Month: September 2022

Is it better to lease a car or buy one outright?

Buying a new car, especially if it is a personal purchase, is likely to be the second most expensive purchase you’ll make, after your home. It’s not surprising then that it makes sense to explore the options you have in acquiring such an asset. If you're buying a car for your company to use, then there are a range of considerations to make too.

Typically, whether the car is a business purchase or personal, one can either buy a car outright or look at the various lease schemes available from car dealers. Of course, how you choose to fund an outright purchase also makes a difference, such as cash from your business’s profits, personal savings if buying for yourself, or a bank loan.

In this article, we’ll look at both personal car purchases, since we assist individuals with their own tax and wealth management issues, and a company car purchase, to highlight some of the main pros and cons between outright purchase and a lease hire arrangement.

If you are in the market for a new car, here are a few questions to consider first:

• Will it be a company car or for private use only?
• Will it be a conventional petrol or diesel engine, or will it be electric?
• Will you be buying it or leasing it?
• If it’s a private vehicle purchase, will you want to use it for business purposes?

The answer to these questions will help shape the importance and relevance of the information we aim to share in the following article.

Let’s consider purchasing a new car for personal use as many of the financing options are relevant to those available if you are buying a car for a business, However, if you are buying a car for business, then it would be a good idea, in addition to the company car section in this article, for you to read our article on:

“Is it worth buying an electric company car?”

This article explores the business advantages and taxation associated with electric vehicles for company use. It also discusses some of the benefit-in-kind (BiK) issues that surface where company cars are concerned.

What is the basic difference between owning and leasing a car for personal use?

There are two basic routes to putting a new car on your driveway:

Personal contract hire: This is the most typical method of leasing a vehicle, but you never actually own the car.
Outright purchase: You own the vehicle outright or at the end of any financing agreement.

What is personal contract hire?

Personal contract hire or PCH, is a long-term leasing arrangement with a car leasing company. It’s a convenient way to enjoy the experience of a new car without having to stump up the high cost of purchasing one outright. The monthly payments are typically much lower than the financing costs associated with a purchase. This is because you don’t get to keep the car at the end of the agreement period. If you buy a car outright, when you come to sell the vehicle, there will be a resale value to help recoup some of the costs or ownership. So with PCH you are essentially just renting the vehicle and will simply hand it back at the end of the term - assuming it has been well looked after. Also, there may be restrictions on how many miles you can drive in a year.

The other potential benefit of PCH is that some packages include servicing and maintenance. Sometimes they may throw in tax and insurance too, so shop around!

What options exist for outright purchase

By outright purchase, we simply mean that at some point during your financing arrangements, you actually own the car, as opposed to just renting it as with PCH.

First though, why would you want to own your own car?

Most people buy their own car because they are likely not buying a new car. There are many great deals to be had for cars that are just a year or so old, as new cars tend to suffer high depreciation in the first few years. So, you get to enjoy many of the benefits of a relatively new and up-to-date model and a much lower cost*.

Owning your own car means you get to do what you like. You’re not worried about how many miles you drive it or any additions you may make. And, you get to decide whether to keep it for life or sell it the next day. You're not locked into any contracts.

Also, a personal purchase is just that - personal. Buying outright means you’ll have complete freedom as to what vehicle you can buy, as not all models are available for PCH schemes. This opens up the door to more unusual or exotic options, if that’s what your budget or taste demands.

Lastly, you own it, nobody else, it’s yours. For some, that’s a very important factor and an experience that sets you apart from others, if that’s important to you.

There are a number of ways you can finance the car ownership experience.

A cash purchase
If you buy a new car with cash, you may be able to negotiate on price with a dealer, especially if new models are close to hitting the streets.

The main disadvantage is that your purchase will most probably depreciate in value. When you come to sell it, you’ll likely get a lot less back.

The other aspect to consider is ‘cost of ownership’. Buying a car and owning one are two different matters. When you own a car, you have to service it, maintain it, tax it, and insure it. These costs can be considerable each year. Then there’s the actual cost of fuel, but then all cars have that cost.

A loan from the bank

It can be a good option for some, especially if you have a good credit rating and interest rates are favourable. You may also be contributing to the cost of the vehicle, which means you may not need to finance the entire cost of the vehicle. Personal loans are typically unsecured, in other words, they don’t require collateral to loan against. In the case of financing a car, the purchase itself becomes the collateral, i.e. if you don’t pay, they’ll take it away!

The main cost associated with a bank loan is the interest payments. At the end of the loan period, you will have actually paid substantially more than the list price of the vehicle; but then, that’s the price of convenience.

Hire purchase - HP

Hire purchase is probably one of the most recognisable forms of financing. HP is probably what got most families through the 60’s and 70’s. HP allows you to spread the cost of the purchase over an agreed timeframe with regular monthly payments - the longer that is the lower the payments. However, you’ll also be paying interest, which increases the total amount paid. There’s usually also an initial deposit and likely a small fee to pay at the end to take ownership of the vehicle. You’re then free to do with it as you will, such as selling it to recoup some of the costs and perhaps buying another vehicle.

Personal contract purchase or PCP

This is a somewhat different form of hire purchase. Both schemes share an initial deposit and the ability to pay in monthly installments over an agreed financing period. The main difference with PCP is that you are only funding the predicted difference between the purchase price of the vehicle and the residual value at the end of the term. This means that the payments will be a lot less, but then you don’t own the car. However, PCP gives you an option at the end of the term:

• Make a final ‘balloon payment’ at the end of the period and take outright ownership, or
• Hand the car back, make a new agreement and buy another car, or walk away.

The cheapest option, if you have cash, is to use cash. The downside is that the ‘liquid’ assets you may need at some point are now reduced. If you need cash in the future, you may have to sell the car quickly and take a hit but not get the best deal.

If you don’t want to use your cash, keeping that for a rainy day, the convenience of low payments, and the option of ownership at the end of the term, PCP may be a good choice. However, if you want to own your car, HP is likely a cheaper option as you are actually contributing to the cost of the purchase over a potentially longer or convenient period

What is the difference between owning and leasing a car for company use?

At some point or another company owners, especially those of smaller firms, give thought to the possibility of buying a new car through their company. After all, why not? Let the company use its profits that you’ve worked long and hard for rather than your taxed dividends or salary. Sounds simple, but of course, the government has thought of that too and so it’s really not that simple. How you plan to use the vehicle in your business has major tax implications for the business and potentially for you too.

Main considerations

For most businesses, cash flow is the lifeblood of the organisation's operation. Without a ready supply of cash to finance day-to-day operations, the company will fail. As such, how the company finances the purchases of its assets is of paramount concern. Of course, cash-rich companies can consider outright cash purchases, especially if the asset is likely to have a reasonable residual trade value. With cars though, ownership is not the goal, sensible financing is.

Leasing, loans, and tax relief
For most companies though, leasing a car is the preferred option. A vehicle lease represents fixed monthly payments over an agreed term. The packages may also include all maintenance and servicing. At the end of the term, the vehicle is simply returned and another one is provided if the contract is continued.

When leasing a vehicle, a business can reclaim VAT back on 50% of the monthly payments, depending on how it is used.

Some companies may still prefer to buy a vehicle. As such, when you take out a loan to finance the vehicle, you can get tax relief of up to 45% on the interest. However, if the car is used for both business and personal use, the amount of relief will be reduced proportionally.

Other allowances

However you decide to finance the purchase of a company car, how you use the vehicle will dictate how you will be taxed and what relief you can claim back.

An important point to note is that under section 38B of the Capital Allowances Act 2001, the cost of a car does not qualify for the AIA. If the car is for business use though, you can use the Write Down Allowance or WDA to deduct a portion of the cost from your company profits.

How will the vehicle be used?

It’s important to point out right away that VAT on company cars can only be claimed back if the car is a genuine pool car and not used for personal use in any way. You’ll have to go to some lengths to prove this too.

VAT aside, a company car purchase represents an asset. As such there are costs you can reclaim each year.

1. Write down allowance (WDA): WDA allows you to claim a percentage of the cost of an asset such as a car each year against profits over a number of years. How much depends on how ‘green’ your car is. In other words, CO2 emissions.

If your car is used as a pool vehicle and has CO2 emissions of less than 110g/km, then it qualifies for an 18% relief as part of the main rate pool allowance.

If your car is above 110g/km, then the rate applied is 8%.

Single asset pool
If the vehicle is a pool vehicle but is also used for both business and personal use, then it has to be allocated to a “single asset pool”. Depending on the CO2 emissions, it will be allocated at a rate of eight 8% or 18%. However, because the vehicle is used for personal use, this rate will be reduced to reflect the percentage of personal vs business use.

Furthermore, the personal use of the vehicle means that an employee is receiving a benefit in kind (BiK).

2. The running costs of a company pool car can be claimed. These include:

• Fuel
• Servicing
• Maintenance
• Road tax
• Insurance

Talk to TaxAgility about the purchase of your next company vehicle

Buying a new car for personal use is simply a matter of choosing the finance method most suited to your finances. If you plan to use your vehicle for business use too, then there’s a clear path as to how you can claim back expenses associated with this, such as mileage claims. We can assist you at the time of your tax return preparation and ensure you are claiming the correct amounts.

Where we can really assist is when you want your company to purchase a vehicle for business use. It’s here that we can discuss your needs and what you hope to purchase, and then what allowances may be available and other claims you could make. We can also advise on the implication of you as a director using the vehicle for personal use, along with the associated implication of it being a ‘benefit-in-kind (BiK).

So give us a call today on 020 8108 0090, and find out how we can help with the next purchase of a company car.

*Note: due to disruption in world trade and the supply of essential parts such as semiconductors and raw materials caused by the Covid pandemic and the Ukraine conflict, many manufacturers have had difficulty in producing new vehicles at the rates previously enjoyed. This has led to a significant increase in the price of second-hand vehicles. For some luxury brands where waiting lists are normal, the cost of a relatively new second-hand vehicle can often be more than the list price of a new vehicle.

Buyers of such vehicles should therefore be aware that should trade and manufacturing return to near normal levels, i.e. pre-covid, then it is likely that their ‘expensive’ second-hand purchase may depreciate as quickly as a new vehicle might.

by Robin Brown