, then the VAT on the rentals can be claimed quarterly. In some cases, you can take ownership at the end of term, but this can only be achieved via a third party.
Hire Purchase is the more traditional funding method – it’s like a loan but in this case the van is the security. The word ‘purchase’ is the key – you own the van. If you are VAT registered, you can reclaim the VAT on the purchase immediately, even though the van hasn’t been paid for. In most cases the VAT on the sale price of the van is required as the deposit. The finance agreement will show VAT clearly and this will be used as proof of purchase to reclaim the VAT. The finance company’s VAT number will be on the agreement.
You can claim 100% of the purchase against taxable profits in the year of purchase even though the van hasn’t been paid for yet. Alternatively, you can depreciate the asset over the term of the agreement. “Up to a maximum of £200,000 of fixed assets can be offset every year.” (Cars are excluded).
Why is leasing so popular? Is it the best way?
Manufacturers will often insist that dealers and brokers only market their make of van using a monthly lease payment and never a headline discounted cost. In fact, the best discounts are only available for vans funded via a Lease finance or Contract hire.
You may be wondering why this is?
If a manufacturer needs to sell old stock, they can get their dealers to have a sale. They may advertise a van with a retail price of £25,000 + VAT for as little as £16,500 + VAT and that would be a great deal! But this would have a negative effect on the second-hand value of the van.
Manufacturers don’t like to advertise big discounts as this devalues their product. They must keep second-hand values high because this dictates the balloon payment that allows us to advertise low monthly payments. Just Imagine what would happen if Rolex sold all their watches at half price for 6 months!
It’s also easier for the likes of us online brokers because when we advertise a lease rental, we are not legally required to show the sale price of the van, finance charges or APR %. Leasing is a rental agreement, not a purchase.
But don’t be concerned. You’re still getting a great deal and the residual or second-hand value of your van is protected so when it’s time to change you will still get a good price so everyone is happy.