Benefits of Leasing

Business Insights

Over two million cars and vans are currently leased by UK businesses and the British Vehicle Rental and Leasing Association's most recent report reveals a six-year high.

Why are so many companies switching to leasing as their preferred method of vehicle finance? Here are six questions worth asking.

1. Am I getting the best deal?

We all like to think we're good negotiators, and we will occasionally find ourselves in the right place, at the right time, to strike a deal. However, the key word here is ‘occasionally', because one-off or low volume purchases generally provide little room to maximise savings consistently.

On the other hand, specialist leasing businesses that buy vast numbers of cars and vans every year are able to use their direct manufacturer relationships and buying power to consistently negotiate strong discounts on the widest range of vehicles.

2. Is depreciation worth the risk?

The true cost of a vehicle is determined by the difference between the purchase price and its value when sold or traded in, known as depreciation.

For example, the UK emerged from the COVID-19 pandemic with a shortage of new vehicles coming into the market. The average price of second-hand cars rose throughout 2021 and 2022 and into the first half of 2023. Good news for sellers, not so good for buyers.

February 2024 saw an 8.3% fall in used-car prices. This comes off the back of a downward trend that started back in September 2023. This is particularly true of electric vehicles, where the second-hand market is still in its infancy and future prices are likely to be significantly affected by decarbonisation legislation — such as the ZEV mandate — and future technological developments.

It's here that leasing offers a significant advantage over purchasing. In effect, you are outsourcing the depreciation risks to a third party that can mitigate these market variations.

3. Is buying or leasing more tax efficient?

The tax implications of buying or leasing varies between companies but, with monthly payments generally fully deductible as a business expense, leasing offers a straightforward way to reduce taxable income. The bigger difference comes when we look at VAT.

VAT is levied at 20% on all new vehicles and this can only be reclaimed if you can prove that there is no personal mileage. Whilst vans are assumed to be for business use only, passenger cars have some degree of personal use. As a result, it's difficult to reclaim any of the VAT paid when buying vehicles outright.

With Contract Hire (the most popular form of car leasing), at least 50% of VAT can be reclaimed on rental payments, rising to 100% if the vehicle is used for business purposes only. This means that for many VAT-registered businesses, leasing works out to be far more cost effective than buying.

4. What happens if I damage the vehicle?

Whether a vehicle is owned or leased; any damage will have a negative impact on its resale value. If you own the vehicle, you can decide whether to make repairs and obtain a fair market price or forgo the fixes and accept a lower valuation.

The same principle applies to leasing. Monthly payments are calculated on the assumption that the vehicle will be returned with no more than fair wear and tear. If this is not possible, you face a similar decision: undertake the repairs yourself or hand it back and pay a final bill based on the work required.

To ensure drivers are aware of the expected condition of the vehicle on return, we use the BVRLA's Fair Wear and Tear guidelines which gives full explanations and descriptions of damage and what is considered fair.

5. Is buying or leasing a better use of funds?

The decision is yours but, even if we put aside the depreciation, reduced buying power, and unrecoverable VAT, many businesses find that they can make their money work harder for them by investing in people or technology.

6. Does leasing restrict my options?

While you may instinctively feel that ownership gives you more control, leasing can be as flexible as you need.

For example, by creating a ‘mileage pool' covering all — or some — vehicles, there's no need to worry about individuals adding more miles than planned. If the size of the pool needs to be increased, it's an easy adjustment to the contract.

To help manage new starters and leavers, individual vehicles can be reassigned to a new driver. If you need to keep a vehicle for a few extra months but not long-term, the original contract can generally be extended.

If you no longer need a particular vehicle, rather than selling it and accepting the current market rate, you can simply hand it back and pay the early termination fee specified in your contract.

The final word on leasing vs buying

Every fleet is different but, when you put it all together, the benefits of leasing will generally outweigh any perceived cons.

If you haven’t evaluated your options for a while, why not speak to one of our experts to see how a switch to leasing could reduce the cost and risk of running your fleet?